Pricing secrecy is rampant in the electronics industry, governed by a strict regimen where suppliers are forbidden to disclose how much particular customers paid for their products and OEM and EMS provider procurement and purchasing experts consider pricing a “competitive weapon.” We are all living a lie.
Let’s take one recent example from a large OEM. IHS Corp. in a tear-down report said it believes Apple Inc.’s materials cost for the iPhone 5s was approximately $191. Some writers immediately pounded Apple for selling the 64GB version of the device for as much as $849, supposedly garnering huge profits from the product. Is this true? Even IHS was careful to point out that its estimated bill-of-materials for the iPhone 5s was “preliminary”. (See: Who’s in the iPhone 5s?).
Apple certainly didn’t provide its actual bill-of-materials to IHS or any of the tear-down services providers; it doesn’t let even its suppliers tell anyone their components were included in its products. IHS, too, noted that its estimate did not include “software, licensing, royalties or other expenditures,” adding to the intrigue and secrecy over the actual cost of the iPhone 5s. Only Apple knows and it’s not telling. Why? This is a “competitive weapon” that’s supposed to keep the company ahead of rivals like Samsung. Really?
Nobody really benefits from the pricing veil covering the electronics component procurement business. Each time a semiconductor or interconnects, passives and electromechanical (IP&E) components vendor releases a new product the press statement typically includes information on volume availability and pricing. However, everybody also knows the pricing is merely a guide.
What your company eventually pays for a component will depend on a variety of factors, including objective and subjective issues, such as the personal relationship a buyer has with the seller at the other end of the phone; the length and strength of the supplier-OEM/EMS provider relationship; volume availability; supplier production capacity; current market and economic conditions; geo-political and natural events that may impact supply and demand, such as the 2011 Japanese earthquake and tsunami; the buyer’s purchasing power (a disputed factor because in the hands of a smart seller it may even be used against the unwitting purchaser); pre-production agreements and; long-term procurement contracts. Other factors play a role when a components distributor is involved but even that relationship may be even more opaque than a direct supplier-OEM/EMS provider transaction.
It’s a messy landscape and the real surprise is that the current pricing mechanism works as effectively as it does today. But the buyer-supplier relationship and the pricing environment could be more efficient with additional transparency. Procurement relationships are often driven by negative influences. The supplier wants the best pricing for their product and although the seller’s agent will undoubtedly swear that the buyer’s agent is being offered the best pricing in the market only one of the two parties really knows the truth.
One of the two wants to believe the seller is keeping “greed” in check while the seller hopes they’ve allayed the buyer’s “fear” of paying more than the competition. Most procurement professionals dread the day a supervisor calls with the ominous message: “The purchase contract you negotiated is 12 percent above what XYZ is paying for the same parts at the same supplier. Could you help me understand why?” Such a memo, which I’ve had a reason to write to myself recently over a botched contract can destroy confidence in a buyer-service provider relationship in addition to being deeply humiliating. Is this really a way to do mutually-beneficial business?
Do OEMs really benefit from the component pricing secrecy and other restraints placed on the supply chain? Does any company, whether a component manufacturer, distributor, OEM or EMS provider? Even the largest OEMs such as Apple with tens of billions of dollars in cost of goods sold and immense purchasing power may believe they are getting the best pricing but they will never be truly certain.
That niggling doubt will continue to hound procurement and purchasing specialists no matter the pressure they put on suppliers. That’s why many companies engage in such ruinous strategies as insisting suppliers reduce pricing by a certain percentage points during each negotiating session. That isn’t negotiation; it’s bullying. It works sometime but it isn’t efficient. In my next blog I’ll pose and try to answer this question: Who benefits from component pricing secrecy?
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.