5Q/5A: Charlie Barnhart and his take on cheap labour
Charlie Barnhart, Principal and Founder of Charlie Barnhart & Associates LLC, has participated in our 5Q/5A series. Here is his take on today's EMS-landscape.
• Where do you see the global EMS-industry in the next 2-3 years (regions as well as market share in manufacturing)?
First of all, we would distinguish between contract manufacturing (CM) and original design manufacturing (ODM) in the overall EMS industry. We believe there are two separate sets of dynamics driving them.
For the CM side, we have gone on record saying that growth in the CM side will peak sometime around the end of Q2/CY2012 and in subsequent quarters the overall total revenues in CM will start shrinking. We also believe the industry will continue to see consolidation and potentially business failure in Tier 1 and 2. This year revenue will be above where it was in 2008, but not by much.
The ODM side is a different story and is skewed by Foxconn. The bulk of the work Foxconn is currently doing falls under the ODM banner. We believe that the industry is in a state of transition, and business models continue to evolve. For example, HCT, which was an ODM, has now for all intents and purposes become an OEM.
Additionally, the mega-transactions that created Flextronics and Foxconn have resulted in an industry where two companies control so much of the supply chain that smaller companies find it challenging to compete with them. We believe this is unsustainable, but Foxconn may be 'too big to fail' for the Chinese.
As far as market sectors are concerned, we believe there will continue to be variation but that all the sectors (except for the mil/aero industry which is running at an unsustainable rate and where a scale-back is on the horizon) have effectively become deeply intertwined and co-dependent.
• Europe has to offer low- as well as high-cost locations. Any predictions on what will prevail in the long run?
Geographic expansion is never going to stop. OEMs will continue to chase lower labor cost regions, at any cost! The cheapest place we can think of is in sub-Saharan Africa, so we wouldn’t be surprised to hear an announcement that someone has decided to start building electronics there -- no matter that there is no infrastructure, electricity, transportation or supply chain support.
Europe is no different than the U.S. in that respect. However, a counter-trend is the rising social/political push-back, where countries like France are punishing companies that pull out of a region. That leads to work-arounds, like where H-P is transferring employees to Celestica in Ireland.
Bottom line, it's not an either-or situation. OEMs should look for an EMS that fits the specific requirement of the program they are contemplating. The 'fit' should match in terms of approach, scale, and complexity. Sometimes that means a low-labor cost region, sometimes it doesn’t.
Remember, labor isn't really the issue, it’s issues like access to a supply chain that enables lower material costs; fulfillment of regional demand; effective management of product lifecycles; and support and facilitation of innovation – that’s what an effective Outsourcing solution is all about. OEMs need to look beyond labor rates.
• Recent audits and reports have put the focus on 'too' cheap labor and its drastic consequences. Your thoughts on the current developments?
You reap what you sow, don’t you? When you operate a slave factory, eventually the slaves will revolt. The Chinese government doesn't really see the big picture. It's so bad at Foxconn now that workers are jumping off the roof, and in Mexico, setting fire to the factory to get let out of the building at the end of the day. Chinese -- not Western-- reporters are going undercover and exposing the awful conditions.
It's pretty simple. If you have really cheap labor costs, it means human beings are being exploited, by definition. And the irony is that some of the hippest companies on the planet (like Apple) are the worst offender by supporting these factories. Will this reality eventually break through our collective consciousness and make us realize how cruelly insensitive we are about this? Public relations efforts and fancy Corporate Social Responsibility statements can only go so far. With any luck, young, socially-networked, hip consumers of high-tech products will lose their appetite for gadgets built by the enslaved youth of China.
• 'Regionalization' or 'regional footprint' are new buzz words in the industry. Are truly local EMS-providers ready to compete with 'the biggies'?
We have been writing about this for over three years, and believe it is an extremely important trend for the industry. It addresses many of the challenges and irrationalities that have created risk and instability. Our data prove incontrovertibly that a regional approach with a reputable EMS, aligned with the OEM in terms of FIT (flexibility, integration, and timing) saves money. OEMs that do a thorough 'true cost of outsourcing' analysis, adding in their own internal costs to manage a geographically remote EMS provider get the same answer.
Our data enable this analysis because we benchmark actual costs, and update on a quarterly basis with real time case studies. These are not forecasts or opinions. These are recommendations based on facts. For example, for our risk tool, we track what happens to cases, and then perform a root cause analysis on those that fail. Not meaning to get overly self-promoting here, but we think OEMs would be surprised to see what the real costs are for some of these cross-hemispheric programs, from an insider's perspective.
• Which market segment will turn out to be the most prominent and important for the EMS-industry in the coming years?
The intuitively obvious answer to this is green energy, but our recent analysis contradicts that. The cases that we've been seeing for renewable energy products tend to be suited to the Tier 1, very high volume EMS provider. These look like consumer, rather than industrial programs, so the mid-market EMS would not be able to compete for these projects. So we still believe the opportunities for the bulk of the EMS industry are in the industrial, security and medical equipment sectors; which are lower volume, higher mix systems.