Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
Here’s something I encounter more often than I should. An OEM with an industrial product asked me to recommend some contract manufacturers. The product needed to be built for rugged environments, the OEM needed to quickly get into production, and it didn’t have a lot of money to spend vetting CMs. The executive asked me to recommend a short list. I gave him two names.
The next time we talked, he said he had a problem. The CMs I recommended were already doing the kind of work he wanted done and that made him nervous. Were the OEMs of these other products direct competitors, I asked.
No, he said, but the products were directly comparable. He said he didn’t want the “risk” of taking the job to a CM already doing this type of work for someone else.
I told him this was exactly why I sent him to these CMs. They know these types of products and therefore will have an easier time moving up the learning curve. Given his requirements, the last thing he should do is go to a CM with no experience. That would be a real “risk.”
Then I explained there are three reasons to use a CM with experience in like-kind products:
1. If the CM builds similar products you might get a better deal on materials because it will have established supply-chain relationships.
2. The CM is less likely to pad quotes to buy new equipment or hire needed expertise because it already has it.
3. The probability of failure of the supply solution – and therefore risk — is reduced, not increased, by experience and like-product know-how.
When I explained the reasons he seemed to get it and, as of this writing, was reconsidering my recommendations. Common sense? Maybe, maybe not. The outsourcing landscape is complex and caution is justified. This is one of many topics we discuss in the Outsourcing Navigator Series. So check it out — you’ll feel better!
And if you have any experiences with CMs manufacturing products similar to those from other OEMs let us hear from you.
I was shocked (a phrase I don’t often use) to learn recently that the African nation of Ghana has become a dumping ground for Silicon Valley’s old computers. Maybe you already knew this, but I did not.
It came to my attention when I saw a TV report, with video footage showing mountains of discarded electronics gear sitting next to a village near Accra, Ghana. As the reporter strolled through piles of this stuff, she stopped to read labels and ownership tags. The discarded computers represented virtually every major and minor brand, and the former owners were a who’s who of Silicon Valley. The villagers were burning the circuit boards and other pieces to extract the copper — and polluting their air in the process. Runoff sludge from the site would find its way into a river that ran into the ocean.
It is worth four minutes of your time to watch the report, or alternately read the script. Some in the electronics industry are working to solve the recycling problem. Based on this report, they can’t solve it soon enough.
Another recent media piece is also worth a look by anyone interested in environmental sensitivity. The New Yorker magazine investigated carbon footprints; the title says it all – “Big Foot.” It explains that while reducing excessive carbon footprints is the right thing to do, doing it is a huge task. Just accurately calculating any product’s carbon footprint is a complicated order. Most of the examples were in food products, but the findings generalize to any and all products.
To end on a positive note, the New York Times reports this week on several new media players that run on solar power. This is the kind of inventive electronics design for environment that Technology Forecasters has been promoting for years.
The TV report and the two articles are all worth reading for those who want to get real – and find some hope – for the challenge of design for environment.
About a year ago, Nokia announced plans to build a cell phone plant in Cluj, Romania, and to begin manufacturing later this year. Two months ago, Nokia announced it would close its plant in Bochum, Germany, and shift production to “lower cost regions.” The Germans are outraged, but more about that later.
There’s a good reason Nokia chose Romania. Its labor costs are not as low as China’s, but for European markets Romania is nearly the same as China on a total landed cost basis.
According to research by Technology Forecasters, Inc., Romania has the lowest labor costs of all European Union members. The results are in a Quarterly Forum Report, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” by Charles W. Wade, a TFI senior consultant. It also covers non-EU Russia and Ukraine. The report is available for download by TFI Quarterly Forum members.
According to the report, a skilled Romanian worker made about US$5,000 in 2005, compared to more than US$30,000 a year for a worker in Germany, which has the highest labor costs in the EU. Wade concluded: “In response to our interview question, besides the Ukraine, Romania was noted as the second most desirable location for a low-cost manufacturing operation in Eastern Europe.”
EMS companies in Romania include Celestica, Elcoteq, and Flextronics. Elcoteq has a plant in Arad, near the Hungarian border, acquired from a customer. It makes sub-systems and other components for base stations for that customer.
“You don’t go to Romania because it is so much better than Poland,” says Carsten Barth, Elcoteq director of marketing and communications. “You look at it from a customer’s point of view.” Arad is about 150 miles from Budapest, Hungary, where the sub-systems are assembled into base stations, Barth says.
More OEMs are seriously considering Romania. Thomson S.A. has studied the country as one option for making set-top boxes, says Francois Gauthier, general manager, worldwide operations for premises systems. “The factory I visited had made a product similar to ours in the past and they had experience,” he says. “We also did an audit and were satisfied with their processes.”
Like other nations reviewed in the TFI research report, Romania is a mix of positives and need-to-improves. It is cost competitive, but wages are rising and it has a skilled labor shortage. The government offers a friendly tax environment, but concerns persist over corruption and intellectual property protection. The infrastructure is inconsistent – better in the western part of the country but less solid in the east.
Marius Stefanescu, a dual Romanian and U.S. citizen, who recently returned to set up an electronic manufacturing consulting business in Timisoara, in western Romania, agrees with the general findings of the TFI research. Stefanescu, who spent a decade in the U.S. electronics industry, is candid about the obstacles, but optimistic about overcoming them.
“There’s always a flip side to cheap labor,” he says. “The ghosts of the past don’t want to go away.” Stefanescu, 34, says the Soviet-era worker mentality is “still prevalent among the 40-plus generation.”
He explains: “An engineer would have been paid more and had more respect in the old days, compared to a regular worker, but there was no incentive for professional development. Some older workers are bitter now. They didn’t realize the change had to come from within them.”
As the two newest EU members, Romania and Bulgaria are trying to avoid mistakes made by Poland and others when they joined, Stefanescu says. For example, he says the Romanian government has been more proactive in tackling the corruption found in these countries, including a TV and billboard ad campaign. “There is a huge incentive to get rid of corruption because there’s a lot of investment money in Western Europe waiting for this to happen.”
He cautions the business culture is based on personal relationships more than in the U.S. Several Romanian companies in the electronics supply chain made successful transitions from the Soviet system, but can be hard to locate. “They don’t put much emphasis on email or the Web,” Stefanescu says. “It is more about knowing someone or knowing someone who knows someone.”
In the end, the biggest problem with moving to Romania, especially if relocating from Western Europe, could be bad headlines like Nokia is getting. Branding Nokia’s move “caravan capitalism,” German union and government leaders have called for a nationwide boycott of Nokia products and for the EU to ban Nokia’s deal with Romania.
Says Stefanescu: “In my opinion, that can only delay but not kill the initiative. Nokia has already invested too much and, what’s more, developing rural Romania is also a clear interest of the EU.”
Two weeks ago I wrote about Nokia’s efforts to reduce its environmental impact as presented at the Green Manufacturing Expo, a conference I chaired in Anaheim, Calif. I promised one more report from the event: This one on Hewlett-Packard.
During the conference, HP announced an engineering development that allows it to use post-consumer recycled plastics to make new Original HP inkjet print cartridges. As of the announcement, more than 200 million cartridges had been manufactured with the process. HP says it used more than 5 million pounds of recycled plastic in its inkjet cartridges last year, and the company is committed to using twice as much in 2008.
What the press release doesn’t tell you is how H-P makes breakthroughs like this happen. Its internal processes were explained in a presentation by Jay Celorie, a manager of HP’s social and environmental responsibility efforts. More than most companies, HP understands that environmental responsibility starts at the top of the organization and must be nurtured throughout. It will not happen without specific goals, objectives and commitment to attain them.
HP has been a pioneer in environmental and other socially responsibility. According to the environmental sustainability segment on its web site, HP launched product recycling in 1987, and launched product design for environment in 1992. HP’s approach is worth studying by companies genuinely committed to the greening of their practices. And it is also worth remembering that even HP – and it would acknowledge this – is just part way along the journey to the kind of environmental sustainability the industry needs.
According to Celorie, HP manages its impact by adopting environmentally responsible practices in product development, operations and supply chain. When it begins to design products, it systematically considers the energy efficiency of the design, the materials that will have a lower impact, and how the device and its components can be recycled at end of life. It establishes goals, just as it does for sales. And it monitors and audits progress toward those goals, including the efforts its suppliers make toward choosing and producing environmentally sustainable parts and materials.
These practices follow the same roadmap TFI Environment uses to support our clients. Does your company have a compass to guide you toward environmental sustainability?
I’ll be chairing the next Green Manufacturing Expo, organized by Canon Communications, on September 22 and 23 in Rosemont, Ill. If you’re interested in attending, please write to Melanie.Cruz@CanCom.com.
From time to time, we hear some version of the following story. Maybe you do, too.
With the best corporate social responsibility (CSR) intentions, an OEM tells its Chinese contract manufacturer to limit workers’ overtime to the amount prescribed under law. Then many of the workers quit and go to another manufacturer that doesn’t follow the law.
Electronics manufacturers and others face the dilemma of breaking the law to offer as much overtime as possible to workers, or complying and losing workers to employers who don’t play by the rule. Chinese labor law stipulates that workers cannot work more than 36 hours of overtime in a month, but does not enforce the rule, and workers want as much overtime as they can get.
We hear the stories, but rarely see any documentation of the problem. So shame on us for not noticing sooner: A study group from the Foreign Investment Advisory Service of the World Bank and Business for Social Responsibility, with financial support from various organizations, including the Electronics Industry Code of Conduct group, recently researched CSR, including the overtime problem, in Shenzhen’s electronics sector and published its finding last summer.
Entitled “Corporate Social Responsibility in China’s Information and Communications Technology (ICT) Sector,” the report examines CSR issues based on interviews with several EMS companies, including Celestica, Flextronics and Foxconn, and several OEMs, including Hewlett Packard, Motorola, Nokia, and Philips.
Here’s a sample of its findings, from section 2.2.7, “Complexity of the overtime issue:”
“Since employee retention is a major challenge in Shenzhen, factories are extremely concerned with losing workers due to insufficient overtime. Among the suppliers interviewed, turnover ranged from 3% to 20% per month. Many suppliers felt that workers demanded at least 60-80 hours of overtime per month, and that overtime only became unwelcome above 100 hours per month.”
No single electronics company can begin to resolve the gap between law and reality. The existing law may be too restrictive, but there is likely an appropriate level of overtime that all parties—the industry, the Chinese government, and the workers – could agree to if they were to negotiate, which the study group recommends.
CSR is important to electronics companies, so it is time for all parties to get together and iron out a resolution, one the Chinese government will enforce. The report recommends stiff fines for companies that break the law and incentives for those that abide by it.
What’s your experience with the Chinese overtime dilemma?
I recently attended two presentations by electronics companies at the Green Manufacturing Expo, a conference I chaired in Anaheim, Calif., that ought to inspire even those who are most skeptical that green can be profitable.
In one, a Nokia manager explained how it had reduced its environmental impact by down-sizing cell phone packaging. In the other, a Hewlett Packard manager discussed its product stewardship initiative. I’ll report on Nokia today and on HP in a future post.
Two years ago, Nokia reduced by half the size of the box for its cell phone. According to David Conrad, head of environment for Nokia North America, about 250 million phones – half the total sold from February 2006 to the end of 2007 – have been shipped in the new box, for a savings of $150 million in materials and transportation.
Nokia can put 1,100 new boxes on a shipping pallet, compared with 480 old boxes, which results in 5,000 fewer tractor trailers on the road. The new packaging, made entirely of recycled paperboard stock containing 55 percent post-consumer recycled content, has saved about 855 trees, eliminated nearly 5,000 pounds of waterborne waste, and diverted more than 77,000 pounds of landfill waste – to name just some of the environmental advantages to date.
Conrad said the only way to have a substantial environmental impact is to challenge convention. Nokia had to get diverse thinking involved in the process. For example, whatever marketing people might lack technically, they more than make up for with creativity. “You have to challenge convention, re-ask questions that have been answered again and again, to make people rethink the way products can be designed, manufactured, and packaged,” he said.
Nokia has been a leader in the green movement in other bold ways. For example, it recently released a cell phone with a case made of plant-based plastic, not petroleum based. Conrad explained the reason for Nokia’s commitment: “Corporate sustainability and environmental sustainability are not mutually exclusive or mutually agreeable; they are mutually dependent.”
That’s exactly the point we’ve been making for 10 years at Technology Forecasters. How do you see it? Do you want to make corporate sustainability and environmental sustainability mutually dependent at your company?
Another Green Manufacturing Expo, organized by Canon Communications, is scheduled for September 23 and 24 in Rosemont, Ill. Let me know if you are interested in attending.
The last time you made an outsourcing decision did you consider the Blizzard of ‘08 in China? Of course you didn’t. Why would supply chain managers have a better crystal ball than the weather forecasters, who didn’t see it coming until it was too late?
Unlike weather forecasters, supply chain managers need to consider the worst case risks of their decisions even if they can’t predict when the risks might occur. If the Blizzard of ‘08 caught you off guard, it says something about your risk management assumptions.
China’s worst weather in 50 years (a series of storms in the past two weeks) has tied the infrastructure in knots, stranding millions of migrant workers who were traveling to visit their families to celebrate the lunar new year, shutting power plants due to delayed coal deliveries, and snarling a rail and highway system already on overload.
As for the impact on the electronics industry, the only evidence is anecdotal. Technology Forecasters consultants have heard stories of lost productivity, delayed shipments (weeks not days), and suppliers not returning calls or emails.
The implication for risk management is clear to Jon Gilbert, TFI logistics consultant and principal of the Gilbert Group:
“When you outsource to a foreign country you’re not just buying the capabilities of the plant, but the whole distribution network in that country, and the infrastructure that supports it. We should not be surprised when we hear about large-scale transportation interruptions in China from this snow storm because their infrastructure is challenged even under normal conditions.”
“Reduce excess inventory,” is the electronics industry mantra when planning supply chains, but the flipside is having too little inventory due to delays caused by weather, fires, earthquakes and human-caused destruction. The challenge is to find the proper balance between the risk of excess inventory and the risk of being caught with none.
At this stage in the industry’s maturity, it is easier to take inventory out of the system than to be more cautious; supply chain managers get incentives for the former, not the latter. At the very least, they need to ask the right questions. Our experts can help.
How do the decision makers in your supply chain balance inventory risks? We’re interested in hearing from you.
Even the best medical doctors consult other experts. Shouldn’t electronics OEMs that spend millions of dollars on outsourcing do likewise? The following illustrates some of the risks of the insular approach.
I recently conducted a review for a large medical electronics OEM on their request-for-quotation (RFQ) and the resultant pricing they received.
The outsourcing job was a product (about the size of a breadbox) that had been re-designed and reduced in cost. As medical gear goes the anticipated volumes were relatively high, so it made for an attractive piece of business for any EMS or ODM seeking new medical business.
Nine companies bid. Based on my recent update to the Outsourcing Navigator I knew prices were rising but was still surprised by the quotes. The three suppliers who would talk to me (one of which was the OEM’s preferred source) had quoted almost twice as much for value-added services than I would have anticipated.
When asked about this they admitted padding their numbers by more than 5 percent (I made it more like 8 percent to 12 percent) as they felt the geography requested was the wrong solution and would result in problems. What a concept though: An EMS company actually priced a job to make some money!
Despite the fact that everyone talks about collaboration these days, none of the suppliers had offered an alternate suggestions to the OEM. When asked why they hadn’t, they all informed me it was “crystal clear” (from comments made by the OEM’s sourcing team) that the solution had already been decided and that the OEM’s main criterion was a contractor that would “keep its mouth shut and do what it was told.”
When I shared this information with the OEM manager working with me on the case study, he was furious and stopped the analysis –he didn’t even ask what was wrong with the geography they’d selected or what a better alternative might have been. Go figure.
The outsourcing landscape looks a lot different than it did last year, much less compared to three, four or five-years ago, and the rate of change accelerates. Given this reality, seeking alternative ideas and approaches is no longer a luxury – do yourself a favor and get a second opinion.
Based on nearly thirty recent, on-site interviews and extensive phone research of electronics contract maufactuers, this exclusive Webcast provides an in-depth picture of the current state of outsourcing in Eastern Europe, trends for future growth, details on a set of Central and Eastern European countries, plus recommendations for OEMs and contract manufacturers.
Outsourcing Trends in Central and Eastern Europe: The Second Wave: Play Now | Play in Popup | DownloadFor a number of years, I’ve been predicting how the path to greener electronic products and facilities would unfold through the next decade. We’ve published TFI’s “Electronics Industry Environmental Timeline” on our web site to give clients context about key directives and other regulatory events since the 1970s, and to forecast environmental trends above and beyond the imposition of any single compliance standard.
For example, by 2010 I expect we will see moderate use of alternative, non- or less toxic materials throughout the electronics, and that this trend will accelerate to widespread use by 2015. Some of this will be compliance driven and some of it will be driven by the fact that electronics companies will come to see that using fewer and non-oil-dependent materials can be profitable.
I elaborated on these projections in a recent podcast with Design News.
Though the European Union’s Restriction of Hazardous Substances (RoHS) Directive loomed large for the industry in recent years, even RoHS will be nearly forgotten in time.
What will be remembered is how the electronics industry seized this moment to make bold and significant changes in the way it designs and manufactures products using drastically reduced carbon footprint, with fewer toxic chemicals, and wasting virtually nothing – using or recycling everything from the raw materials except the squeal (as the meat industry used to say about pigs).
The point is to get out in front of the timeline for business benefit. Learn how by attending the Green Manufacturing Expo next week in Southern California (which I am chairing) or by asking me about our high-return environmental and social responsibility partnerships with electronics companies. A good place to start is to take a look at the road map.
As always, we’d like your thoughts here, too.
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