After the Product Build

Some very interesting developments in after-market services these days.

One major player, Celestica, has been expanding its AMS for the past several years as it seeks higher margins. Higher-value services now represent roughly 5% of the company’s revenue, according to Deutsche Bank. (AMS in this case consists of everything from logistics to in and out of warranty repair.)

Skip Boothby, Celestica’s director of Global Services (which includes AMS), says they see two primary trends:

1.  Postponement regional configure to order: Celestica sees order fill rates falling because the decision (forecast) is made too early in the product life cycle. The response is that the product is built to the lowest common denominator and shipped to a lower cost region where it is then built to order.

2. Direct order fulfillment: Here, Celestica sees product being built in a low cost region and shipped direct to the customer within a couple days. An example is Apple building PCs at Foxconn in China. The opportunity for the EMS is to add the transportation element which, if it can master, adds a new profit center.

Boothby says Celestica is trying to execute a “control tower” strategy whereby they oversee everything from rework/repair to logistics/reverse logistics to warranty and field service. He said their transportation management service is “very profitable” (but didn’t put a number on it).

They currently sell these services a la carte. They have considered developing a licensing arrangement or other pricing models. They want to make it affordable for startups and companies where their client relationship is in the “low millions.” This is just starting to be rolled out. The average AMS account is $7 million, all of which is value-added (labor, not materials). Most customers are not existing PCBA manufacturing customers. Most AMS work is one-off.

Boothby’s comments came during the Outsourcing Navigator Council meeting, produced by Charlie Barnhart Associates and hosted at Teradyne. If you’ve never attended one of these meetings (they host one or two a year), they really are very valuable, and draw a good cross-section of supply chain executives. I’ll have more on this shortly.


Chatting with Charlie

Be sure to tune in to Charlie Barnhart’s chat on outsourcing models and trends later today at PCB Chat.

Charlie’s long been known for his scrupulous analysis and willingness to slay the sacred cows of contract manufacturing. He’s sure to offer some entertaining and informative answers to your questions.

The chat takes place today from 2 to 3 EST. To attend, click here.

Inside EMS

I attended a fascinating conference yesterday on the state of electronics outsourcing and supply chain management.

Set on the campus of Tellabs in the Chicago suburbs and produced by Charlie Barnhart Associates, speakers and attendees patiently dissected current trends and needs.

So as not to inhibit discussion, I promised not to reveal any specific remarks or details prior without getting the individual speaker’s signoff, so for now I will stick to generalities.

Attending were representatives from about 10 EMS companies and a like number of OEMs, some from Fortune 100 companies. There were also various analysts and other talking heads/pundits. I was the only media person in attendance.

Topics ranged from the concrete to the speculative. Tellabs spoke at length on how and why the telecom gear maker decided to outsource its electronics assembly, and was refreshingly upfront not only about the pros and cons but about the mistakes it made along the way.

Researcher Matt Chanoff noted the startling success of the Apple iPad and wondered whether the reason it has managed to capture a 95% share of the tablet market despite more than 80 competing products has to do more with the “ecology” of Apple vs. the form, fit or function of the iPad itself. He also pointed to a few distinct trends in the electronics design and manufacturing space, noting an unprecedented product platform commoditization is underway, while at the same time a newish breed of hobbyists (“prosumers”) has emerged and created a niche market for very expensive, semi-retro (read: electromechanical) products like cameras.

CEO Cary Wood laid out the turnaround of 118-year-old Sparton, which came thisclose to bankruptcy before righting the ship. The current metrics are an impressive display of refocusing and rebalancing. He said that the bulk of Sparton’s EMS customers two years ago were money losers, and Sparton had to either cancel the programs or renegotiate terms. But the bigger issue was convincing the sales team to jettison bad customers. Wood was forthcoming about the specific policies they put into place, including standardizing templates for pricing and quoting, and installing a sales and incentive program based on profits. He also noted that given Sparton’s exceptionally long history in Michigan, they effectively had to relocate the headquarters because they were the big fish in that small pond, and after all the local layoffs and shutdowns, they would have been tarred and feathered. He also said they made the decision to separate HQ from a manufacturing site so as not to get too emotionally attached to a particular business.

Time and again, OEMs and EMS companies said it was advantageous for competitors to place programs with a single EMS and that IP concerns didn’t really factor into the equation. The EMS companies said that OEM competitors are attracted by the knowledge that the EMS knows how to build products for the target market and that the EMS would also know what the appropriate prices would be. (That latter point was made several times.) In short, IP concerns take a backseat to the hope that the EMS would ensure the build price remained consistent with their competitors’ products (which also hints that OEMs accept the commodity nature of most of their products).

Another speaker asserted that no EMS is too big to fail, Flextronics and Foxconn included. He pointed to the disruption such an event would have on supply chains, pricing and capacity.

The good folks at CBA put me to work moderating a panel made up of two OEMs (Tellabs and Eaton) and three EMS companies of varying size and geographical reach (Plexus, Morey and Creation Technologies). I’ll have more on that in a bit.



Tea Time

Consultant/gadfly Charlie Barnhart today said his model suggests higher near-term risk for certain sectors of the EMS industry.

“It won’t be a catastrophic, ‘off the cliff’ event, but certain areas are substantially more at risk than others,” he wrote in his weekly blog, singling out military and aerospace for “significant demand dropoff this year.”

Contrast Charlie’s tea leaves with the longer-view held by iSuppli and Global Industry Analysts.

The former is forecasting revenues to rise 8.5% this year, to $347 billion, building on 2010’s ridiculous jump of 33.5%.

The latter asserts the market is much smaller, projecting it to reach $231.4 billion by 2015. That’s roughly $30 billion less than what iSuppli says the market for outsourced electronics was in 2009.

Without insight into iSuppli’s and GIA’s respective methodologies, it’s impossible to know why such a large discrepancy exists. This I will say, however: If I had to bet on which model is right, I’d take Charlie’s.

Barnhart on Regionalization

Charlie Barnhart’s group has conducted an interesting survey on regionalization.  A quick rundown of the findings:

  • Is it best to manufacture electronic products in the region into which the product will be sold?  84% agreed to some degree.
  • Is your company currently utilizing a regional approach to electronics manufacturing? 80% said yes to some degree.

I don’t think the survey was scientific. It sounds like respondents were visitors to his website, and there’s no telling whether people voted more than once, or how many people voted, etc.

But like much of Charlie’s work, it’s always good water cooler conversation.