By Jennifer Read

Having spent time at O’Hare airport in Chicago recently, I noticed several billboards advertising Accenture consulting services. One is a photo of an elephant skillfully maneuvering a wicked wave on a surfboard. I think it might be digitally enhanced. The tagline is, “Who says you can’t be big and nimble?” This was a replacement for the Tiger Woods campaign, after Accenture dropped him due to his difficulties, so it might have been thrown together, but I don’t think it’s very effective. Consultants have been accused of not having a good handle on the basic laws of nature, and this seems to me a very good example of that weakness. Elephants can’t surf. I think there are some lessons to be learned here.

In choosing to outsource manufacturing to companies in countries with cheap labor, electronics industry decision-makers have, sometimes unwittingly, added substantial risk to their business. Now, calculating the cost and responding to the consequences of that risk is part of the job description of every OEM operations manager, even those that have no substantial operations in China.

In recent years the EMS Tier structure has changed dramatically. A few companies, with Foxconn way out in front, have gobbled up the majority of the EMS pie. Seven companies with operations in China – CBA calls them the China Syndrome Seven – have engaged in predatory pricing and thereby now dominate the majority of global outsourcing. This dominance, in turn, has enabled them to exert a stranglehold on the supply chain, which has created severe parts shortages during recent months for everyone else. Anyone having trouble getting tantalum capacitors? The China Syndrome Seven have the supply chain locked up. This stark reality is an example of how this situation impacts all electronics manufacturing in every industry.

The size and scale of these China Syndrome enterprises, especially Foxconn, is beyond the industry’s experience curve. While top line growth is seemingly unstoppable due to the global demand for electronic wizardry, the health of these companies’ bottom lines is completely dependent on artificially low labor rates and on the complex and opaque supply chain contracts they negotiate through dominance. The resulting global interconnectedness of the electronics manufacturing industry, along with the sheer size of these operations and their lack of transparency, is what creates the risk.

The conventional wisdom has always held that the supply of cheap labor in China is a bottomless reservoir, but there are signs that managing it may be far more difficult and unpredictable than most electronics manufacturers anticipated. For example, Foxconn has announced it is moving its Shenzhen factory inland in response to the global outrage over worker suicides. Imagine the logistics of completing that task on a human level, while continuing to satisfy Steve Jobs’ iPhone marketing juggernaut. It could take a few months to move or replace 300,000 workers, don’t you think? That’s like a refugee situation. Is it really possible to do that and still build millions of iPads and iPhone 4’s? The recent hardware issues in Apple products seem to indicate not. Will demand fluctuate substantially when Apple fans become dissatisfied? Will there be panic in Cupertino? Foxconn’s success surely results from military-like control over all aspects of its employees and operations. Is that sustainable in the Internet age?

So we have to ask ourselves, could Foxconn collapse? If it does, how would that impact your business?

Foxconn represents nearly US$90 billion of electronics manufacturing capacity. What if a portion of that goes completely offline, even if for only a few months? Like a sudden shortage in any part of the global marketplace, there will be some ‘scrambling’ and panic to capture capacity – both from Foxconn and its competitors. What does that mean to your product’s manufacturing schedule? There isn’t enough capacity left in the world to replace US$90 billion quickly.

Many industries are dependent on Foxconn’s customers’ products. With the global economy so fragile, what kind of ripple effect would its unraveling create?

Failure tends to happen because of small inconsequential events that cascade into catastrophe. Seldom is it one single cause, and the situation is typically fine – until it suddenly just isn’t. Industry ‘experts’ and pundits may continue to tell us that elephants can surf, but perhaps we should spend time figuring out what to do in case they can’t. An elephant falling off a surfboard can create quite a big splash. Knowledge, as always, is power.