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| As seen in the June, 2004 issue of SMT Magazine |
| Collaboration with Offshore Companies in a Rising Economy |
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When you are a small PCB supplier or a small contract manufacturer, how do you solve the problem of a down turn in the economy and stay afloat until business resumes? You look at the marketplace and analyze what is happening and cure those terminal ills by giving what the OEMs want. Global positioning requires viable technology platforms from which to build an effective business by understanding what has happened in the past and plan your approach wisely. If it means buying more equipment, or finding more suppliers, then you do it.
Global Communications, a supplier of printed circuit boards, power supplies and other electronic products, for the past twelve years, has had a successful run working with OEMs and CEMs, supplying medium to large quantities of PCBs from China, Taiwan and Hong Kong. The company has now taken on the task of manufacturing power transformers for the banking industry, wire harness cable assemblies and other electronic products, that are made in China, Taiwan and Hong Kong, for all industries throughout the United States, Canada, Mexico and Europe. The products are ISO, QS or LPS certified and UL approved, and most of all, cost about one third of the identical products, made in the United States. For OEMs and CEMs to pay less for the same products produced offshore, has given them more product for their buck, thus enabling them to be more competitive in the business of design an development, while being able to stay in business. This meant that suppliers, such as Global Communications, have come to be a huge source of value potential, by creating partnerships with offshore companies as well as those OEMs and CEMs in the United States.
During the down time, when there were periods of less than adequate business, and customers filing Chapter 11, Jerry A. Grunor, President of Global Communications, visited China, Hong Kong, Taiwan and Korea. He assisted a group of newly formed PCB manufacturers to get new equipment and to be ISO 9001:2000 and QS 9000 certified, plus UL94V-0 approved. Global Communications has increased its stable of PCB facilities to 24, who can build boards, as small as single sided and two layers, plus small quantities of prototypes, and multiplayer boards, up to 64 layers. Global Communications has even produced large size boards and arrays within a delivery time of 7 to 12 days. Pricing is most competitive, and the quality is excellent. Already, this has paid off during the downtime, as many orders from new customers have been processed leading into the year 2004.
The same companies who came to Global Communications with small orders, looking to the future for large, annual shipments to help them keep their own costs down to a minimum, are now requesting such items as 120 v and 230 v power transformers, that are used in check scanning machines for banks.
Other items that are difficult and expensive to get in the U.S. are cable assemblies that Global Communications was successful in having built in Taiwan that met all UL approvals, and at a much lower price. These same companies have asked Global Communications if they would handle the assembly offshore by getting the component parts and doing all of the assembly work. This type of turn-key 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. Outsourcing became a way of life in the United States and started to generate an direct impact on a company's bottom line.
"The 'Return on Investment' started to pay off as we see a recovery in the marketplace," says Grunor. "We are going after the small business from companies that are trying to develop new products in the market. They need to keep their costs to a minimum and any one of our manufacturing facilities are able to accomplish this."
By working with companies that need good, competitively priced products combined with excellent quality and on time delivery, Global Communications has contributed to their focusing on growth through cost-reduction. This also eliminates waste in the company's internal process with their connections with other suppliers.
Global Communications realized that their ability to supply many products and services offshore can create a huge source of value potential, by developing partnerships. By becoming a procurement company, that in itself has changed the way companies are now doing business, not only in the U.S., but in other countries, including Asia. Suppliers with the right connections overseas can truly be a great source of market intelligence and save on wasteful time, effort and money by companies of all sizes. Whether the market is short or long term, it is now possible to find the exact products you want, at the least expensive price, and still have money left over at the end of the month for new innovations and design ideas.
Let's look at the history of how all this happened…
The promise of low labor rates and an access to a potential huge marked has lured scores of OEMs and electronic manufacturing services (EMS) to China, Taiwan and Hong Kong. Seeing this window of opportunity years ago, Global Communications has increased its partnership with Asian companies that are diversified in building all types of electronic components, products, supplies and services. By most accounts, companies in the United States are satisfied with the cost savings they have achieved by working with suppliers who have the knowledge and contacts with offshore manufacturers. India is now moving in the same direction due to their low-cost manufacturing base but will have years to catch up to the tremendous growth that has taken place in China. Also, many of their facilities are yet to be certified and the quality is still taking a back seat to those Chinese facilities that have been in operation for years.
As reported in other trade publications, the next five years will be a key period in China. Asia-Pacific is expected to become the largest electronics component market, which in turn will create opportunities for component companies in China. Since China's entry into WTO, the outside government has changed. Imports and exports have grown, bringing further incentive to supporting industries. Digitalization and networking are pushing the rapid development of the information industry. Eventually, China will become one of the world's foremost IT manufacturing base, the source of production and export of thousands of different products.
Growing demand for (and standardization of) electronics raises the requirements for production volume, efficiency and profit. It also means that competition will become more complex. With China's entry into WTO, the domestic market is more open to foreign enterprises. Tariffs are coming down and the service industry has opened, giving foreign corporations the chance to compete with domestic firms. The "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 from 2004 to 2005, PCB output will grow by 20%. Too many new enterprises and domestic expansion are the main reasons for oversupply and price erosion. By the end of 2004, China will likely have become the second-largest source for PCB production, after Japan. By 2005, they 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 of 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 is attracting overseas investors, making this a great opportunity for Chinese enterprises. But problems arise as Chinese companies are still not used to working with American companies. They lack the understanding of deadlines, of competitive pricing, of the importance of communication, and the fact that quality is still the number one ingredient to keep its 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 any where in Asia.
Based on experience, Global Communications has found that newly formed printed circuit board manufacturing companies in Asia are limited to four layer boards, and that it is important to work with many manufacturing facilities that specialize in all layers, from single sided boards, up to 64 or more layers. The facilities that specialize in larger layers would be more competitive. Those companies that offer lower per piece pricing, may have a higher set up, tooling and electrical testing fixture cost. It is with negotiations, that Global Communications can guide the offshore facilities to lower their set up and tooling costs, while still offer more competitive per piece pricing, and guide the manufacturers to what the going rate structure is in the U.S. Everyone wins, as the manufacturer gets the business, and the CEM gets a good quality product at a lower price.
Another major concern is the way goods are packaged from offshore companies, whether they are shipped by air or by ocean. Most air shipments consist of cartons of products, whereby pallets are used when the products are shipped by boat. Normally, a shipment by ocean from Hong Kong to the Long Beach Terminal in Los Angeles, would take about 14 days, plus a day to clear customs, prior to trucking them directly to the customer. Freight weighing about 9000 pounds by air would probably cost about $5,000, whereby if the same freight went by boat, the cost would be around $500. (Show slides here)
You also have to train the offshore facilities how to package the products in cartons, using one and one half inch foam to protect the boards, and line each board up in the same direction so the corners do not get damaged during shipment. Packing lists are essential with each carton marked and the amount of boards and weight in kgs are indicated on the packing list. All shipments going by air that weigh over 40 pounds would be more suitable for freight forwarding shipment rather than express mail, due to costs. It is most important to make sure that all specifications of jobs are clearly written on packing lists, and what the job consists of, so that everyone shall have an understanding of the product to be received. The performance of both the supplier and the customer would be measured by this understanding.
Good Packaging Practices:
 Let's talk about weight limits. For a shipment that is not palletized, end-to-end, each container or carton, should weigh less than 30 pounds because boxes may be tossed about by shipping personnel. Heavier boxes are more likely to be damaged. 100 pieces of 6 x 8 (inches) per box or carton, for example, are a good starting point
There should be a minimum of 1 ˝ inches of foam packaging material on EACH SIDE of the container. Full length and width of foam boards are preferred to cardboards. As cardboards are harder, they may damage the PCB's edge if the container is bumped against a hard object.
Packaging materials on sides must be overlapped to protect the PCB's corners.
The contents must be packed tightly as such that they will not shift. This is very important. Loosely packaged shipments cause more content damage.
Another criteria in freight forwarding that has come to light is that shippers are having to deal with a new world when it comes to security. At the same time, they must keep paying attention to an information-fueled business evolution whose pace is as inexorable as it is rapid. The last thing you want is to see your cargo stalled and delayed, or pay financial penalties due to the new security environment. Companies that formerly focused on shaving dollars from their transportation costs now need to concentrate on functionality and following the rules more than ever before. From a general standpoint, there is a greater reliance and greater demands being placed on the forwarding industry as never before. Forwarders and customs brokers are immersed in the complexities of global transportation transactions.
Irrespective of the mode of transport, the security of the supply chain from origin to ultimate user is of prime concern to all parties to the supply chain…not only to the government, but to the private sector. Shippers certainly need to increase their 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 providing a one-stop shop for international trade. Logistics providers and transportation intermediaries are now asked to follow whole new ways of business. Forwarders are becoming the international trade industry's technology providers of choice, provide shipment information so that customers' freight will move seamlessly and without service failures.
But complexities of freight forwarding and understanding the same old problems of first building, and then shipping the products don't stop here. Companies still have to employ the best practices under supply management that includes customer service, loyalty and cost advantages, so that the customer will have the trust and confidence in the supplier.
Imagine when a distributor tells his customer that the power transformers that he is getting from Taiwan is LPS certified and the customer starts to order thousands. When the transformers arrive, there is a document that says that a similar transformer has been certified, but does not actually indicate that the transformer ordered by the customer was. To add more to the problem of working with a dishonest distributor, the labels on the transformer may show UL approval, when in essence, they were not approved. In order for a transformer to get its UL approval, it must be LPS certified. The distributor obviously lied to get the business, and now the customer would be left sitting with thousands of transformers that were not certified. This kind of abusive outsourcing happens time and time again.
Global Communications stepped in and corrected the problem by going to the manufacturer in Taiwan and requested that they redesign the transformers for LPS certifications and send new samples to Global's headquarters in Dana Point, California. Mr. Grunor, upon receiving the new sample transformers, presented them to the customer for their approval. Not only were the transformers LPS Certified and UL Approved, the cost of each transformer was about $3.00 less than what the customer originally paid to the former distributor.
Another challenge that is working, both collaboratively and supportively, is the partnering of a PCB supplier with small, contract manufacturers. Global Communications found good working relationships with a few, small contract assembly manufacturing companies in southern California that are eager to offer quick turn assembly at a most competitive price, compared to the large, contract assembly manufacturers. By getting components, including the bare boards offshore, these small contract manufacturers can offer quick turn service and lower pricing than before. When the quantities get larger, the customer is offered the opportunity to have their boards assembled offshore at a tremendous savings in cost.
For the last ten to fifteen years, more complex boards for telecommunications and the like were developed. Much of the PCB manufacturing moved to Asia, but we invented new electronic products that required more complex circuitry, and the PCB industry as such prospered, despite the fact that many consumer electronics plants closed in the U.S. We started to lose production when everything started to move East. Then in the beginning of 2000, it started to happen very fast. In the next few years, experts expect China to provide 50% of the world's EMS but the domestic market is likely to grow as quickly as well. What started as a move East of low-tech PCBs and other components, has accelerated to a full-scale exodus of component and system design, as well as the production of finished goods, benefiting the Western consumer… unfortunately, hurting the Western manufacturer.
Just recently, the German firm Siemens indicated that they are moving most of the 15,000 software programming jobs from its offices in the United States and Western Europe to India, China and Eastern Europe. They have recognized that a huge amount of software development activity needs to be moved from high-cost countries to low-cost countries and about 3,000 of the 30,000 software programmers that Siemens employs worldwide are already in India.
Scores of Western firms have farmed out software development and back-office work to India and other countries, where wages are significantly lower. India is expected to earn $13 billion from such services during this year alone. The job shift has led to a backlash from unions and politicians in Western nations. It is calculated that programmers worldwide would lose their jobs once the planned shifts are implemented as the Indian subsidiary will fight hard to get a portion of the pie, and China too will get a chunk of the pie.
Lower labor costs have been the major factor in losing jobs to Asian manufacturers. But on the other hand, Asian PCB companies had access to cheap and plentiful financing from the stock exchanges and they used this opportunity. There is no question about the dramatic growth rate that had occurred in China, as well as Taiwan and Hong Kong. On the other hand, there has been a dramatic effect on companies in the U.S. that have been manufacturers of PCBs and other electronic products for years. This change is only building as the Chinese become more knowledgeable and financially secure. We used to have 'Yankee Ingenuity' but we have given in to the sleeping giant who is sitting at our back door.
The electronics industry was not the first to utilize offshore manufacturing. This type of manufacturing started back in the 40s and 50s by wholesalers and American manufacturers in the retail industry. By the 70s, many large retail Giants went offshore to get many of their software and hard goods manufactured.
Wal-Mart, who is not just the world's largest retailer, but the world's largest company - bigger than ExxonMobil, General Motors, and General Electric, has sold $244.5 billion worth of goods last year. It sells in three months what the number two retailer, Home Depot sells in a year. Wal-Mart no longer has any real rivals.
Like many OEMs in the electronics industry, Wal-Mart wields its power for just one purpose: to bring the lowest possible prices to its customers. Wal-Mart has the power to squeeze profit-killing concessions from vendors. To survive in the face of its pricing demands, makers of everything from bras to bicycles to blue jeans have had to lay off employees and close U.S. plants in favor of outsourcing products from overseas. Does this sound familiar?
Of course, U.S. companies have been moving jobs offshore for decades, long before Wal-Mart was a retailing power… long before the electronics industry started to see this trend about twelve years ago. Long before the small manufacturers of printed circuit boards and contract manufacturers and other hardware companies started to lose their customers because of the importers who started to manufacturer and assembly goods and services in China, Taiwan and Hong Kong. This process of elimination of jobs and companies did not only start in the electronics industry in the past few years, but was slowly creeping into our market for decades. The die was cast many years ago, even before NAFTA and WTO, when China was opened up to our country. The electronics industry only advanced the stages of offshore outsourcing. Not all the blame for lost jobs in the electronics industry is because of the import of electronics from Asia.
But there is no question that a company like Wal-Mart is helping to accelerate the loss of American jobs to low-wage countries such as China. Wal-Mart, which, in the late 1980s and early 1900s trumpeted its claim to "Buy American," has doubled its imports from China in the past five years alone, buying some $12 billion in merchandise in 2002. That's nearly 10% of all Chinese exports to the United States.
Think of it this way! One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market. "One of the things that limits or slows the growth of imports is the cost of establishing connections and networks," said Paul Krugman, the Princeton University economist. "Wal-Mart is so big and so centralized that it can all at once, hook Chinese and other suppliers into its digital system. So-wham! You have a large switch to overseas sourcing in a period quicker than under the old rules of retailing."
As outsourcing continues, the future OEM is no longer a manufacturer, but more of an IP provider with marketing capabilities. How we do business is changing, and unless we find that we are in the throes of another industrial revolution, we have to keep up with the demands of our customers, not by choice, but by 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 to diversify your product range and be able to provide quantities, both small and large, as well as excellent quality, competitive pricing, and of course, on time delivery.
We should expect to see price hikes in China as well as tightened supply conditions. China is one region that is seeing more aggressive price increases because they have been so far below the curve. This will not favor the buyer's market as demands increase and supplies tighten which will cause lead times to stretch. It is starting now! Starting in April, 2004, they have started to raise the cost of raw materials, and the manufacturers are requesting longer lead times to build the products. The manufacturers are also asking for an increase of 8% to 10% to cover the cost of materials.
Most manufacturers are still optimistic about 2004 as it started with an upward climb. Certain prices are dropping as well as inventory levels, but the semiconductor, due to strong end-equipment demand from computer, cell phone and consumer electronics equipment manufacturers will show tremendous growth, perhaps up to 10%. IT spending is on the move, therefore companies are upgrading their obsolete computer systems for the first time since 1999. Growing demand for wireless devices will help drive the building of more wireless infrastructure which will further boost electronic components demand.
The small manufacturer, who would honor lower pricing to get more business, once they have a few large customers to book most of their capacity, will not take on any new business, thus leaving less competitive pricing for buyers. There may be modest price increases of products of 1 to 2% per quarter compared to the price drops of 12 to 15% in the last year, especially for some parts that have been selling below margin, such as those raw materials. Many suppliers, to stay in the game, are just about breaking even, while some are losing money. Therefore, an increase in pricing may be evident.
Due to the downturn in the past couple of years, buyers have gotten used to quarterly price declines and the availability to buy parts whenever they wanted, at prices they wanted to pay. People in purchasing think that they will always get price reductions. However, even without price increases, suppliers won't increase capacity anytime soon and that could pose problems if demand skyrockets. The key is to build a backlog to remain high for some time. Right now, the industry is shipping out everything within 30 days. That could change in the next six months.
In essence, scarcely two years after China joined the World Trade Organization, more and more of the global economy seems to be falling into orbit around the world's most populous country. Yet the transportation and communications are still unreliable in China, so it is important for your operation to have good freight forwarding facilities in Hong Kong, where it is less expensive to ship out goods, than from China. It is also essential to have people who can communicate well in English and Chinese by getting to know the habits, the culture, and the fundamentals of the way Chinese people 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 the ones that are made by daily communication over the internet, and sharing the same problems, the same grievances, and the same social worries and family ties. After years of dealing with companies in China, Taiwan, Hong Kong and Korea, such a relationship has materialized between the employees of Global Communications and the many facilities it has partnered with overseas. That is the first step in a good partnership.
We can't foresee the future nor can we be certain what lies ahead on the horizon. All we know is that we have gone through some rough times these fast few years, and we may not be finished yet, as many hard working people are out of jobs. There may not be any jobs for them in the near future, until we start to see growth and a potentiality of new business, where the interest rates will climb, and people feel more comfortable in investing in new products. Losing jobs to competitors may have been a blessing in disguise if they were not profitable. Each job should have a profit margin or we will not last in business.
The recession has had an effect on many electronic manufacturing services, both large and small. But the small electronic manufacturing service (EMS) company, battling the same woes as the larger suppliers, does have an edge. The steps they are undertaking, although less challenging but just as painful, shall enable them to ride this recession and become the leader 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 shall enable them to become a most successful business.
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"We are happy to report that the recession did not hurt us", remarks Grunor. "We took the time to re-evaluate our position in the market and came up with some innovative programs. Within the market, there is a solution to every problem, once you have that formula."
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Jerry A. Grunor
President
Global Communications
Div. of Global Communications 2000, Inc.
32545 B Golden Lantern, #283
Dana Point, CA 92629
Tel: (949) 248-7815
Fax: (949) 248-7819
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More News...
"From Marketing to PCBs" - PC Fab Magazine, Jun 2000
"Global Communications' Success Story..." - OEM Technology News, Mar 2000
"Q: How is the web changing your business?" - InternetWeek Magazine, Dec 1999
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