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Collaboration with Offshore Companies
December 31, 1969 |Estimated reading time: 8 minutes
To cope with an economic downturn, small printed circuit board (PCB) suppliers and contract manufacturers should analyze what is happening in the marketplace, giving OEMs what they require.
By Jerry A. Grunor
Global positioning requires viable technology platforms from which to build an effective business by understanding what has happened in the past and plan an effective approach. It may mean buying more equipment or finding more suppliers.
One company*, which has partnering facilities in China, Taiwan and Hong Kong builds PCBs, transformers, and wire harness and cable assemblies. All of these companies meet UL approvals. Many customers have asked the company if it would also handle assembly offshore by getting the component parts and doing all of the assembly work. This type of turnkey operation has paid off for many companies that would have had to pay a lot more for their products and assembly if the same work was done in the United States.
The ability to supply many products and services offshore can create a huge source of potential value through partnership development. By becoming a procurement company, that in itself has changed the way companies now are doing business, not only in the U.S., but in other countries, including those in Asia. Suppliers with the right connections overseas truly can be a source of market intelligence and prevent wasted time, effort and money for companies of all sizes. Whether the market is short or long term, it now is possible to find the exact products a company wants, at the least expensive price, and still have money left over for new innovations and design ideas.
Outsourcing in China
The promise of low labor rates and access to a potentially huge market has lured many OEMs and electronic manufacturing services (EMS) companies to Asian markets such as China, Taiwan and Hong Kong. By most accounts, companies in the United States are satisfied with the cost savings achieved by working with suppliers who are diversified in building all types of electronic components, products, supplies and services, as well as contacts with offshore manufacturers.
Asia-Pacific is expected to become the largest electronics component market, which in turn will create opportunity for component companies in China. Since China's entry into the World Trade Organization (WTO), the outside government has changed. Both imports and exports have grown, meaning further incentives for supporting industries. Digitalization and networking are pushing rapid development of the information industry. Eventually, China will become one of the world's major IT manufacturing bases, the source of production and export of thousands of different products.
Growing demand for and standardization of electronics raises requirements for production volume, efficiency and profit. It also means that competition will become more complex. With China's entry into the WTO, the domestic market is more open to foreign enterprise. Tariffs are coming down and the service industry has opened, giving foreign corporations the chance to compete with domestic firms. Globalization of the domestic market does raise general concerns. Prices for almost all consumer electronics are decided by the market, which means first and foremost price competition, but also means technology content, quality, service and motivation. In essence, all enterprises in mainland China, whether state-owned, privately owned, joint ventures or foreign-funded, are considered Chinese enterprises.
It is estimated that by 2005, PCB output will grow by 20 percent. Too many new enterprises and domestic expansion are the main reasons for oversupply and price erosion. By the end of this year, China likely will have become the second-largest source for PCB production after Japan. By 2005, it may very well become the leading source. Globalization has become a domestic challenge, yet the Chinese economy rests its hopes on it. Due to the downturn in the U.S. economy, global PCB output suffered. Many PCB manufacturers in North America are seeking long-term development via a global strategy, especially by promoting American standards across Asia.
China's trade reforms and stable society are attracting overseas investors, making this a great opportunity for Chinese enterprises. But Chinese companies are not used to working with American companies, and lack the understanding of deadlines, competitive pricing, the importance of communication, and the fact that quality is still the No. 1 ingredient to keep customers happy. It takes a lot of teaching by those intermediary companies who see this as an important window to continue the business of importing products from anywhere in Asia.
Moving the Product
Part of the training involved the packaging of products in cartons by using 1.5" foam to protect the board instead of cardboard, which tends to damage the corners of the boards during shipment. Figures 1 and 2 depict acceptable and unacceptable ways of packaging PCBs for transport.
Figure 1. PCB sides and corners are fully protected with foam boards, ensuring their safety during transport.
Also critical is a good freight forwarding company to ship cartons to the United States, where another freight forwarder will pick the cartons up from customs and deliver them by truck directly to the customer. The performance of both the supplier and the customer would be measured by this understanding.
Figure 2. The shipping package shows packs with PCB edges next to one another, creating an unacceptable packaging situation.
Companies that formerly focused on shaving dollars from their transportation costs now must concentrate on functionality and following the rules. Generally, greater reliance and demands are being placed on the forwarding industry. Forwarders and customs brokers are immersed in the complexities of global transportation transactions.
Irrespective of the mode of transport, supply chain security from origin to ultimate user is of prime concern to all parties within the supply chain, not only to the government but to the private sector. Shippers must increase collaboration with their forwarders and third-party logistics providers. The key is that shippers must recognize that adapting to the new regulations means not just dealing with shipments, but taking on whole new ways of business. Forwarders are becoming the international trade industry's technology providers of choice, providing a one-stop shop for international trade. Logistics providers and transportation intermediaries now are asked to provide shipment information so that customer freight will move seamlessly.
PCB Outsourcing
The last 10 to 15 years have seen more complex boards developed. Much of the PCB manufacturing moved to Asia, but new electronic products require more complex circuitry. The PCB industry as such prospered, despite many consumer electronics plants closing in the U.S. In early 2000, production began to move east at a rapid rate. In the next few years, experts expect China to provide 50 percent of the world's EMS but the domestic market is likely to grow as quickly. What started as a move of low-tech PCBs and other components east has accelerated to a full-scale exodus of component and system design, as well as the production of finished goods, benefiting and hurting the Western customer at the same time.
Lower labor costs have been the major factor in job loss to Asian manufacturers. However, Asian PCB companies had access to cheap and plentiful financing from the stock exchanges, and used this opportunity. There also has been a dramatic effect on PCB and other electronics manufacturers. This change is only building as the Chinese become more knowledgeable and financially secure.
As outsourcing continues, the future OEM is a manufacturer no longer, but more of an intellectual property (IP) provider with marketing capabilities. How business is done is changing, and U.S. manufacturers must keep up with customer demand. This transition has given companies a strategic advantage by knowing the best outsourcing facilities, enabling them to provide more manufacturing services than ever before. The key is a diversified product range and the ability to provide quantities, both small and large, as well as excellent quality, competitive pricing and of course, on-time delivery.
Pricing and Supply
Price hikes as well as tightened supply conditions are in the future for China, which is seeing more aggressive price increases because it has been so far below the curve. This will not favor the buyer's market as demand increases and supplies tighten, which will cause longer lead times.
The small manufacturer, who would honor lower pricing to get more business, will not take on any new business once they have a few large customers to book most of their capacity, thus leaving less competitive pricing for buyers. Product price increases may be 1 to 2 percent per quarter compared to price drops of 12 to 15 percent in the last year, especially for parts that have been selling below margin. To stay in the game, many suppliers are just about breaking even, while some are losing money. Therefore, an increase in pricing may be evident.
Due to the recent downturn, buyers have grown accustomed to quarterly price declines and the ability to buy parts whenever they wanted, at prices they wanted to pay. However, even without price increases, suppliers will not increase capacity anytime soon, posing problems if demand skyrockets. The solution is to build a large backlog. Right now, the industry is shipping out everything within 30 days. That could change in the next six months.
Communicating with China
More and more of the global economy seems to be falling into orbit around the world's most populous country. It therefore is essential to communicate well in English and Chinese with offshore partners, as well as getting to know the habits, culture, and fundamentals of the way the Chinese react to Americans. In China, many rules are fixed, but people can be flexible. Personal networks on a daily basis are most important between American suppliers and their counterparts in China. The greatest partnerships between American companies and those in Asia are made by daily communication over the Internet and sharing the same problems, grievances, and social worries and family ties.
Conclusion
The recession has affected many electronic manufacturing services, both large and small. But the steps many are undertaking, al-though challenging as well as painful at times, shall enable them to become leaders in the manufacturing picture in the long run. By trying to dialogue the problems and work out solutions, each company can reap the benefits that will enable them to become more successful.
* Global Communications 2000 Inc.
Jerry A. Grunor, president, may be contacted at Global Communications 2000 Inc., 32545 B Golden Lantern, #283, Dana Point, CA 92629, (949) 248-7815; Fax: (949) 248-7819; E-mail: jerry@globalcom100.com; Web site: http://www.globalcom100.com