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Beyond Outsourcing Post #2: 10 Global Trends and Implications for OEMs

Monday, May 6th, 2013

CBA is publishing a series of articles based on our ground-breaking study, Beyond Outsourcing, released to Outsourcing Navigator Members late last year.

The first introductory article can be accessed here>>>

The second article in the series describes the 10 global trends OEMs are currently facing as they redesign their global supply solution.

1. EMS/ODM Prices Are Converging.

For the OEM, using an Original Design Manufacturer (ODM) model historically delivered a cost benefit over an EMS because ODMs provided an off-the-shelf design and fewer ancillary services.  OEMs that used the ODM approach gained something in time to market, but arguably lost something in competitive advantage due to innovation. However, the cost advantage for OEMs who use this approach is disappearing as ODM costs have been driven up by the OEM community’s expectations over the past decade (especially from the supply-chain and SG&A perspective.)

IMPLICATION: If you are depending on an ODM model you should be actively exploring other options.

2. Regionalization Is Gaining Momentum.

What started as a trickle has become a stream. It is not a torrential river yet, but substantially more than a trickle and momentum is building. With rising transportation and global labor costs, combined with increasing global risk, OEMs in the midmarket have come to understand that a cross-hemispheric supply solution is not cost effective.

IMPLICATION: More OEMs are designing a supply solution where they build in the region for the region.

3.  Global Capacity Utilization Is Increasing

While outsourcing began as a way for OEMs to convert fixed cost (e.g. plant equipment, buildings, etc.) to a variable basis, as EMS capacity increased, OEMs became focused on securing continuous cost reductions. Today, hardware manufacturing has become a commodity and OEMs rely on continuous cost reductions for manufacturing to stay competitive.

EMS companies were able to accommodate ongoing cost reductions for many years as they had underutilized factories they needed to fill (including over a hundred OEM divestitures). That reality is changing. In short, perhaps the biggest risk facing OEMs is the fact that available global capacity is now reaching full utilization and prices are not likely to continue on their downward trajectory.

Our data shows a significant reduction in the supply of EMS capacity and we have forecasted that if additional capacity doesn’t come on-line within the next two-three years demand will exceed supply.

IMPLICATION: While overall capacity may not change, more of the available capacity may be going offline due to changing business models and other trends. With demand exceeding supply, prices must rise for EMS services.

4.  Labor Costs in China Are Rising Far Faster than Anyone Predicted.

Our data indicates that for electronics manufacturing, there is not an unlimited supply of low cost labor in China, in spite of the huge population. Pressure from human rights organizations; rising middle class expectations, and government regulation to avoid social unrest have contributed to the rapid rise in wages. CBA forecasts that labor costs will continue to rise for at least the next two to three years.

IMPLICATION: Does this mean OEMs should exit China immediately? Probably not; but a thoughtful well-developed alternative solution that is fully congruent with an OEM’s immediate and long-term needs should already be in development.

5.  Slower Rate of Growth of Electronics Outsourcing

The EMS penetration rate is the percentage of electronics total available market (TAM) that has taken the plunge to outsourcing to an outside entity for manufacturing services. This measure is the baseline upon which the industry has historically based its growth forecasts. CBA has watched the rate of growth of the EMS industry slow.

IMPLICATION: Finally the industry is realizing that outsourcing is not one size fits all and the heady days of double digit, year-on-year sequential growth in outsourcing are behind this industry.

6.  Risk in the Supply-chain Has Reached Unprecedented Levels

The risks involved in global electronics hardware manufacturing are increasing. Few would argue that statement. Yet many would argue that these risks, including geopolitical instability, turmoil in the financial system, and certainly natural disasters, are beyond the control of most strategic planners, so why even worry about them? Thankfully most front-line managers understand that even in the best of times outsourcing is an inherently risky proposition best controlled with careful planning and thoughtful execution; unfortunately this insight seldom reaches the C-Suite.

IMPLICATION: Many OEMs are reconsidering their entire supply solution to mitigate risk and thereby reduce their true costs.  The question is whether or not these insights will be embraced by executive management in time?

7.  The Demand Cycle Has Shortened

Most OEMs simply don’t know what they need until something is sold; and then they need it from their manufacturers within days not weeks. And further complicating the situation, most refuse to maintain finished goods inventories or operate in-house manufacturing capabilities in parallel to their outsourcing suppliers which would dramatically improve their response times.

For a few years, ‘Lean Manufacturing’ looked like it would provide an answer, but Western industry simply could not bring itself to fully embrace the approach with its many operational disciplines.

What we are left with is a dysfunctional system where OEMs refuse to place firm commitments, where forecasts are meaningless, where the outsourcing industry is afraid to order anything until the last possible minute and the downstream supply chain routinely labels everything as non-cancelable/non-returnable. Meanwhile the ‘express delivery’ service industry reaps the rewards of the industry being behind the demand curve.

IMPLICATION: The expectation is that, just like in the virtual world, an almost infinite array of choices of physical products should be available instantly. This trend is unlikely to reverse.

8.  Fewer Resources at OEMs

As the so-called ‘outsourcing dividend’ has finally begun to dry up, OEM top-level executives have begun squeezing every internal element of their own enterprises in an attempt to preserve profits.

Beyond general cost-cutting in travel, internal support activities and miscellaneous expenses/benefits we’ve also noticed an even more unsettling trend:  elimination of the outsourcers themselves. These are the operations managers and supply chain specialists who understand manufacturing well enough to manage a complex cross-enterprise supply solution.

IMPLICATION: There are far too few people within most OEM organizations with ‘tribal knowledge’ about manufacturing; almost no one is left that truly understands the real risks and costs, or appreciates the value.

9.  EMS Are Trying to Diversify Their Revenue Streams

The EMS industry has been actively expanding their services offering deeper into the product lifecycle as a means of diversifying their revenue stream in pursuit of margin improvement. In spite of a significant effort on the part of the EMS community, during the past decade the acceptance rate for these life-cycle services has not been particularly high. The most probable reason that OEMs haven’t embraced these new services is they’ve become so conditioned to commodity based pricing for PCB & Box Build that they don’t want to pay for the actual costs of these extras. In fact, many OEMs have started moving in the other direction, exerting more control internally over several stages of the product lifecycle.

IMPLICATION: The EMS industry’s efforts to improve financial performance are not working.

10.  The Global Market Is Not What Was Expected

Capturing global demand is a potential opportunity for nearly any type of business, electronics being no exception. With demand in the developed world slackening due to the continuing hangover from years of excess spending on both the public and private level, emerging markets have become nearly everyone’s best hope for growth.  Yet demand for OEM products in emerging markets for the most part requires a middle class willing and able to spend on imports. Simply manufacturing a product in an emerging market is not a guarantee that local buyers for that product will magically appear, contrary to what many OEMs believed.

IMPLICATION: The opportunities of a truly global marketplace have proven irresistible, yet elusive.

Next month:  Beyond Outsourcing Post #3: OEM Risk Ranking of EMS Service Offerings.

EMS companies have expanded their service offerings to include such things as design services and aftermarket support in an effort to improve margins. Our next article reveals what OEMs really think about the risk to them of engaging with their EMS in these arenas.

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Next Evolution for Outsourcing

Thursday, April 4th, 2013

How We Got Here

The global outsourcing phenomenon is entering a new phase. EMS prices are rising; geopolitical risk and uncertainty are increasing, and many OEMs are reconsidering their global solution, including abandoning outsourcing altogether for certain segments of the product lifecycle. The relationship between OEMs and their EMS providers is worse than it has ever been. The level of mistrust is very high. EMS are disengaging with unprofitable customers at the same time that OEMs are demanding increasingly draconic cost reductions and onerous terms and conditions.

Something has got to give.

And when it does, global capacity shifts will impact all end markets and sizes of companies, from the Goliath fringe to the most regional.

Late last year, CBA published an Outsourcing Navigator Council Report, ‘Beyond Outsourcing’ that outlined some of the characteristics of the next phase in global electronics manufacturing. We looked at the industry’s past; did a deep dive into our database of case studies, and conducted in-depth interviews with the industry’s key players. The results are a guide for OEMs on how to move forward into this next evolution, learning from the mistakes of the past. What is that quote? ‘Those who refuse to study the past are doomed to repeat it.’

Today we launch a series of articles to discuss the key findings from the Beyond Outsourcing Report. There will be five articles, released on the first of the month:

1. Introduction and Background: How We Got Here

2. 10 Macro Trends Driving Outsourcing

3. OEM Risk Ranking of EMS Service Offerings

4. Outsourcing Alternatives

5. Buy or Build?

This article will start the series by briefly describing how we got to this point. Originally, OEMs designed, developed, and manufactured most —if not everything—that went into their products, hence the name ‘Original Equipment Manufacturer’. Then as technology evolved and became more pre-packaged and ubiquitous (e.g. integrated replaced discrete logic and modular construction supplanted elemental designs) product differentiation shifted from a matter of functionality to an issue of cost-versus-performance.

This created a high-degree of ‘product churn’ in the market place and life-cycles began to shrink. As a result, sales forecasts became increasingly unreliable due to demand fluidity brought about by shifting user preference. In reaction, OEMs looked for methods to shift their fixed-costs to a variable basis, as utilization rates in their internal factories became progressively more difficult to predict and control.

The outsourcing industry, initially on a consigned basis, began as a means by which to ‘buffer’ these peaks and valleys in the OEM’s manufacturing requirement, but these companies soon gained greater responsibility as their service offerings expanded. OEMs continued to shrink investment in internal capabilities and outsourced more functions, more often. Eventually they began to dismantle their internal operations and launch large scale divestiture programs.

These actions, coupled with the impact of globalization, and an unprecedented economic downturn post Y2K, created a supply-demand imbalance in the EMS industry (favoring the OEM) and prices for manufacturing services dropped precipitously.

This advantage was embraced broadly by OEMs who quickly came to rely upon this recurring windfall to prop up their eroding margins. So when EMS pricing ultimately hit the bottom of the pricing curve, they saw little choice but to abandon their existing supply-base and transfer their outsourcing requirements to lower-cost solutions such as China.

This left many midmarket OEMs without a supportive, low-cost, local alternative for the early and late stage elements of their product life-cycle, and many simply resigned themselves to off-shoring these requirement to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography.

In many if not most cases, this provenance resulted in a cumbersome, expensive, and ineffectual solution that still plagues many of these OEMs, who continue to struggle with a cascading set of requirements that remain inadequately or totally unfulfilled. In short, the “baby was thrown out with the bathwater” a consequence certainly not intended but very real indeed. And while a sea-level change in outsourcing now appears inevitable, the question remains – will these shifting tides ultimately solve the issues that have resulted?

Clearly, in-sourcing much of the product life-cycle including; prototyping, NPI, EOL and on-going support (if not the full production requirement) would not be free, but neither would it be as expensive as many people believe. High quality, well maintained equipment of all types is in surplus throughout North America and Western Europe, as are the human resources necessary to perform these tasks. And for a midmarket OEM with an outsourcing spend of as little as $50-100 million per year, a persuasive financial argument can easily be made for in-sourcing.

As each OEM’s situation is different, each OEM’s solution will be unique. This series of articles is intended to stimulate a discussion of how OEMs can re-think outsourcing starting with a clean slate. So use these suggestions only as a starting-point and aggressively seek out or craft a wholly custom solution that complements and harmonizes with your requirements. What is most important is not which option you choose, but rather that you choose an option that integrates a life-cycle based solution into your manufacturing strategy.

Next month: 10 Macrotrends Driving Outsourcing

For more information about the full report, contact Jennifer Read, Jennifer@charliebarnhart.com; Eric Miscoll, eric@charliebarnhart.com

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The True Cost of Labor: An Insider’s Insight

Thursday, February 7th, 2013

When we talk to OEMs about the fully burdened cost of labor in geographies around the world they often are in disbelief of the numbers we present. This is true whether we are talking to OEMs in North America, Europe, the Middle East, or Asia. “That’s not what I pay.” Well, on average, actually it is!

How can we so certain? Two reasons:

1. We have an unprecedented level of insight into this calculation from running and advising EMS companies (both large and small) for over a third of a century.

2. Our client list and therefore our data base is one of the largest in the industry thus providing us with a constant and reliable stream of industry comparables during both good times and bad.

Admittedly, the labor rate that appears on EMS/ODM quotes (or is provided to OEMs in discussion) can have very little relation to what’s actually included in a contractor’s quotation as the quoting process is as much an art as it is a science. This is true because there isn’t any accounting “rule” related to quotations and a contractor can present whatever number they wish for whatever question asked as long as they report their actual internal numbers in compliance with local taxing and securities regulations.

Which begs the question: do you as an OEM share your internal cost-accounting data with your customers?

Never forget that both EMS and ODM companies are for-profit enterprises and therefore have to:

1. Fully recover all their costs,

2. Include sufficient margin in their price to produce a profit.

And if they don’t they will go out of business.

For an EMS or ODM the simple truth is that the more they tell an OEM about their internal numbers the more the OEM will pick-away at their price. It’s just the way business works. We get what we negotiate, so handing the person you are “negotiating” with a loaded gun is a really, really bad idea.

So why does CBA calculate and publish the Fully Burdened Cost of Labor for over 20 international geographies for its Outsourcing Navigator Council (ONC) members quarterly?

Because, as it says on our website:

“Myths, misconceptions and financial gamesmanship have made rational decision-making relative to the Electronics Manufacturing Services industry virtually impossible. Our data reveals just how dissatisfied the OEM community has become with outsourcing. The level of mistrust between the parties is astounding, and wholly unique to this industry. Therefore we have constructed the Outsourcing Navigator Council as a venue where Outsourcing Professionals can get real data-based answers to their questions.”

Reliable, current data is particularly important today for both communities as capacity utilization rates, especially in key regions such as Mexico, S.E. Asia and the non-Euro regions of Eastern Europe, continue to rise while in geographies such as China labor costs are going up far faster than anyone predicted (remember when people were saying that China would never have a labor shortage? That was another myth about China that has proven false. See Industry Week Article)

Bottom-line, you can trust our data even when the numbers sound strange to your ear.

To gain access to our Outsourcing Navigator Council (ONC) data, contact Jennifer Read or Eric Miscoll.

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Contrarian View About Jobs

Saturday, December 22nd, 2012

It seems like everyone is talking about jobs these days, especially in the US during this election season. CBA has always been the contrarian in the room – the one in the back when Groupthink threatens to take over, that jumps up and says, ‘Wait a minute, not so fast!’

So in this situation, again we feel we must protest the current narrative that’s unfolding in what passes for thinking in terms of the global workforce.

Here’s what we’ve been hearing: companies are sitting on piles of cash, and have job openings that go unfilled because managers can’t find people with the right skills to hire. So they post jobs on their websites, and collect resumes for months and months, but never hire anyone. Why is this? Here is the narrative:

  • We need more math and science taught better at an earlier age, and the schools and universities aren’t producing enough American citizen graduates. We need people that know how to develop the future high tech products that unborn prospective customers of companies like Microsoft want so Microsoft will be innovative and competitive again and C-suite stock options will be worth what they used to be. And they need to be willing to work for $40,000/year on contract.
  • It’s the government’s fault. We need more H-1 visas so we can hire the mythical PhD/MBA/MSEE 20-year old Einsteins from Asia that are getting educated in the US and are willing to work for $40,000/year on contract.
  • Our workforce is too old. The engineers we have keep complaining about stupid things like, R&D funding cuts; having to work with teams that are located seven time zones away at 3 am; reaching the boundaries of the laws of physics.
  • The new hires are lazy and spoiled. They want to be millionaires by the time they are 25 and complain because we don’t have free beer available at 10 am.

The alleged talent shortage  issue was addressed recently in a Wall Street Journal op-ed recently by Brad Smith who is general counsel at Microsoft. He outlines ways he thinks we need to improve the education and immigration policies to address the talent shortage in high tech.

What all this doesn’t address is the fact that compared to 25 years ago, it’s more likely that the really smart kids graduating from advanced math and science programs will get sucked into the financial industry to design the latest robo-trade app and make millions, a fraction of a cent at a time. Whose fault is that?

I have news for you, Mr. Smith. It’s not the fault of the workers or the universities. It’s the C-suite leadership and the calcification and financialization of the high-tech sector. We have to start investing in people again. And by doing so, re-spark the sense of purpose and excitement that drove the high tech industry in its youth. People aren’t just an entry on the balance sheet — a potential source of improved margin.

In the old days, high tech companies did a lot more training than they do now. There was a budget for workers to go to industry training seminars, attend trade shows, informal and formal mentoring programs, join associations. There is precious little of that type of activity going on now as people are working harder for less money, doing the job of the three colleagues that were laid off in the last round of cut-backs. This is especially true in high tech hardware manufacturing, which has become an undervalued commodity.

Innovation isn’t something that can be taught. It must be identified and then nurtured over time, and that’s the role of management. However, these days, whenever big companies get in trouble, they start firing people, many times a LOT of people, e.g. Hewlett-Packard’s 35,000. This is in spite of constant annual report bromides saying people are a company’s most important asset. C-suite managers have no concept of how crippling quarter after quarter of layoff threats are to morale in a corporate culture. Once the RIF process starts, all productive work stops cold across the board. It’s a fact that is rarely mentioned in earnings calls. And you can forget about innovation in that environment. Everyone is working on their resumes, not next generation technology.

Corporations have an evolutionary cycle that is currently out of synch with the innovation cycle. It’s very difficult to create a start-up culture within a company that has had as many top level management missteps as Hewlett Packard. Volumes of business journal articles have been written about innovation, but in our industry, it comes down to this: people will rise to the challenge. If you create a corporate culture where innovative people are nurtured and rewarded, the organization will innovate. Currently, people are devalued as corporate accountant wonks chase ‘low cost labor’ across the globe for a few more slivers of margin. But that strategy is increasingly seen as a loser, even on Wall St.

Here’s some news: Asian workers are looking more and more like your college-aged neighbor living in his or her parents’ basement. As we’ve been saying for several years, the Foxconn model is unsustainable: Terry Gou is allowing news to leak about iPhone 5 production schedules that are being blown up by worker dissatisfaction. I especially like this quote:

An iPhone 5 back-plate runs through in front of me almost every 3 seconds. I have to pickup the back-plate and marked 4 position points using the oil-based paint pen and put it back on the running belt swiftly within 3 seconds with no errors. After such repeat action for several hours, I have terrible neckache and muscle pain on my arm. A new worker who sat opposite of me gone exhausted and laid down for a short while. The supervisor has noticed him and punished him by asking him to stand at one corner for 10 minutes like the old school days. We worked non-stop from midnight to the next morning 6 a.m but were still asked to keep on working as the production line is based on running belt and no one is allowed to stop. I’m so starving and fully exhausted.


By my own calculations, I have to mark five iPhone plates every minute, at least. For every 10 hours, I have to accomplish 3,000 iPhone 5 back plates. There are total 4 production lines in charge of this process, 12 workers in every line. Each line can produce 36,000 iPhone 5 back plates in half a day, this is scary … I finally stopped working at 7 a.m. We were asked to gather again after work. The supervisor shout out loud in front of us: “Who wants to rest early at 5 a.m !? We are all here to earn money ! Let’s work harder !” I was thinking who on earth wants to work two extra hours overtime for only mere 27 yuan (USD$4) !?

Who thinks Apple is going to continue to meet the financial world’s increasingly unrealistic expectations when their hardware supply chain implodes? Terry Gou has already announced he is going to build an inland manufacturing fortress in China staffed by robots. And the fact that Foxconn is leaking stories like the one above means they expect Apple to pay for it, holding the brand hostage to the bad publicity about human rights abuses, which customers are beginning to hold Tim Cook responsible for. So, why doesn’t Apple build a 21st century Green robot factory in North Carolina instead?

Another secret that has been leaked recently is the detail about Google’s regional server farms strategy, born in the US and Western Europe, and currently being exported to Asia. Who says hardware can’t be a competitive advantage? The stripped down designs by-pass traditional OEMs like Hewlett Packard or Dell, using $1500 of components. How this hardware is utilized within Google’s overall corporate objectives, including energy efficiency and speed, are what make this the kind of innovation story the industry should embrace and emulate.

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CBA Industry Resolution for 2013

Friday, December 14th, 2012

T’is the season for quiet reflection, taking stock of who’s been naughty and nice and so forth, so we recently began thinking about New Year’s resolutions for our family members. Some of us have young adults under our supervision; in fact, as we were sitting in the emergency room recently, where one of our young adults was being treated for a broken arm caused by an ATV accident, we realized that our advice should be short and sweet in order to be most effective.

So it is in that spirit that we submit CBA’s 2013 Electronics Industry New Year’s Resolution:

“Try not to do anything stupid next year!!!”

For the electronics industry, it’s no secret that 2013 is going to be challenging. Many global trends that have been percolating for a decade are likely to come to a boil. The sovereign debt problems of developed nations, the geopolitical unrest in emerging markets, the rising labor rates in ‘low cost regions’, as well as major market shifts around the world, will likely test the mettle of many managers of electronics companies as they guide their company’s manufacturing strategies.

Given this less than rosy outlook, the new buzz word we have been hearing – ‘re-shoring’ –gives us reason for pause, as in our opinion, this word echoes much of the nonsense that was bandied around during the recent electoral silly season. Political candidates curried favor by promising to bring manufacturing jobs back to the US. This is in contrast to what is actually happening within the global electronics manufacturing industry today, a return to ‘regionalization’ (or build in the region for the region.)

Make no mistake. Building in the region, for the demand from within that region, is a good idea and a trend we have been tracking for the past couple of years.  But the word ‘re-shoring’ implies something completely different. To us it sounds more like public relations amd plaques for corporate social responsibility than a viable means of reversing the knee-jerk reaction to the Groupthink that led to the wholesale transfer of work to China about 10 years ago.

If the decision is made to change the current manufacturing approach (always an expensive proposition), then first do a thorough buy vs. build analysis of your company’s unique situation, taking into account the entire product lifecycle and starting with a clean slate. Understand thoroughly the current costs of manufacturing, both internal and external, and then construct a global supply solution, embracing the capabilities and requirements of both your internal operations and your potential supply base. For large OEMs that probably means building in the region for the region, no matter which continent that happens to involve. But for smaller to mid-market OEMs,  that probably means in their home region, not around the world.

OEMs of all sizes that do this type of analysis can rest assured they will be keeping the CBA 2013 New Year’s Resolution for the Electronics industry in spades.

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Terry Gou Is Ironic

Friday, November 9th, 2012

CBA was struck by the irony of a news article recently quoting Terry Gou, head of Taiwanese EMS company Foxconn (Hon Hai), offering to train Americans in electronics manufacturing. The thought was he wanted to help President Obama bring jobs back from China. We read some arrogance and perhaps taunting in that comment from Mr. Gou. It caused us to reflect on the background of his company.

We recalled that Mr. Gou got his start driving around to US high tech companies like IBM and Dell in a rented Lincoln Continental selling connectors out of the trunk. He forged partnerships that allowed him to be in the right place at the right time when Wall St. convinced high tech industry executives that manufacturing was not a core competency, and they should dump their factories. That started the great outsourcing, and then off-shoring trend that enabled Foxconn and other companies in China to experience their miraculous expansions. It also arguably gave the Chinese people a shot at a better life, but not without a LOT of support from Chinese government officials, who were and are, shall we say, “flexible” about workers’ rights, finance, and intellectual property. As CBA has been saying for many years, OEMs that do business with the aptly named Foxconn are in about as good a position as the fabled chickens negotiating with the fox for a ride across the river. Apple is about to find out firsthand if the rumors about Foxconn branding their own cell phones are true. They already know what it’s like to see knock-off Apple stores selling knock-off iPads, iPhones, and so forth in the world’s largest emerging consumer market.

Young Chinese workers are also having second thoughts about the model. We think it’s unsustainable.

So, we wonder what exactly Mr. Gou could teach Americans about manufacturing? Human rights abuses and sourcing counterfeit parts springs to mind.

Ultimately we firmly believe Americans can figure out robotics and the next evolution of electronics manufacturing on their own, thank you very much.

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Speaking Truth to Power on Vietnam

Friday, August 31st, 2012

One of the ways our Outsourcing Navigator Council members use our data is to help the manufacturing operations team push back when told by senior management to do something the ops team knows will be catastrophic. Since our data are from real-time industry-specific case studies, and can be tailored to like-kind, scale equivalent analysis, this approach is usually quite compelling, and we have been part of some heroic rescues by the hard-working folks on the front lines for, especially, low to medium volume, complex electronics OEMs.

Recently, journalists and other industry tourists have published cheerful and well-meaning articles about Vietnam, expressing positive surprise at the high level of expertise available in the country. This caused us a quiet ‘uh-oh’ as we anticipated a new round of client complaints about C-Suite pressure to ‘drop everything and move manufacturing to Vietnam’ as labor costs in China escalate.

So let’s look at the facts. Vietnam is a small (size of New Mexico) populous  (9th in the world) country that’s listed as ‘lower middle income’ on the World Bank rankings. It has a per capita income of US$1,100. It experienced a boom in FDI in the late 1990s and early 2000s, accelerating during that decade and after joining the WTO in 2007; investment by the electronics industry included Jabil, Foxconn, Sparton, and others who set up EMS facilities, mostly serviced in industrial parks around HoChiMinh City and Hanoi. Its supply chain ecosystem was enhanced when Avnet bought a local distributor in 2009.

However, CBA’s Outsourcing Navigator Council global capacity utilization table shows Vietnam losing favor in each of the last 4 quarters. Why?

One reason is infrastructure. All the things C-Suite executives take for granted that are necessary for the highly complex human activity known as manufacturing: reliable power, internal transportation system; telecommunications, water and sanitation. These support systems are better than they used to be in Vietnam, but add risk to manufacturing there.

The second reason is skilled labor. While there may be 89 million people in Vietnam, the urbanization rate is still only 30%, compared with 47% in China and 72% in Malaysia. Many Vietnamese young people want to be engineers, but  you might find nearly as many skilled Vietnamese engineers if you send your work to the Jabil facility in Tempe, Arizona as their facility in HCM City. Sons and daughters of the intellectual cream of South Vietnamese ex-pats escaping the ‘Reeducation’ camps of the 70s and 80s are disproportionately represented in the undergraduate engineering programs across the U.S. These well-educated U.S. citizens return to Vietnam and spend money during Tet, but don’t typically want to return there to work. They’d much rather stay in the U.S. where they can speak their minds about the government of Vietnam without fearing reprisals.

The third reason is Ease of Doing Business. Vietnam is a Communist country, where corruption and inefficiency are a way of life, and the current global economic crisis is exacerbating the problems of a managed economy. The country dropped 8 points on the World Bank’s Ease of Doing Business Ranking, from 90th in 2011 to 98th in 2012, out of 183. Just to put that in perspective, China is ranked at 91, Zambia 84,  Belarus is 69, Kazahkstan is 47, and Tunisia comes in at 46. The government is scrambling to initiate economic and fiscal reforms of banks and state owned enterprises (which represent 40% of GDP)  as the country’s inflation rate soared to the highest in the region, averaging 18% in 2011.

So, aside from the fact that it’s a great country to visit with beautiful beaches, why would it make sense to move an electronics manufacturing program from any geography to Vietnam, when the risks are high and increasing?

Good question.

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First Ever EMS-Only Executive Council Session Oct. 24 Santa Clara

Thursday, August 30th, 2012

Our next Outsourcing Navigator Council (ONC) meeting will be entirely focused on the challenges of managing an EMS business.

EMS Business Leaders are invited to attend this comprehensive strategic planning session focused on the data and insights needed to successfully manage an EMS business for both near term and long term profitability.

CBA has teamed up with Southwest Securities and ITM Consulting to give EMS Executives the business intelligence they need now.

The theme of the day is Finding Opportunity in the Current Global Electronics Manufacturing Environment. Ray Carpenter, director and head of electronics investment banking at Southwest Securities and Phil Zarrow of ITM Consulting will join CBA Principals for an intensive, no-holds barred day of solution-oriented discussion about the challenges and opportunities arising from global trends.

Topics include:

  • List of actions to perform to maximize the net sale value of an EMS business
  • Implementing Lean Six Sigma for significant improvements in profitability
  • Beyond Outsourcing: The Future Landscape of Global Electronics Manufacturing, ONC report update
  • Expanding into higher margin services: is that strategy working? What the data say.
  • Is EMS industry finally at the financial brink? Options for a business model overhaul.

This data-intensive event is open to Non-members. It’s a chance to get to know our methodologies. And your Workshop registration fees will apply to membership should you decide to join this year.  (Check out our FAQs about the Council.)

What: ONC EMS-Only Member Meeting and Public Workshop

When: October 24; 9:00 AM- 4:00 PM

Where: Santa Clara Hilton Hotel, 4949 Great America Parkway, Santa Clara, California

Cost: This event is Free to Outsourcing Navigator Council members

Workshop Pricing:

  • ONC Members: FREE
  • Non-members**:  $250 if registered in advance,
  • $300 at the door (**Workshop fee applies to 2012 ONC membership)

This is a limited seat event, so do not wait! Sign up today.

Full agenda and registration link here>>>

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Article from Wired: Google and Amazon manufacturing hardware?

Monday, August 6th, 2012

These are some of the not-so-secret trends that are driving the revolution in outsourcing that is occurring as we speak. It’s not your father’s outsourcing industry, and hardware manufacturing is once again a competitive advantage.

Where in the World Is Google Building Servers, by Cade Metz

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How Healthy is the Electronics Manufacturing Industry?

Friday, July 20th, 2012

CBA Global Electronics Manufacturing Wellness Rating

While improving slightly this quarter and forecast to improve again next quarter, when viewed historically, it would be hard to argue that the global electronics industry is very healthy (see chart below). If a human being’s health were described as functioning at 35%, that person would be dead.

What is driving the sad condition of this patient? There are a number of specific factors:

  • Distribution of global capacity is in the process of a dramatic restructuring.
  • Projects that went to China for the wrong reasons are being repatriated in all three regions.
  • Taiwanese ODMs are pushing back on OEMs and selling their technology directly to end users.
  • Debt-ridden consumer countries are cutting back as the global financial crisis continues.
  • Labor rates are rising, and skilled labor shortages are appearing in China, as growth slows there. This might be good news for exporters to China as the domestic market may be finally getting real.

Ultimately, this means that if you are an OEM, your current contract prices for EMS/ODM services have bottomed out. Be nice to your suppliers and push back on upper management when they say they want it cheaper. We can help with data to support you.

If you are an EMS/ODM, this means that margins are strengthening, and maybe you will stay in business after all.

And for all participants in the global electronic supply chain, we reiterate that risk is high and it remains likely that you will have some type of supply disruptions in the coming quarters, so stay alert.

For more information about CBA’s data-driven approach to decision-making, go to www.charliebarnhart.com or contact Jennifer Read or Eric Miscoll.

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