Steve DeCollibus, Managing Editor, Circuitnet

Venture Outsource posted their Q1 2010 Electronics supply chain survey last week. Venture Outsource is an online electronics manufacturing services (EMS) industry resource for information on best practices and strategy attracting opinion leaders in product companies and suppliers and vendors to these companies with responsibilities in corporate strategy; vendor selection, global sourcing and logistics and worldwide operations.  We often post links in Circuitnet to their web site.  

Circuitnet: This is the third time you have conducted the Electronics Supply Chain Business Outlook Survey. What motivated you to create this free resource for the electronics manufacturing industry?

Mark Zetter: I’m glad you asked. I sometimes find it interesting that people will pay to attend an industry event and then allow being monitored or knowingly provide answers to specific questions in order to provide certain information to their host, only to later have to pay the host to obtain the information which they previously gave freely.

Maybe we're doing this all wrong and we should compile our survey findings in an industry report and sell it back to industry instead of providing it online for industry to utilize without cost.

Truth be told, our site sponsors help offset the costs of putting a lot of our great content out there for the industry.

Circuitnet: What is your ultimate goal in carrying on with the study?

Mark Zetter: When the world was collapsing and a lot of electronics companies across the supply chain were scrambling to make ends meet, even to survive, it seemed like a good time to take an industry pulse.

We then thought it would be good to conduct our survey a couple of times following that first effort so we could obtain trend information and provide some leading indicator data to further help our readers.

Initially, it really was just about giving information back to industry, courtesy of our sponsors.

Whether it's our surveys or other article content, I'm hopeful we can continue to provide authoritative and useful content for industry for quite some time.

Circuitnet: What are the trend lines telling us about what you are seeing in the industry?

Mark Zetter: Our 500+ survey respondents indicate they are hopeful to see continued improvements in the electronics supply chain in the second half of 2010.

As with each of our surveys, we created a Future Index based on the average of each of the respondent's scores for their expectations regarding the economic situation; employment, business volume, and profits.

Our most recent survey revealed a mean of 5.6 for our Future Index which is up from 5.1 for our August 2009 survey on a scale of 1 to 10. Although this increase can be considered welcome news, it's only slight and still represents a level of caution in decision makers' attitudes.

Even though many respondents in our survey indicated they feel the worst of the recession is behind us, this does not mean the horizon ahead is calm.

For instance, our measurement of the current economic situation came in with a mean score of 4.8 out of 10, an increase of only 0.9 from August 2009.

In contrast, employment and prices mean scores, 5.7 and 5.8 respectively, are the standouts. (See Table 4)

Table 4

 Meanwhile, technology OEMs have the lowest Current Index, which is the average of each of the respondent's scores for their current outlook regarding the economic situation; employment, inventory levels, business volume, and prices, while manufacturers of electronics equipment and distribution / logistics providers have the highest mean score of 5.9, respectively.

Depending on how you look at it, this could be interpreted as different viewpoints tied to where companies fall into the supply chain. OEMs typically lag one or two quarters behind component suppliers in feeling the impact of demand improvements.

We also created our Overall Index which measure respondents' opinions on the state of the supply chain.

Our most recent Overall Index saw an increase mean score to 5.47 which is 13% greater than our last survey. Computing / PC and semiconductors were the only stand outs in this area with mean scores of 4.8 and 6.1, respectively.

The lower score for the PC segment may reflect the seasonal low following the surge in demand in the fall.

In looking at the higher score for semiconductors, this could be due to both supply shortages in specific markets, such as for analog components, and their place on the leading edge of the supply chain time horizon. Controlling for the shortages, this could be a harbinger of better times ahead for the whole supply chain.

Readers can click here to view complete results from our Q1 2010 Electronics Supply Chain Business Outlook Survey, titled '2010 Q1 Electronics supply chain survey reveals guarded optimism'.

Circuitnet: VentureOutsource.com has tracked the industry through the worst downturn in history for both electronics and manufacturing in general. What are your thoughts on where we might be headed as an industry?

Mark Zetter: The EMS industry will continue to become more and more competitive.

OEMs are constantly looking for ways to lower costs and will continue to look at EMS and ODM companies for their product design needs while they reduce their internal engineering resources.

This will bring more opportunities for ODM companies (and EMS companies offering design services) for entry-level, high volume products as well as high-mix, low volume outsourcing programs.

Meanwhile, OEMs will continue to have difficulty withdrawing from the mindset of continued cost reductions, but EMS providers need to be able to make a reasonable profit.

OEMs regularly cram cost reduction goals down the throat of their EMS or ODM partners.

While it's natural to realize (and assume) some cost reductions over time for OEMs (and their outsourcing partners) due to the simple fact that falling prices throughout a product's lifecycle can influence this, it is not sustainable.

Granted, efforts by providers to drive efficiencies in the supply chain, rollout improvements in their manufacturing processes, and implement better sourcing all typically lead to increases in profitability for EMS and ODM providers which, unfortunately, sometimes leads to even more pressure by OEMs to have some of this profit shared with them in cost reductions.

As you can see this can be a vicious cycle.

In the end, OEMs are locked in a narrow mindset and EMS companies are under constant pressure. What type of 'relationship' is this?

EMS and ODM companies provide more value for their OEM partners than some OEMs give them credit for. The value proposition as its perceived in the EMS-ODM relationship has to change.

Some OEMs see this. Most EMS companies see this.

Celestica is one EMS company that clearly sees this and seems to be making positive inroads with educating their sales force and their customers about the value the Company provides. It's not just about being the lowest cost producer. (Read an interview with Celestica CEO Craig Muhlhauser)

Other EMS providers I see taking this approach include Plexus, Benchmark, Flextronics and Jabil to name a few.

Beyond the cost vs. value argument, I see a lot of pressure increasing for EMS providers in the sub $500 million space. These companies must either scale or offer/acquire technological capabilities to better differentiate themselves because they don't get the opportunity to compete on price.

One common problem with acquiring assets of distressed providers for the sake of scale, or taking on business serving markets the EMS provider is not qualified to operate in often results in poor product quality for the OEM.

When quality suffers, some believe the downside for the EMS industry as a whole is pricing moves lower than the market rate and margins erode for all providers.

EMS companies interested in acquiring assets or OEMs considering engaging newly-formed EMS organizations by virtue of a merger or acquisition can better understand the risk profile of an EMS provider’s business model by running it through a simple matrix explained in this interview with Lincoln International's Jack Calderon.

Circuitnet: Thank you for your insight.