Front End I AFDEC

Encouraging investment

in an offshore manufacturing economy

estimated overall decline in the 20%-to- 40% range. The good news is that the UK remains the second largest market for electronic components in Europe and with many innovative systems integrators, a flexible skilled labour market and a mature supply network is well positioned for growth.

Over the last decade there has been an increasing trend towards offshore manufacturing in Asia. Adam Fletcher suggests improved industry opportunity tracking systems are required if the components market in the UK is to return to long term growth

T

he pace of off-shore manufacture in Europe has slowed, mainly because many of the products that

benefit most from rock-bottom labour, land and capital costs are already being manufactured in Asia, most notably in China. True, some systems integrators (OEMs, ODMs) are moving their manufacture back closer to home (Eastern Europe) citing concerns over intellectual property, product quality, shipping and inventory pipeline costs, but this is currently only marginal in terms of the overall market value. In the last ten years the value of the

UK/Eire electronic components market declined by approximately 50%, due principally to offshore manufacturing but also because of the swing in global market demand away from data- communications equipment towards consumer products. The UK/Eire is considerably more exposed to inward investment and multi-national systems integrators - who rightly follow the ebb and flow of government incentives - than other countries, which is probably why the rest of Europe fared slightly better in the same time frame, suffering an

8 April 2010

Out-sourced manufacturing

North America is no stranger to out- sourced manufacturing. For decades US OEMs have been ‘on-shoring’ to Mexico to benefit from lower costs but the local electronic component suppliers didn’t suffer as parts were typically purchased by the OEM customer in the US and then ‘free-issued’ to the OEM’s local subsidiary or to their Mexican CEM partner. Today they are suffering and the improvement in the Mexican economy has coincided with an increase in US demand for lowest cost off-shore manufacturing in far-flung locations such as China, where components have to be locally sourced. It’s difficult to obtain accurate

information on the revenue of the Chinese market for electronic components as there is a degree of double counting but best estimates suggest that it is already larger than the total European market and is rapidly catching the Japanese and North American markets. The resulting imbalance of sales

revenues between the design locations in Europe and North America and the manufacturing locations in (mainly) China has given rise to two main concern for many electronic components suppliers: One. How to allocate resources appropriately? And two. How to generate a reasonable return on investment made in demand creation and support for European- and USA-based design customers? Management of their systems

integrator customer relationships on a global basis still remains a massive challenge for electronic component manufacturers. Many do not have a direct sales force in all the geographic locations and even where they do they still rely on their authorised distributors to cost effectively access all the potential customers in the market. Engaging effectively with a multi-

national OEM who designs and manufactures in multiple locations can be a challenge for the entire supply-chain, exacerbated by the increased use of original design manufacturers (ODMs) by the OEM to supplement their design efforts in Europe and North America. A further level of complexity is added by the requirement to support the multiple offshore contract electronic manufacturers (CEMs) with whom the

Components in Electronics

OEM customer contracts. No organisation can justify providing customer support without the reward of production quantity orders.

Business opportunity tracking systems

In response to today’s high level of off- shore activity electronic components manufacturers and distributors have established sophisticated business opportunity tracking systems that internally communicate information about the system integrators (customers) product design requirements, the products used, where the product is likely to be manufactured and by whom. The objective is to ensure that the

organisation secures a RFQ (request for quotation), in the absence of which they have no hope of winning the production order from the customer or subcontractor. Just as importantly, an effective business opportunity tracking system enables the components manufacturers to identify who in their global organisation and distribution network was involved in the demand creation effort and reward them appropriately. Simple enough in theory, but in

practice an effective business opportunity tracking has proved to be very complex and difficult to administer, despite armies of people being drafted in to help. These systems are highly reliant on receiving top quality data from a vast number of sources both internally and externally, from people with varying cultural backgrounds and motivations. There is no industry standard system and many suppliers insist on customising the system they do have to serve additional internal and industry specific information requirements, resulting in the classic RIRO (rubbish in, rubbish out) scenario. The global electronic components

industry has to define and establish a ‘standard’ business opportunity tracking system that enables suppliers to compute and extract the metrics required to aid effective investment decision making. High among these critical metrics is the need to know in which geographic locations customers are justified in

requesting additional demand creation resource investment to support their design activities. The Electronic Components Supply

Network (ecsn) is collaborating with other trade association members involved the International Distribution of Electronics Association (IDEA) to help define an effective industry standard business opportunity tracking system. Until such a solution is defined electronic components manufacturers have no structured method to guide their investment decisions and will increasingly be tempted to divert their resources away from the UK, Europe and North America to where the revenue is being generated. Inevitably this will have a very negative impact on the competitive position of system integrators based in Western economies and their ability to both influence and design with the latest electronic component technologies. There is no doubt that demand

creation activity with system integrators in the UK/Eire generate significantly more sales revenue for electronic components in geographic locations beyond our borders than we get credit for. If this is to be sustained systems integrators need increased demand creation investment to support their design activities but in today’s highly competitive market component manufacturers’ local supply network partners must be adequately remunerated for providing it. This can only be achieved by effective collaboration across the entire UK/Eire electronic components supply network, particularly between systems integrators (OEM, ODM, CEM), component manufacturers and authorised distributors. Defining and implementing an effective industry standard business opportunity tracking system is surely an excellent first step. It is also critical that we improve

understanding of the needs of partners in the electronic component supply network about the quality and flow of sensitive commercial information. If we’re able to do that then that should lead to better design and investment decisions by all parties.

AFDEC | www.afdec.org.uk ECSN | www.ecsn-uk.org

Adam Fletcher is chairman of AFDEC/ECSN

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