For all the talk about and desire for more and improved visibility into the electronics supply chain, the industry remains today one of the more opaque segments of the global economy. Much of the opacity is self-imposed. OEMs have over the years placed heavy restrictions on what component suppliers, distributors, and contract manufacturers can disclose to their own audiences, fostering a situation where problems like double-ordering, inaccurate demand and supply forecasting and excess production capacity thrive, according to industry experts.
The problem isn’t going away anytime soon. Based on a review of executive presentations, speeches, regulatory filings and internal corporate materials, electronic companies continue to hide information critical to demand and supply planning from each under the assumption that the disclosure could hurt the individual enterprise’s market position.
Nevertheless, electronic companies want to know more about actual demand and supply conditions at customers, first- and second-tier suppliers, raw material vendors and even end-users. In recent months EPS editors have worked with research and consulting organizations that desperately want intelligence on whose components were designed into certain high-volume electronics devices, who supplied these parts, which distribution partners supported the programs, which contract manufacturers were engaged to make the products and whether these devices potentially violate patents controlled by research sponsors.
Simultaneously, though, companies continue muddy up the distribution and generation of such information in their own supply chains by restricting who vendors can talk with, what they can disclose and when they are allowed to provide such information. In fact, the largest OEMs in the consumer electronics industry – marked by accelerated product introduction – are amongst the harshest in restricting what vendors can disclose to shareholders and investors. Some even have a zero disclosure policy, according to industry executives interviewed for this report. They decline to be identified to protect their enterprises.
OEMs don’t want component suppliers to talk about their relationships; often most people don’t know whose parts were designed into a finished equipment until it hits the market. That’s why companies like IHS Corp. does such a brisk job of providing and selling “tear-down” information that detail which vendors supplied what for a specific electronic device to the public. IHS and its rivals rush to buy the first set of such products, break them down and piece by piece identify the suppliers, estimate cost and put together a profile of how much it cost the OEM to manufacturer the equipment. The only thing they cannot estimate is the sales, marketing and administrative cost to the OEM.
Why do we engage in this economic rigmarole? Simple answer: Because people assume supply chain information such as vendor partnership, component pricing, manufacturing expenses and such other details constitute competitive intelligence that, if known to the “enemy” could result in significant sales and market share losses.
A conference call held recently by Jabil Circuits Inc. to discuss its fiscal 2014 second quarter results demonstrates the absurdity of this thinking. Mark Mondello, CEO of the contract manufacturer, danced around the supposedly sensitive issue of the company’s disengagement from smartphone manufacturer Blackberry Ltd. (NASDAQ:BBRY). Unusual for OEM-EMS relationship, Mondello provided additional information on the impact of the discontinuance of the Blackberry contract on Jabil but also embellished his statement with the usual fuzziness.
“During the second quarter we recognized restructuring related charges of $36 million, $28 million attributable to the wind down of the BlackBerry relationship,” Mondello said. “These charges reflect into some further reductions enforced and asset write-downs.”
Blackberry was a major contributor to Jabil’s sales in years’ past so the loss of such an important contract represented a huge blow to the company. A Jabil investor might have lied to know how the company is coping and which new contracts it has since gained to, at least partly, offset the loss of the Blackberry contract. Jabil has indeed been successful in gaining new contracts but – muzzled by the terms of the engagement – Mondello and Forbes Alexander, CFO of the EMS provider, could only provide fuzzy hints.
“We continue to enjoy strong customer relationships in the areas of printing, point of sale, digital home appliances and automotive,” Mondello said during the conference call. “In combination with running their business with great efficiency the High Velocity team is also celebrating 15 new customer wins. Our industrial business remains stable and is very well diversified. The team serves many of the world’s largest industrial brands and global conglomerates. We provide progressive manufacturing and supply chain solutions that positively impact end markets, market such as farming and heavy machinery, smart metering and monitoring, energy, power generation and home comfort and security.”
But who are these customers? Jabil didn’t identify the new enterprise customers by name and did not provide granular information such as the value of each contract to investors. Beth Walters, senior vice president, communications, and head of investor relations at the company explained why as she cautioned analysts ahead of opening up the conference call for questions.
“Before we begin our question-and-answer I’d like to remind our call participants that in customary fashion [and] out of respect to our customers we are not able to and we’ll not address any customers specific or product specific question,” Walters said.
Out of respect for customers? It’s a weak defense for a practice that has kept the industry in the 20th Century and made it difficult for effective supply planning.
The information many OEMs don’t want investors to have are often not sensitive enough to derail planning or hurt customers in any appreciable way. Rather, the absence of the data clouds up the supply chain by making it extremely difficult for suppliers and contractors to base capital equipment and other production decisions on actual market information. Instead, they make often inaccurate guesses about who does what, where, when, how much and at what cost. They then develop plant capacity additions or reductions on these obviously erroneous assumptions.
This situation is not limited to the relationship between contract manufacturers and OEMs alone. Component vendors and distributors, too, are often disallowed from talking about customer relationships. Speculations mounted years ago, for example, when Apple Inc. (NASDAQ: AAPL) years ago deposited $3 billion with some components supplier to guarantee adequate supply of LCD components. Neither the company nor the suppliers would comment although it was quite evident to industry observers that a supply arrangement of this size would ripple throughout the supply chain and should be considered by other companies in their capex planning.
Apple is especially notorious for precluding its suppliers from talking about their relationship with the consumer electronics OEMs. It puts supplier, EMS and other partner executives in absurd situations during conference calls when they use euphemisms such as “a large customer”, or “our big data customer”, as Donald Duda, president and CEO of Methode Inc., said in a recent discussion with analysts.
In his presentation, Duda identified many of Methode’s automotive customers by name – BMW, General Motors and Tesla – but slid down the same customer obfuscation path later while talking about areas of challenges in the interconnects and power products supplier’s business. Interestingly, Duda emphasized lack of visibility injected into its operations because of problems at the “big data customer” as opposed to the higher level of visibility it has into demand from automotive OEMs.
“I’m not exaggerating when I say that the [big data] customer could very well call tomorrow and say I need product and they would expect us to ship it but we don’t have the visibility that we’d have in the automotive market,” he said.
The visibility the electronics industry wants so much will continue to elude it as long as OEMs put greater emphasis on secrecy about their own components demands and contract manufacturing relationships.