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The Charlie Barnhart & Associates Composite Risk Index continues to climb, indicating accelerating risk for the electronics manufacturing industry. However, with the announcements of a return to growth, and most analysts saying there's no danger of a double-dip recession, where does the risk come from? Our latest analysis indicates these five sources of risk:
- Cost of labor.
- Risk of failure in Tier 1 EMS.
- Abrupt slowdown in government spending.
- Global market rebalancing.
- Global complexity beyond the ken of C-suite decision-makers.
Prices for both EMS and ODM services in China have increased and are forecast to continue to increase at a rate of approximately 1 percent per month for at least the next six quarters for an aggregate of at least 20 percent. This is without taking into account {complink 2125|Foxconn Electronics Inc.}'s announced raises (unlikely) and the Chinese government agreeing to ease currency protections (also unlikely).
Recent actions at the Tier 1 EMS level have virtually guaranteed some type of catastrophic event at the “Goliath fringe.” In the 1990s and early 2000s, Solectron Corp.'s strategy of top-line growth at the expense of profits led to its eventual demise and acquisition by {complink 2085|Flextronics Corp.}; we see similar behavior among Tier 1 EMS and global OEM customers. A failure at this level will have repercussions throughout the supply base.
Companies selling to the military and government markets are facing uncertainty as stimulus money runs out and austerity measures kick in across the developed economies. In the US, the day of reckoning for state budgets, combined with eventual defense budget cuts, will bring many programs to a halt, sometimes without warning. This is already reflected in some earnings guidance. For instance, {complink 1131|Cisco Systems Inc.}'s surprising announcement of a lower than expected annual sales forecast are attributed by TheStreet.com in part to cuts in capital spending by state governments.
Lip service is being paid to the need for emerging economies to open their markets to slower-growth, developed economies. Overall, this is good for everybody, because emerging markets need to become less export dependent and their citizens need access to the world's goods and services. Developed economies, on the other hand, need to find new markets for their products. However, making this happen will require a level of global cooperation that seems unlikely.
Currency and tax issues, the challenges of global emerging markets, the unique history and challenge of outsourcing electronics manufacturing, and rapid changes in technology have created a perfect storm situation for C-level executives in OEM corporate boardrooms. Engineering and technology are no longer the main drivers for strategic planning, and the potholes and pitfalls are much more difficult to navigate than they were in the past. Operations and supply chain managers are cautioned to manage this carefully, as they will see potential supply disruptions before the top executives do.
Note: The CBA Composite Business Risk indicator is an estimate of the overall supply risk in the global EMS sector and is related to the Geographic Constant in the Global Risk Module (GRM) tool of the Outsourcing Navigator Series. It also includes factors related to monetary exchange, economic forecasts, infrastructure scalability, cost and availability of resources (including energy), outstanding regulatory and geo-political issues, status of down-slope supply-chain, availability of up-slope services, cost and availability of capital, fixed asset utilization rates, book-to-bill ratios, current delivery trends, lead-time projections, and a quality rating factor.
Hi Jennifer–good stuff. There's always risk in business but you can't always see where it is coming from. I think CBA's point about the shifting global economy will have more of an impact than anyone expects it will. As Bolaji points out, everyone is circling the wagons but reaching developing economies is going to be crucial long-term for the more devloped nations.
Mr. Ken, what you have stated is cent percentage correct only. Even when we deales with the resellers or vendors, the market price of components are not at par with the quality or performance of the product. In our company like you stated we had certian bench marking process. Who ever meeting the bench mark standards can bid & if they are willing, they can contribute to the bench marking stsnderds also.
Hi Ken, I was wondering how/if your benchmarking takes into consideration piggyback pricing on components? For example, if company XYZ has a list of components and one or a number of components needed are low to medium in volume numbers, but there are other companies that run much higher volumes of the same or compatible components. Does your service take this into consideration in a way to provide the best possible pricing by taking advantage of other company’s larger production or ordering runs?
Also, to Toms’ point, do the benchmarking reports take component quality into consideration and perhaps offer a rating system along with best/average pricing?
Dave and Toms
Thank you for your questions.
We control quality in three ways. We know the source of the Platinum reference data so we know if it was through a reseller, distributor or direct. Any one time, low ball price is excluded. Exact component matching ensures benchmarking components of the same quality. Other factors like payment terms can impact these component prices but with a large enough sample size the “Average” and “Best in Class” reference points are meaningful. The third way is testing data integrity before it is accepted into the reference data sets.
A piggyback price would be used in the Silver and Gold Services although we would not know it is piggyback. Our Platinum implementation service would look at that possibility if it could aid a client. Because of our Platinum implementation service, some suppliers are willing to offer group pricing to our clients as they are part of the Lytica family. This may or may not yield a savings to the client.
A company advantaged by piggybacking may have better pricing and it may even set a new “Best in Class” reference. Everyone needs to compete with “Best in Class” pricing and our comparisons tell how much of an advantage the best has. “Average” pricing comparisons shows how most others are doing. What is important is knowing how much better your own spending could be, and our reports benchmark this. Further, Section 7 of our reports discusses pricing factors and their impact. More information is also available on our YouTube video at http://www.youtube.com/watch?v=wki2EE8u31s&feature=related.
FREEBENCHMARKING.COM was launched on October 27th , 2010 and it is receiving a great reception in the marketplace. I will take your input to my development team and see how we can work it into our product roadmap.
Ken Bradley
President, Lytica Inc.
I think it is very clear that developed nations has to reach the emerging countries to generate revenue. With most of the consumer electronics are already making huge amounts of profict for the companies by seeling their products in the emerging countries, now the bigger companies should lead in the front and to work along with the governments of developing nations to define the strategies for growth and to market their products and services.
This kind freebenchmarking will be useful for the OEM's making very high volumes of products. But also when it comes to the pricing offered to these bigger OEM's they will be offered best in class price. Does the benchmarking service will provide details reports reagarding the pricing offered to the other companies or pricing of similar components by the different suppliers?
One of the surprises I have had since leaving a big OEM and working with multiple clients through Lytica as well as serving on Boards was to find out that big OEMs don’t always get the best pricing. Our reports, in section 7, address some of the factors that impact pricing. I was surprised to discover that volume isn’t always number one.
That being said and to address your question more directly, this is a benchmarking service and we do not reveal client or supplier prices. We provide competitiveness assessments and with the Gold reports information that will enable a client to act on cost improvement.
The reports assess a client’s input against “Average” and “Best in Class” pricing. Our reference datasets contain information from small, medium and large size corporations. We have found opportunity in all clients’ submissions regardless of size. No one is best at everything. Companies, regardless of size, generally do well where they have focused. Cutbacks at many companies, particularly the large ones, have left some commodities unattended giving rise to higher pricing and opportunity.
Regarding the pricing of similar components by the different suppliers, our reports provide details of exact and total matching. Total matching adds the pricing statistics from functionally equivalent components alternate Off-AVL suppliers to the competitiveness assessment. Also, our Platinum service assists clients in finding and implementing component alternatives from suppliers offering acceptable quality, price and service.
Hi Deve,
No, we are NOT considering the quality of the products directly in initial stage of bench marking. The process is like that, we are short listing the products which primarily comply with the bench marking standards and some times may ‘n’ number of products get short listed. Once it got short listed, the next step for filtration is based on the quality. Sure we have a policy of rating also, based on quality vs pricing mechanism. I think almost all companies have similar policies before going for final purchases.
Nice article. Cost of labor is definitely going to increase in Asian countries.
I agree. While labor cost will increase and perhaps the cost of doing business in general will increase, OEMs need to be more creative about how they plan to grow their business in 2011 and beyond. Government stimulus money will not last forever and companies have to re-adjust their internal costs accordingly. Perhaps developing the strategy to market to developing countries to increase revenue is the answer.