Entries Tagged as 'EMS insider insights'

Request Free Webcast: Charlie’s Q3 Update

“This is an industry that’s extremely dependent on its ability to absorb its fixed costs. EMS companies do that by continually growing their top line. We are expecting at best a flat year, and at worst a loss of 3-5%. Net of consolidation, this could be a very tough year for the EMS industry.” — Charlie Barnhart on subscriber briefing call, 11-6-08  Download this 30 minute briefing webcast to catch Charlie Barnhart’s take on recent global economic trends and how they might affect the EMS industry. Charlie discusses his findings based on the latest issue of Leading Indicators’ Monthly Report. 

Hear Charlie discuss the following issues:

  • Is further EMS consolidation likely?
  • Are the published industry growth forecasts for electronics realistic, considering the CBA Leading Indicators data?
  • What are the likely trends based on quote activity coming out of specific geographies?
  • What is the impact of currency fluctuations on the total costs for EMS programs?
  • How are lead times changing?

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Is That Opportunity Knocking?

Excerpts from the Leading Indicators monthly reports…

June 2008
* Mexico – Almost unchanged over the past 2-3 years but increasing utilization for both PCBA & BOX should begin to yield reductions in rates. Geography remains an attractive on-shore solution for its’ NAFTA partners…
* China – 38% increase in PCBA over the past 5 years, 90% derivative of increases in underlying DL & OH with remaining 10% attributable to Yuan/$USD conversion.  During same period BOX increased 200% as consequence of very high demand vs. expansion-rate for “usable” BOX capacity. Trend is expected to continue…

July 2008
* Mexico – The burdened labor rate for PCBA dropped 6.4% and 9.2% for box build…
* China – The burdened labor rate for PCBA increased 1.3% and 3.3% for box build. This trend of is expected to continue throughout the balance of 2008…

August 2008
* Mexico – The burdened labor rate for PCBA was unchanged but the Box Build number dropped 4.8%. This was the second month in a row that the Box Build labor rate has dropped in Mexico…
* China – No new data for PCBA, which seems extremely questionable (the first time in the 5-year history of the ONS that no PCBA data was collected?).  The burdened labor rate for Box Build increased 7.6%…

September 2008
* Mexico – The burdened labor rate for PCBA and Box Build was unchanged on considerable case-analysis, which confirms the drop we noted in burdened Box Build rates in August. This trend is expected to continue into 2009 as load continues to increase…
* China – The burdened labor rate for PCBA was up slightly on increased wage rate in considerable case-analysis. Based on this data it is expected, net of a reversal in the currency exchange trend between the Yuan and USD$, that PCBA labor in China will exceed $10/hour in Q4CY08. No new data on Box Build…

October 2008
* Mexico – Burdened DL for PCBA and Box was down sharply, on considerable case-analysis, as a consequence of currency translation and improving OH absorption as a result of increasing load. Net of the Peso strengthening against the USD$, average labor costs are expected to be lower in CY2009 as ADDING additional DL will lower the average rate within most of the facilities in this geography…
* China – Burdened DL for PCBA and Box was up as a consequence of currency translation.  Costs are expected to continue to increase during the balance of Q4CY2008 as the full impact of China’s new labor laws have yet to be fully actualized…

November 2008

Knock, Knock… In the vast majority of cases, Mexico is now the lowest net-cost EMS solution for North American OEMs.

Charlie

Stealth Attack on EMS Industry

No matter who wins the election, it’s very likely military spending will be drastically cut as Americans pressure Congress to fix the domestic economy and explore energy initiatives. Charlie Barnhart & Associates (CBA)  research reveals a disturbing consequence of lower defense spending on the domestic EMS industry that could put further pressure on manufacturers. While defense contracts are a fairly low percentage of the overall TAM in the North American region for electronics, these higher margin contracts contribute disproportionately to the bottom line of many US manufacturers. That’s why so many CMs have been chasing these projects with such enthusiasm for the past decade. As high volume, low mix business moves offshore, the conventional wisdom held that defense projects were far more stable and profitable as they were bound to stay onshore because of government regulations. Furthermore, the volumes, though low, were steady, because the end products were getting blown up and needed to be replaced.

The point is, if that business dries up suddenly, it will be a jolt to budgets because there really isn’t any foreseeable business waiting in the wings to replace it.

Is China’s Cheap Labor Supply Really Unlimited?

A lot has been written recently about the dwindling availability of cheap labor in China. ( See 9/6 issue of The Economist, “Reserve army of underemployed”) Some propose that the good times (for Western electronics OEMs) will soon be drawing to a close – some claim there is plenty of runway remaining for at least the next decade. In our opinion what all these reports are missing is that the operant term in the preceding sentence is ‘cheap’, which from a business perspective is measured by an OEM’s Total Cost of Ownership – not just what they pay for labor.

Here are the facts as we’ve measured them from actual electronics industry data:

1. The cost of labor in China has increased faster than the currency adjusted local inflationary index for at least the past 6 quarters (the raising cost of labor is not news at this point it is history).
2. China as a low cost labor source has now been eclipsed by both India and Vietnam whose labor costs are lower on a fully burdened basis for both PCBA and Product build.
3. The concentration of manufacturing in China’s River Deltas has reached the point of functional saturation, as determined by the industry versus the speculation of academics and journalists.
4. On a Total Cost of Ownership basis (for most Western OEMs) Mexico & Eastern Europe are now at parity with China for all but the smallest, lightest and high volume consumer product solutions.
5. Given the increasing cost of oil over time (and the global green movement) it is inevitable that cross-hemispheric solutions will ultimately lose ground to within-region (called ‘near-shoring’) solutions.

None of which means that the billions and billions of USD$ spent every year on electronics manufacturing services in China will suddenly evaporate in a puff of smoke. But times are changing… which may be the ultimate ‘So what?’ When has this industry (or much of anything else) ever operated in a quiescent state? Someone once said ‘change is inevitable’… so check your historic basis at the door and go do your homework, as I also remember someone else saying ‘Outsourcing is not a one-size-fits-all activity and never will be.’

To save you from having to Google ‘Outsourcing is not a one-size….’  that auspicious observation comes from last month’s EMS Industry, LEADING INDICATORS report that is available from Charlie Barnhart & Associates LLC through www.charliebarnhart.com at the ridiculously low price of $595 per year.

Leading Indicators Briefing Call Recording Available for Download Now

Charlie Barnhart discusses his research methodology and the current state of the art of Electronics Manufacturing Outsourcing.

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Baseless assumptions led us astray from regional strategy

POSTED BY CHARLIE BARNHART ON TECHNOLOGY FORECASTERS BLOG

For many reasons, Technology Forecasters has been predicting a return to the regional sourcing strategy that was the hallmark of electronics manufacturing before Y2K and the rush to build anything and everything in China.

(For example, see the May article by Bruce Rayner, TFI vice president and director of consulting and research, in Manufacturing Business Technology, or the conclusions from my presentation at the Spring Quarterly Forum last month: “Recalibrating the Cost of Outsourcing/The Changing Landscape of Outsourcing.”)

In this context, it is useful to review the assumptions - unfounded it turns out — that led the industry away from the regional strategy. I offered this view at the Spring Quarterly Forum last month. These unfounded assumptions, which became rationalizations to justify the move to China, have mistakenly become imbedded in the industry’s collective perception. A mindset correction is needed.

Here are the ones I encounter repeatedly.

Assumption
: Systemic quality problems in Mexico and/or Eastern Europe, or products manufactured in Mexico or Eastern Europe are of poor quality. Fact: No statistically significant data has ever been found to support this assertion.

Assumption
: It is always cheaper to manufacture products in China and ship them to their point-of-sale than it is to build them in a higher-cost labor region. Fact: Our Outsourcing Navigator Series modeling has consistently shown that on a TCO basis this isn’t true in all cases — and almost never true if materials are sourced at their point of lowest cost and assembly is done regionally.

Assumption: It is necessary to build in China to penetrate the huge potential market in China. Fact:  A review of publicly traded global OEMs financial statements clearly indicate this approach has not come to fruition.

Assumption
: Cross-hemispheric strategies (i.e., using emerging, remote lower-cost labor to build electronics) provide social and economic benefit to all parties involved. Fact: Given the state of the environment, the global electronics industry and most of the associated economies this presumption seems questionable at best.

Just because everyone else is doing something (like jumping off a bridge) doesn’t mean it is a good idea. Isn’t that something our mothers taught us?

You might know of other baseless assumptions - or you might disagree with these. Either way, let us hear from you.

 

 

 

Have you noticed?

Today’s products are smaller, faster and lighter and operate on networks that are more cost-effective, offer higher levels of functionality and are far more integrated. But you already know this as you work in high-tech, where change — especially the change brought on by innovation — defines your professional life. But did you notice that the landscape from which the majority of these high-tech products are sourced is currently rumbling at about a 7.0 on the Rictor Scale?

What landscape is this?

It’s the global outsourcing landscape and it doesn’t matter whether your products go into the consumer, computing, communications, medical, industrial, aerospace or automotive industries — the ground is shaking. Nor are you exempt if you’re one of the very few high-tech companies that doesn’t outsource manufacturing, as you almost certainly outsource something; be it design, front or back office activities, channel functions, logistics, reverse logistics, or any of the other activities that are commonly serviced from outside the organizational boundaries of the typical high-tech company.

What is causing the ground to shake?

The eroded US dollar, increasing costs in low cost labor regions, inadequate and failing infrastructure, record setting energy prices, global climate change (previously known as Global Warming which I guess didn’t sit well with those folks whose local weather was getting colder!), unchecked and seemingly uncontrollable piracy of IP, failed product safety management, supply compression, escalating consumer expectations, open frustration with customer service, falling stock prices, scandalous corporate behavior, pessimistic forecasts and a general softening of the G8 economies. Did I miss anything?

What does it all mean?

Probably that the company you work for will be paying more for the services you procure. These costs can not help but rise when the dollar isn’t worth as much as it was when you wrote those original outsourcing contracts and the underlying costs in those low-cost, geographically remote, regions you migrated to are a lot higher than they used to be. Plus you will have fewer suppliers to pick from due to ongoing supply-compression. Simultaneously, your business is probably experiencing a tougher, more competitive environment where customers are increasingly discriminating and harder to retain. Consumers who are short of cash and believe they have experienced poor customer service have no problem deciding that cheap knock-offs look attractive.

What can you do about it?

Actually, you can do quite a bit about it. Starting with acknowledging the inconvenient truth (sorry Al) that while business quakes can be nerve racking they do not have to be fatal. If your external costs go up – cut your internal costs. Most OEMs spend as much managing their outsourcing initiatives as they pay their suppliers for value-added services. Are fuel costs and surcharges eating away at your margins? Then stop shipping material half-way around the world – multiple times. Embrace a rational regionalization strategy so both you and your products end-up accumulating less frequent flyer miles. If your markets go soft – get tough. Go fix those things that are keeping you from taking customers away from your competitors (or even worst, losing customers).

Why start with these items?

Cutting costs and getting tough ought to be self evident — the reasoning on geography is that too many high-tech companies are building their products in one hemisphere but selling them in the other. This is a questionable strategy that gets more dubious when you add in the environmental and corporate social responsibility impacts of the approach and the probability that costs will continue to escalate. Even in those very few cases where a cross-hemispheric strategy makes some sense from a financial perspective how long will it be before the current level of flux nullifies these justifications? Who knows?

What is known is that the systems of trailing indicators (like book to bill ratios, etc.) that the industry relies upon to monitor the business landscape have become less revealing with each passing quarter. Outsourcing managers need indicators that provide more insight into what is likely in the future, rather than looking at the past. In other words, what we need is leading not trailing indicators – the landscape is shifting too fast to merely look at the past!

What are leading indicators?

Insights into what direction (and how fast) things are moving versus numeric summaries of what happened in the past. We need approaches and formulations rooted in the principles of business theory that we all learned but summarily forgot the moment we walked away from academia. Risk mitigation, latency, hysteresis and a few other items so arcane I’m reluctant to even list them here (not sure what the proceeding terms mean? Go ask one of your engineers, they can probably give you an analogy.) Scary concepts? Perhaps a little. Incomprehensible? Absolutely not! High-tech loves complexity; complexity of speech, complexity of thought and complexity of approach.

Maybe this is why the ground is shaking? The boundaries of the simple, trouble-free, straightforward, uncomplicated, comfortable ways of doing business are long gone. High-tech has become virtual, leveraged, global and dynamic. High-tech has changed the world. You rock.

But now it is time to step-up a level. Quarterly business reviews and Supplier Scorecards aren’t going to solve your problems. The formulation, execution and management of a cost-effect outsourcing strategy has become more complicated than just dumping requirements into the newest low-cost labor region. Dash-boarding will no longer keep you safe and on the right path – you need a heads-up display with GPS mapping functions, live traffic updates and the most current weather forecast.

Got questions?

Give me a call and let’s talk!

Charlie Barnhart & Associates LLC
charlie@charliebarnhart.com
408-230-9691

Get a Second Opinion for Medical Outsourcing

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.

Getting Beyond Price

One of the hardest-to-explain aspects of outsourcing is that pricing has remained a top concern of OEMs, even as EMS providers have dramatically reduced their operating margins and increased their service offering. The pressure to cut costs is so pervasive it has come to define the contentious EMS/OEM relationship.

Why the emphasis on price? During the past two decades, OEMs have shifted manufacturing from in-source to out-source. As a result, the EMS industry enjoyed substantial growth, which yielded massive economies of scale. As a result, they were able to lower costs, which were generally but not always shared with their OEM customers. As the proportion of product costs derived from buying rather than building rose, OEMs focused on driving EMS costs as low as possible.

This course of action first strained then soured the relationship. The OEM’s constant push for the lowest possible price and best available deal fostered an irreconcilable level of contention. This in turn made OEMs increasingly dubious of their EMS providers. As a result, they began demanding significantly more detailed cost information, which led to the practice of “granulizing” every element of their EMS supplier’s pricing and “cherry picking” line items across multiple supplier quotations to justify questionable pricing expectations.

In an attempt to preserve a sliver of their shrinking margins, EMS companies came to view this process as “death by a thousand nicks” and responded by inventing creative ways to cloud the issue. Needless to say, this resulted in the OEM losing “visibility” because they had to rely on second-hand information provided by their EMS providers. Some cynics went so far as to call it “disinformation.”

And for good reason. In the vast majority of quotations provided by EMS companies, “material mark-up” – or some such addition by another name – is typically added to the cost of materials. Usually this is explained as the cost of procurement or procurement-related functions, such as supply-chain management, component engineering or quality assurance.

OEMs rightly question this practice. Examine any EMS provider’s income statement and search for the “material mark-up” line item. It doesn’t exist. In fact, all of these mark-up costs are already accounted for and included in the overhead element of cost-of-goods, which is applied as a burden to direct labor. It doesn’t matter where in the world the transaction takes place, or whether workers get paid 10 cents- or 10 dollars-per-hour, the accounting is done the same way: operating overhead is absorbed by burdening direct labor. And by coupling these costs with the actual cost of material, the three elements of direct labor, overhead, and materials define cost-of-goods.

Simply put, there is no such thing as “materials mark-up.” It is a creation of the outsourcing industry designed to circumvent the unpleasantness of discussing actual margins when negotiating pricing with OEMs. Sad but true.

Clearly the EMS outsourcing model is seriously flawed, if not actually broken. So what should an OEM do? Demand suppliers to be more forthcoming with data, even though they know it will be used against them? Hire more people to further scrutinize and harass their already disillusioned EMS suppliers? Abandon EMS and embrace ODM solutions? Perhaps OEMs should just give-up on outsourcing and start shifting production back in-house?

These are impossibly hard questions to answer as every solution will be unique to each OEM’s circumstances. There is no silver-bullet. The outsourcing landscape is a complex, opportunity-rich environment where the proactive flourish and the timid become consumed by circumstances of their own making – not a pretty picture, but at least an honest one.

Take a Bow!

If you’ve never worked in outsourcing, take it from me – outsourcing is hard work.

It doesn’t matter if you work for the buyer or seller, or a supplier of parts or services - outsourcing is hard work. And in my humble opinion the people who make their living doing the work of outsourcing are some of the most dedicated yet least appreciated people in the electronics industry.

Why underappreciated?

Perhaps it’s because the people who practice the craft of outsourcing have never shared with their co-workers just how complicated and problematic the process they manage can be – probably because they were too busy trying to expedite product deliveries while simultaneously mitigating excess materials from the third product forecast change of the month. A forecast they already know will be obsolete before they show up for work tomorrow morning. Yet they push forward.

Or maybe it’s because we’ve become an industry of Product Development and Marketing elitists. Ever hear a CEO telling a securities analyst how they were going to build the next great commercial enterprise by never actually building the products they sell – I have.

Guess what… the CEO’s dream is only possible because there are hundreds if not hundreds of thousands of very hard working people out there building the products that the CEO thinks they’ll never touch. People both inside and outside the enterprise with the chutzpa to do the heavy lifting and fight the endless battles, people whose experience is measured by scars not patina, people who make it happen – everyday – not because someone tells them how much they’re appreciated but in spite of the fact that they’re ignored.

So if you’re in the craft and making it all work – thank you and rock-on!