Rethinking the Supply Line

The PCB fabrication industry is older than most of us still working. It is overdue for modernization. We have not seen transformational manufacturing changes in the PCB bare board industry during the past 15 years.

What we have seen is the installed capacity moved to China. It has been reported that 60% of global board fabrication now comes from mainland China or Taiwan. This move created a forced shift in how boards are purchased, and consequently created new demands in communication and logistics. Specifically, language, time zone, and cultural considerations. Bigger companies with China-based feet on the ground could adapt easily; the rest of us had to learn new skills.

I am suggesting that the rest of us modernize and rethink our supply line strategy.

Some may remember the evolution of the electronics component industry. First, component manufacturers sold directly to OEMs. Gradually, customers and component manufacturers found that a better path was through a local distributor. Arrow, Avnet, Future, DigiKey, and many others were born out of this efficiency. Today, it is an exception to buy directly from a component manufacturer.

PCB fabrication is difficult for distributors because every board is custom. Repeat: every board is custom. Custom equals high potential for error, which equals close technical review required.

So, buyers must go to China directly and slog through the variety of China sources. With this come the multiple challenges of accountability, communication, logistics and culture. The most dangerous of the challenges is having picked a supplier that occasionally (or often) sends subpar boards and provides no recourse or no response to your complaint. Do you really want to commit such a critical part of your BoM to the lowest China bidder?

The modernization of the PCB industry is not in processing, but in supply chain. A new category of value-added distributor is evolving in the same way the component distributor evolved … to make things easier. We call it “Managed Manufacturing Services.”

Think of it as a value-added distributor of printed circuit boards. This concept can greatly improve the supply chain for both customer and China manufacturer, but only if they really add value.

What are the important values, and how does this approach add value?

Technical support. The value-added distributor must be your expert design reviewer, capable of counseling you and quickly fixing the errors.

Only technically trained PCB teams really understand the manufacturability challenges of bare boards. With the technology of new IC packages pushing toward smaller geometries, new thinking is required about designing for manufacturability. So, your value added distributor has to be technically trained to provide this service.

Communication. The value-added distributor must be capable of clearly and cleanly communicating with a factory in a different country.

We have been working with offshore factories for a long time. We learned through hard knocks that developing a strong relationship with your counterpart in Asia is critical. I call it “Pitcher-Catcher.” Whether a fastball or a curveball, the two communicate in one cohesive motion. This takes time to develop and not every factory gets it.

Time zones can work to your advantage. We pitch everything to China by 5 pm Pacific and have answers at 6 am the next day. Your distributor must know the factory requirements well enough that only a few questions (EQs) come back, lessening the need for middle of the night conference calls.

Accountability. Your value-added distributor must have carefully vetted and audited the factories they use. They must be US corporations with financial accountability to their customers.

Slogging through a variety of factory options is not a good idea. Jumping from one to the next based on price and email pressure is also not a good idea. It wastes time and invites disastrous quality issues. Customers with little or no knowledge of what makes a solid factory are at particular risk. Yet most customers fall into this category.

If you have someone on staff with experience in this area, you can send them to China to visit multiple factories, but unless this person has in-depth knowledge of what makes the difference between okay and fantastic at the granular level, it is waste of $10,000. It takes deeply experienced people to see the difference. It takes board manufacturing experience.

From the China manufacturer’s side, it is just like the component manufacturers of old. It is much more efficient to deal with a small handful of companies who service the US market than it is to staff and service everyone. The culturally smart ones are beginning to see this and actually do view us as distributors for them. It is a proven supply-chain solution.

Following the model of the component distributors, we can modernize this PCB industry. We can improve efficiency, quickly adopt new technologies, and capture lower costs all by modernizing the supply chain. Welcome the value-added PCB distributor, or as we call it Managed Manufacturing Services.

Thomas Smiley is president, Precision PCBs;

Don’t Expect Apple to Fall for US Again

Analysis of the impact of Apple moving its production — or at least some of it — to the US will continue over the next several months but with the imminent change in US administration it could be peaking now.

Back and forth continues among various media sites debating whether Apple can or can’t, and should or shouldn’t, relocate some of its assembly.

Forbes today points to multiple studies, one by Syracuse and another by MIT (from June) that estimate assembly costs for a high-end domestically produced iPhone would rise 5% ($30 to $40). Other estimates peg it at closer to 13% ($100).

To be sure, there will be more of these types of discussions taking place. But much of the chatter disregards that Apple can’t do this alone. We have argued previously that Apple’s mastery of the supply chain has as much to do with its success as the occasionally startling hipness of its designs. The cool factor is subsidizing; keep in mind Apple has only 12% share of the cellphone market, and the tablet market — in which it once commanded a 90% stake — is now absolutely flooded with competitors and shrinking by the year. Apple’s net income has been falling with it, and the Watch Series 2, its latest entrant in the smartwatch sector, is not only losing share, the entire category is diving.

Capacity would not only be a huge issue, but the costs of scaling up are not included in any of the financial analyses I’ve read. The very real costs of $1 million or more per high-volume line would be to be absorbed — and passed on. (Zhengzhou is said to be the largest Foxconn/Apple factory in the world, with 94 lines currently running.) That’s not including the costs of finding and/or greenfielding factories, hiring, training, and so on. By the time all that is done, a new administration could be in place.

And then there’s the issue of taxes, which most reports fail to assess or even discuss. A New York Times article today, however, quotes a former chief of staff of the congressional Joint Committee on Taxation as saying: “US multinationals are the world leaders in tax avoidance strategies. In doing so, they create stateless income — income that has become unmoored from the countries to which it has an economic connection.”

Apple has stashed scores of billions of dollars offshore to avert a ginormous tax bill. The US corporate tax rate is third highest in the world on a top marginal basis, according to the Tax Foundation. This is a bit of a red herring — the lowest listed non-island nations are Uzbekistan and Turkmenistan, and no one is thinking of rushing there. But Ireland is among the lowest 20, a fact Apple has used to its advantage (although that could bite them, if the EU has its way).

All of this adds up to a very unlikely scenario that Apple will be motivated to relocate production. I could see a bit of highly publicized migration to what’s essentially a US showroom as a means to give politicians a “win” and displace some heat, but it would be trivial relative to the overall volume.

Update: Here’s yet another opinion, published on Dec. 29. And other, from the South China Post, asking whether China’s manufacturing is “hollowing out.”

Dec. 30 update: Foxconn’s CEO says will invest $8.8 billion in a new flat-panel display plant in China.

A ‘Worthington’ Idea

EMS firm Worthington Assembly last week announced a deal to market its EMS services via CircuitHub.

WAI is a small EMS company located in Western Massachusetts. Like many in the sub-$20 million space, WAI’s owners double as its salesmen, and the firm relies heavily on word of mouth (and engineers changing jobs) for prospecting.

CircuitHub developed a universal parts library and is offering that, along with BoM, bare board and assembly quoting. PCD&F did a piece on the company last year.

Chris Denney, WAI’s CTO (and a sometime CIRCUITS ASSEMBLY columnist) explains the partnership here.

Clearly, more opportunities to order boards from a variety of suppliers via a single website are popping up, with the site typically offering free software in order to gain visitors (FabStream, for example, offers use of a PCB CAD tool capable of up to 12 layer boards, and SnapEDA offers simulation).

I would not anticipate larger EMS firms would go this route. But for smaller ones, whose cost of sales would be proportionally high relative to its income if it employed direct outside sales, using app-based vendors could be a creative and low-cost way to find new customers.

What Does New CEO for Microsoft Mean for Hardware?

In the end, Microsoft couldn’t pull the trigger. In Seattle, outside just wasn’t “in.”

The world’s largest software developer today named Satya Nadella, head of the the company’s Server and Tools unit, as its new chief executive. The 46-year-old Nadella becomes just the third person to lead Microsoft, one of the most successful and wealthiest companies ever.

Thus ends one of the longest mating calls since Prince Charles’. Microsoft was reported to have danced with a bevy of blue chip candidates, including Ford Motor CEO Alan Mulally, Qualcomm COO Steve Mullenkopf, and Oracle exec (and former HP head) Mark Hurd, among others.

So when John Thompson, Microsoft’s new chairman, says, “Satya is clearly the best person to lead Microsoft,” one wonders why it took so long for them to recognize it. Perhaps they had to go through the rituals before realizing the prettiest date was the one they already live with.

In opting for Nadella, Microsoft eschewed calls to go outside for an executive who might shake up its culture or sell of pieces to boost its share price. Like Intel, it chose continuity and engineering prowess over salesmanship and the flavor of the day.

My take is Microsoft’s culture isn’t the problem; it’s been the top management’s inability to establish the proper hierarchy to allow the brilliance of the company’s thousands of engineers to come through. Time and again, Microsoft has had great ideas on the drawing board, but been beaten to market by competitors that simply execute much faster (read: Apple). Under Nadella, that will have to change.

Clearly Nadella understands how hardware can drive software purchases. As head of Microsoft’s Server and Tools business, he led a $19 billion, 10,000-employee entity that is front and center in the world of cloud computing. As he told Venture Beat in an interview last May, “We broadly as a company are moving from a software company to a devices and services company, and that’s really the transformation, both in terms of technology and delivery – as well as business model. What I do, what our division does is very central to this.”

Given his knowledge of the hardware supply chain, we are eager to see whether Nadella sees value in pulling manufacturing in-house. Such a move could demonstrably alter the EMS landscape for years to come, not because Microsoft is a dominant customer of any of the major contract assemblers — Flextronics builds the Xbox, but none of the Top Tier EMS firms counts Microsoft at a 10% or more client — but because OEMs have a herd mentality and if it works for Microsoft, they will likely follow.

Thanks to the roughly $100 billion in cash Microsoft has on hand, Nadella will have the resources to get wherever he wants to go, and, with Steve Ballmer retiring and Bill Gates stepping down as chairman, he will have full authority to make the tough decisions without the specter of the founders looming over his shoulder. Those two decisions — cofounder Paul Allen stepped aside years ago and is now seen rocking out at Super Bowl parties for the Seattle Seahawks, which he owns — should not be downplayed, as Nadella will not only need the financial backing but the unmitigated authority to make Microsoft as successful in next three decades as it was in the last three.

Why a Tight Supply Chain Is Actually Less Restrictive

This is a great first-hand account of why a tech OEM found manufacturing in Mexcio to be far superior to China. The shorter supply chain, lower inventory, access to plentiful skilled engineering and machine talent (and accountants versed in manufacturing operations) — all of these have played roles in the decision-making and success of 3D Robotics.

PwC: Climate Change Breaks Supply Chains

PricewaterhouseCoopers (PwC) is the world’s largest professional services firm. It’s not known for scare tactics or liberal crazymaking. Yet PwC’s new report on climate change says that investors in long-term assets or infrastructure, particularly in coastal or low-lying regions, need to consider pessimistic scenarios. climate-change-risk

In other words, risk assessors must plan for flooding, shutdowns and delays in the supply chain. If Hurricane Sandy didn’t make that obvious, this report will.

“The International Energy Agency, for example, now considers 4C (Celsius) and 6C scenarios as well as 2C in their latest analysis,” says the report. Under those conditions, the broken supply chain is a major business problem.

Specific sectors of concern Sectors dependent on food, water, energy or ecosystem services need to scrutinize the resilience and viability of their supply chains, while carbon-intensive sectors need to plan for more invasive regulation and the possibility of stranded assets, PwC said.

Drought, poor quality, flooding and other water-related challenges negatively affected 53% of the world’s largest listed companies in the past five years, up from 38% last year, yet there’s been no increase in the number of corporations providing water-related risk assessments to investors, according to an October report by the Carbon Disclosure Project.

In September, CDP’s Global 500 Climate Change report found 81% of reporting companies have identified physical risks from climate change, compared to 71% in 2011, with 37% perceiving these risks as a “real and present danger,” up from 30% in 2011 and 10% in 2010. —Environmental Leader

PwC suggests that many companies now view preparation for climate change as not only an indicator of resilience, but also as a competitive advantage.

Action your company can take:

  • Consider getting involved in a program like the Corporate Leaders Network for Climate Action.
    Consider investing in risk mitigation technology, such as a software module that tracks emissions and waste from your manufacturing processes.
  • Consider a web-based (subscription) module for VOC and HAP management, such as Actio Regulator.

Review the PwC reports:


PCB West Next Week

As most of you (hopefully) know, PCB West is next week. The annual conference and trade show, now in its 21st year, is the biggest and best event for the electronics design, fabrication and assembly in the Silicon Valley.

Here’s what Dave Ryder, president of Prototron Circuits, has to say about PCB West: “We have been coming to this show for a number of years now and we never fail to pick up some very good and productive leads. In fact, last year we were so busy that we barely had time to eat lunch. With all of the PCB designers attending the conference it makes this a great show for us who are in the quickturn prototype business.”

PCB West takes place Sept. 25 to 27 at the Santa Clara Convention Center. The exhibition, which is free to attend (be sure to preregister at, is Sept. 26. The show floor is sold out. Check it out!

India Goes Dark

Some 300 million Indians are without power today as no fewer than six states there lost power for an extended period of time. Add this to the growing list of recent potential and real supply-chain disruptions. There are at least 80 EMS companies affected by the outages, based on the number of entries in the CIRCUITS ASSEMBLY Directory of EMS Companies.

While the extended length of this weekend’s outage was an exception, according to Reuters, “blackouts lasting up to eight hours a day are frequent in much of the country.”

This is not to say that companies shouldn’t manufacture in India. However, the national power concerns should be a consideration for those who choose to put all their eggs in one (offshore) basket. Spread the risk.




Supply Chain Shakeup is Here at Last

We’ve often wondered whether the roughly 25 years of serious electronics outsourcing has been deleterious for OEMs. Certainly OEMs that have come to rely heavily on contract manufacturers now lack much of the know-how that comes with in-house product build. That’s a subtle change, and one that’s hard to measure directly.

But I’m getting at something more concrete. Indeed, is it possible the broad-based philosophy to “outsource everything” has not only led to a loss of manufacturing development but also actually cost more than had OEMs maintained their internal production capabilities?

Some OEMs are finding out. The ODM model, not so long ago the envy of the contract manufacturing world because of its higher margins, is being torn apart. Customers are pushing for additional services and in the process driving up internal ODM costs.

The flooding in Thailand, the earthquake and subsequent tsunami in Japan, the unrest in the Tunisia – all these unpredictable events are forcing OEMs to look ever more closely at their ever-more-fragile supply chains. The decimation of the disk drive market in Thailand last fall really woke everyone up.

Now, industry leading mid-market OEMs have already begun restructuring their supply chains, disengaging and reworking their manufacturing agreements with ODMs, and reconsidering regionalization builds (aka reshoring). This is a multi-step process that will take several years, says Charlie Barnhart, but it also is “a very definitive trend.”

Barnhart made his comments the Outsourcing Navigator Council meeting May 30 at Teradyne in suburban Boston. (I was fortunate to be invited to moderate a panel on EMS after-market service trends; more on that later.) Barnhart is a bit of an industry gadfly, but he’s provocative and willing to buck the conventional wisdom when his data (and his gut) tell him so. If he’s right, expect upheaval, and expect it soon.

We can’t say we haven’t been expecting this.

India’s Environmental Policy for Chemicals

Last April we wrote about India’s new manufacturing policy. They needed one then, and some say still do. Manufacturing in the land of cumin and curry has stalled. But don’t be fooled into thinking that means manufacturing is not happening at all in India — it means growth has stalled, not production.

Some wonder, rhetorically, how could Indian manufacturing have kept growing…?

Answer: by finding new markets.

Maybe you saw the news (India GDP news May 31, 2012) that India’s GDP growth slowed to 5.3% in Q1. This represents a three-year low for the nation. However, let’s not count India out just yet. Not even close. The nation, like many of its neighbors, is pausing, looking for new markets to pour its tremendous energy into.

One of those markets looks like it might be the chemicals industry.

Let’s take a look at the chemical industry (and related policy) in India.

India industrial sector growth: chemicals. In India, the chemical industry is said to be one of the oldest in the nation. It’s essential to any nation’s economic development that is based on manufacturing. In years past, India has had to import and almost-embarrassing amount of raw materials, including chemicals. Still, the Indian chemical sector is growing, estimated now to be worth about $108 billion.

Asia itself is a rising star in chemical sales. For example, over the last 10 years, Asia’s share of global chemical sales has increased by ~14%. Currently, the Indian chemical industry accounts for approximately 7% of India’s GDP. The share of industry in national exports hovers near 11%. Despite its large size and significant GDP profile, India’s chemicals industry represents only about 3% of global chemicals.

The Indian chemical industry is one of the most diversified sectors touching thousands of commercial products. As the raw materials engine in a booming manufacturing ship, the chemical industry is central to industrial and the agricultural development. The chemical industry provides essential building blocks for multiple downstream industries, such as textile, paper, paint, soap, detergent, pharmaceutical, varnish, etc. In India, the chemical sector is known to be largely based on feed stock derivatives from cracking of naphtha in oil refineries providing the building blocks, such as benzene, toluene, xylene, cresols, etc.

India environmental policy: chemical policy like REACH? India’s Ministry of Chemicals and Fertilizers has declared the need to invigorate the chemicals aspect of its environmental policy. Holding out for REACH-like* legislation might be a stretch in the near future (someday maybe). But the Ministry is talking in the direction of the safer use of chemicals. “For the protection of human health and the environment, and in order to reduce the current number of chemical-related laws,” authorities are saying.

*REACH is a European regulation, a pioneer initiative in the world on that deals with the registration, evaluation, authorisation and restriction of chemical substances, which entered into effect on June 1, 2007 in the European Union.

However, in India, the Department of Chemicals and Petrochemicals did begin a consultation process of the draft national chemicals policy in April of this year (2012). The resulting document includes a wide range of objectives and proposals.

Included in the documentation is the stated need to consolidate the “multiple legislations in India governing the chemicals industry that fall under the purview of different ministries.”

Also, according to the draft, India lacks legislation that addresses the following:

  1. the registration of substances
  2. preparation of a national inventory
  3. restrictions on hazardous substances
  4. banning of certain substances
  5. detailed classification and labeling criteria
  6. transport classification

The draft policy also calls for the creation of a “National Chemical Centre” (NCC). They would perform functions such as:

  1. draft legislation
  2. monitor its implementation
  3. monitor international trade practices
  4. identify opportunities for innovation and technology

The NCC would have a role in disseminating information about hazardous chemicals and create and maintain a chemicals inventory, which would include data on production, consumption and toxicological properties.

A second new body which the document states should also be set up under the guidance of the department is a “Chemical Standard Development Organisation”, or CSDO. They would “drive consensus regarding national requirements, including safety norms.”

Sound like REACH?  Yes — ish — in theory.  In reality though it’s light years away, in miles, sure, but mostly in time.

Resources besides those referenced above, as links:
International Labor Assn for Sustainable Development ILASD
Subscription / fee based: Chemical Watch