A potential bright spot: given that OEMs tend to expand their fixed-to-variable based cost initiatives during periods of downturn and that Japanese manufacturers (who account for approximately 1/3 of the global TAM but less than 1/8 of the global outsourcing spend) are experiencing unprecedented levels of competition from significantly lower-cost producers in China and India, a significant “up-tick” in outsourcing from Japan, which would be extremely favorable to both CMs & ODMs, now seems at least plausible.

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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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

We’ve been following the conversation on an Industry Week forum.

I felt I had to weigh in on this topic, because I believe there’s a lot of misinformation, especially as it applies to electronics manufacturing.

I’ve managed and trained workers from every level of business (factory floor through the board room) for over 30 years and have found Americans to be the hardest working, most dedicated and flexible work force anywhere in the world. By contrast, the major problem I’ve seen since the early 1990s with US manufacturing has been the lack of a consistent, unambiguous and clear vision of where companies are trying to go and how they’d like to get there. Tell the American worker what’s expected and provide them the tools, resources and training to make it happen and they’ll deliver! What doesn’t work is treating them (either the hourly direct or salaried indirect) as an expendable burden who do nothing but drag the enterprise down and make the executive staff look bad.

I’d be interested in what others think. Please post a comment and let me know!

Charlie Barnhart & Associates LLC isn’t in the business of writing testimonials, but we think it’s important to let our OEM clients know that we’ve finally found an EMS case-study that has actually risen to the challenge of lower volume/higher mix manufacturing by application of a NASCAR ‘pit crew’ philosophy. As every NASCAR enthusiast knows, the speed of the pit crew can be the winning difference in a sport where lap times are measured in milliseconds and the distance between the first and second place finisher can be less than a car length. This situation no doubt sounds all too familiar to many OEMs who are dependent on their EMS suppliers to compete in tough global markets that have suddenly gotten even tougher via the ongoing economic meltdown.

On the eastside of the Silicon Valley, in a place called Fremont, California, is a little known contract manufacturer named Victron (www.victron.com) that not only does a pretty decent job building electronics but also has figured out how to do it quickly and on short-notice. Unlike so many of their competitors Victron’s focus is not just on manufacturing but rather on manufacturing quickly and doing so on-demand. How quickly? How does a one-day manufacturing cycle sound (and remember we’re talking lower volume/higher mix!)?  How do they do it? You guessed it – LEAN!

To start off with, just like the NASCAR pit crews, Victron chose to focus on those activities that were within their span of control rather than obsess on issues they couldn’t change (e.g. forecasts that are often wrong and the fact that most orders are received at the last minute). Their goal was to provide their race-car driver (the OEM) with the best turnaround time possible, thereby becoming part of the winning solution versus remaining part of the reason for losing. A refreshing idea!

In our review, they admitted that the first (and probably most important) step in the entire process was to accept the fact that batch manufacturing was not the answer and instead of trying to schedule the orders to accommodate the factory they would need to arrange the factory to meet the orders. Secondly, they decided to make the objective of a one-day turnaround their business as usual process – not an exception. Next they systematically evaluated and re-engineered every step in their operation (soup to nuts) to eliminate redundancy, bottlenecks and delays. Finally they implemented a process of fine-tuning each remaining activity to reduce wasted time and/or motion, sometimes via application of a technological tool, sometimes just by common sense. A process which they admit – took time, money and management commitment but clearly has yielded significant returns.

In their words, “By creating a business model around reality, and developing a time-based core competency, we have improved financial performance for both our shareholders and our customers”.

Victron isn’t about to provide me with a detailed list of how they managed to accomplish their one-day manufacturing cycle (so I can tell you and the rest of the world) but I can assure you they have done it. I’ve been through the facility and inspected their records, and what I’ve taken away from this case-study is something I’ve always believed and tried to teach in our Workshops and Symposiums… that it’s more about hard-work, common-sense and the application of the core principles of Lean Manufacturing than anything else.

Bottom-line, the customers of Victron have one of the best pit crews I have ever seen, and after 20+ years in the EMS industry I’ve seen quite a few.

I’ll be discussing this and other issues in my October ‘Leading Indicators Monthly Report’ so be sure and subscribe today so you get your copy later this week.

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.

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.

According to the most recent edition of The Charlie Barnhart Leading Indicators Monthly Report, the average cost of labor for Electronic Manufacturing Services in most global geographies continues to rise at a rate equal to or slightly above the currency adjusted local inflationary index, the exceptions being the United States, Mexico and India where the fully burdened cost of labor for both PCBA and Box Build was down marginally on improved absorption. The largest increases in the cost of EMS value-added services occurred in Western Europe and China. Both of these trends are expected to continue in 2008, net of significant strengthening of the UDS$ against the Euro & Yuan or its weakening against the Peso & Rupee.

Usable Capacity:

The majority of outsourcing continues to chase a diminishing available capacity principally located in the river deltas of China and the non-euro based countries of Central & Eastern Europe. While the industry continues to add capacity, these regions are approaching operational limits due to shortages in qualified human and infrastructural resources.

Risk factors:

The composite business risk (CBR) indicator^* for all of North America, the euro-based countries of Eastern Europe, Thailand and Australia went down this reporting period (decreasing risk) and went up (increasing risk) in Malaysia, India and China. All of this means that Mexico (for North America), Thailand (for Asia) and the euro-based countries of Eastern Europe (for Western Europe) as the best value, lowest risk solution for high volume requirements.

Lastly, the overall situation in China continues to deteriorate and given the high concentration of Outsourcing in this single geography we have begun advising our clients to accelerate analysis and integration of alternative solutions.

^*The CBR indicator which is called the Geographic Constant in the Global Outsourcing Tool of the Outsourcing Navigator Series includes (as a minimum) assessment of current case-studies, monetary exchange, economic forecasts, infrastructure scalability, cost & availability of resources (including energy), outstanding regulatory/geo-political issues, status of down-slope supply-chain, availability of up-slope services, cost & availability of capital, fixed asset utilization rates, book-to-bill ratios, current delivery trends, lead-time projections and a quality performance rating for each major EMS geography.

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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.

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