Trends that Presaged These Uncertain Times

Any writer of current trends wants to be up-to-date. Normally I could write this piece and expect that by the time it was published, it still had some relevancy. Current events, however, may give us cause to ponder. Today the House rejected the $700B bailout plan proposed by the Treasury and the Dow dropped 777 points. This news will long be forgotten by the time you read this, and more pressing news-of-the-day will be at the forefront. The events we now see unfolding will arguably transform the way America does business more than any policy shift since World War II.

At the time of this writing, the financial and credit crisis has not yet become our industry’s crisis. Tech companies have managed to weather the current storm. We took our licks during the telecom meltdown at the beginning of the decade and have learned to manage very lean. Adjustments in our industry have moved at a snail’s pace in contrast to the sweeping transformation in the banking industry this year.

Imagine an electronics industry where the world’s largest companies have been nationalized, most of the leading computer, semiconductor, and telecommunications companies have gone out of business, and every large contract manufacturer is in bankruptcy, sold, or shifting into a new business. This is precisely the sort of radical transformation that the financial industry has undergone during the past 12 months. Though many called it insufficient, even the failed $700B bail-out package was three times the aggregate annual revenue of the entire global contract manufacturing industry. Through it all, global electronics spending and demand have been mostly unfazed, leaving a worrisome disconnect between our industry and the financial infrastructure on which it and every other industry relies. Can that disconnect continue? Many companies are adopting a wait-and-see approach. This, of course, further retards demand and exacerbates the problem. Even in light of all of this, there are ongoing trends in electronics manufacturing that presaged these uncertain times.

Outsourced Contract Manufacturing

Looking specifically at the contract manufacturing industry, there were subtle shifts already underway before the financial crisis hit redline. While the outsourcing trend hasn’t reversed, it has definitely slowed in the spaces we watch. Jim Walker of Gartner Dataquest sees combined growth for front- and back-end outsourced manufacturing services growing 7.6% in 2009 and 12.6% in 2010, however, he notes that “continued economic difficulties could change this picture dramatically” (see AP editorial board Aug-Sep 2008). Companies continue to search for lower labor cost areas for assembly of their products; however, other factors outside of lower labor costs are becoming increasingly important.

Figure 1. The breakdown by end-product of one U.S. contract manufacturer.
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OEMs are increasingly shifting to in-sourcing and near-sourcing due to several considerations. First of all, protecting intellectual property (IP) is risky where legal and enforcement infrastructure is weak. The labor cost advantage from outsourcing has narrowed due to significantly higher wage inflation in outsourcing countries. Labor costs were rising at a double-digit clip in China during several months prior to the Beijing Olympics. China is no longer the lowest cost labor outsourcing location.

Freight costs have escalated; another element that decreases the cost advantages of outsourcing. While oil prices have abated recently, the shock of $4 per gallon gas in the US has sensitized us all to this factor.

Long supply and support lines increase the cost and risk of supporting outsourcing partners half way around the globe. This, coupled with political unrest and military intervention in remote countries, increase the risk further. Witness the recent efforts to overthrow Prime Minister Samak in Thailand, long regarded as a peaceful and stable outsourcing country by international companies.

Near sourcing in the US and Europe is becoming more capable and scalable. Figure 1 shows the breakdown by end product (of our company), a US-based contract manufacturer specializing in complex, high-precision contract assembly. We have made a concerted effort to build a diversified portfolio of emerging product applications that serve to buffer the cyclicality of the industry and respond to technology shifts and demand fluctuations.

In the stock market they say that for every new low, there is a new high that follows. In our industry this translates to monitoring vital trends while taking a long view of our future.

Click here to enlarge image

BRUCE W. HUENERS, president, may be contacted at Palomar Technologies, 2728 Loker Ave. West, Carlsbad, CA 92010; E-mail: [email protected].


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