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Electronics Production | October 06, 2009

Six things electronics companies should NOT do in future

If we assume that the global recovery is in fact imminent, if not occurring now, (probable US stock market crash notwithstanding) let’s discuss how companies can ensure success in the new world order.
To paraphrase a now-famous saying, ‘a catastrophe is a terrible thing to waste,’ – here’s an opportunity for the industry to reset and perhaps correct some self-destructive behavior that’s been evident since the outsourcing phenomenon began. Since everyone likes lists, here’s mine for how to avoid doing the same things that got us into this mess. So, from now on let’s NOT:

1. Mindlessly follow the herd. Media love trends. The simpler and less nuanced the better. Industry editors like to quote ‘experts’ and, let’s face it, it is safer to say the things everyone else is saying. Eventually these ‘opinions’ become self-fulfilling prophecies as Wall St. analysts see the articles and then pressure CEOs to follow suit.

Unfortunately business success requires innovation, and when you are talking about business processes, that mean NOT doing what everyone else is doing, but instead doing that which works best for your organization’s unique set of talents, markets, skill-sets, products, assets, resources and capabilities.

Right now, industry editors are discovering a new ‘trend’ – that electronics OEMs are bringing their manufacturing ‘in-house’ and we are returning to a vertically integrated model, as if that were the only recipe for success and those that aren’t following the herd will fail. This will once again result in lemming-like behavior. When you are talking about business strategy, that’s a recipe for disaster.

Ironically, as one of the aforementioned ‘experts,’ Charlie Barnhart & Associates is predicting that the self-fulfilling prophecy phenomenon will occur once again in outsourcing. We predict that, unless some new catastrophe rolls down the pike, by the end of Q2 of 2012, the outsourcing pendulum will have stopped, and will start reversing itself.

In other words, outsourced electronics manufacturing as a % of TAM will stop growing and start shrinking by that time. You heard it here first. However, that doesn’t mean that if your organization outsources, or doesn’t outsource, and it’s working for you, you have to do anything in response to trends. We’re hoping that this time, companies will do what’s right, not what’s trendy.

2. Get trapped in outsourcing as a ‘strategy’. CBA says this often: Outsourcing is a tool, not a strategy. It’s one possible response to a business need, like eating is a response to hunger. You can eat hamburgers, vegetables, or cotton candy. You will feel differently depending on which you choose. The same with electronics manufacturing and outsourcing. It’s just one possibility.

And what’s more, outsourcing is a powerful tool, like dynamite. If you don’t understand it thoroughly, its implications, unintended consequences and total costs, you will blow yourself up. Outsourcing can work very well for many products, geographies, market segments, and volume levels. But CBA believes that too many companies outsource too much, too often, in geographies that are too remote, for all the wrong reasons.

3. Be politically correct, but not honest. Those of us who have been around awhile are somewhat alarmed at the growing tendency to change language to appease one interest group or another. We are concerned that this has led to the practice of labeling (and rejecting) people and arguments without thoughtful analysis. This may be a function of the torrent/flood/tsunami of information in which we live and work.

Quick and easy ways to delete and categorize are critical to get through the day. However, it has led to a cloud of unknowing hanging over us all as we struggle to figure out what the heck anyone is trying to say. For example, in my neighborhood, several of us drive ‘previously owned vehicles’. However when I call them ‘used cars’ instead of previously owned vehicles, I’m instantly maligned and marginalized.

Get over it – they’re ‘used cars’ and there’s nothing wrong with that! We have to start talking to each other more plainly, as big grown up adults, as we negotiate manufacturing issues with other business entities. Nor should we engage in blame games when people make mistakes in order to advance a position. Just solve the problems as they come up, using direct, simple language that honestly addresses the issues as you see them.

4. Write off China. Another example of something companies should NOT do right now is mindlessly follow the herd about China. Someone should ask all the companies whose CEOs forced them to have a ‘China’ solution, whether facility, supplier, or whatever, ‘how’s that working for you right now?’ At the time, the stated rationale was, ‘to capture the domestic market in China’ – but what that really meant was ‘to find low-cost labor’.

In electronics, since labor is only 5% of selling price, that unstated rationale never made sense. And ask Motorola how that domestic market rationale has played out for cell phones. Now with the labor costs in China rising rapidly and any advantage easily offset with other internal and external added costs, companies are leaving China in a panic.

The thing is, China is not one thing, especially for electronics manufacturing. Lemming-like behavior will again spell suicide. As time has gone by, the capabilities of China in electronics have improved dramatically. Those that had bad experiences two quarters ago, and are now retreating in horror, will miss opportunities, as there are some very good shops there now and some companies will be able to use them to capture domestic markets in Asia. The key is to carefully craft a rational and innovative manufacturing policy.

5. Engage in passive-aggressive or terrorist tactics. We are seeing some truly alarming behaviors in EMS-OEM contract negotiations. Desperate, in fact. We have stated in the past that some toxic OEM-EMS relationships resemble a master-slave situation. The suggestions that are coming out now go way beyond that. They have by-passed a warden-prisoner comparison and are at the terrorist-victim level.

For example, an OEM asked us whether we thought it would be a good idea to introduce ‘punitive’ terms into a contract with an EMS. As in, if the EMS misses a shipment, they will be fined some amount that is high enough to be painful. On the other side, we are seeing EMS companies signing up for terms that they have no intention of complying with, if activated.

That’s the passive-aggressive side. They figure they are churning business anyway as the relationships have become unprofitable and unforgiving, so what difference does it make? They will just dump the OEM if they try to impose punitive terms. This is insane. No one can be successful under these conditions and these negotiations are suicidal for both parties.

6. Invent any more management principles. We don’t need any new, cleverly named ‘initiatives’ or ‘re-engineering’ or ‘paradigm-shifting’. Business management is not rocket science. In fact, rocket science is not even rocket science. I know rocket scientists, and the work they perform is fairly straight forward from a practical perspective. The point is, let’s stop all the silliness and focus on what’s important.

We have some critical work to do after this latest catastrophe. Let’s not waste time. Let’s just build useful, innovative electronic products, near where the customers who want to buy them live, and save the world.

Author: Charlie Barnhart at Charlie Barnhart & Associates

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