All,
"Virtual manufacturing": a more efficient and practical use of capital. (Note: SI's dictionary still doesn't know that the word "outsourcing" is a word! That will change soon, I trust.)
mercurycenter.com
Parts is fast-growing
piece of tech industry
BY K. OANH HA
Mercury News Staff Writer
When you buy a new computer from
Hewlett-Packard Co. or International Business
Machines Corp., it's likely that major parts of it were
put together by a company other than the brand-name
manufacturer.
The computer may have been assembled, tested and
shipped to the local electronics store using
contract manufacturers whose names you
may never have heard.
And computer companies aren't the only ones who manufacture this
way. Brand-name companies such as Intel Corp.,
IBM and Northern Telecom Ltd. rely on contract
manufacturers to make some of their products, saving
the original equipment manufacturers money and
allowing them to focus on design, research and
marketing.
Contract manufacturers these days have a hand in the
production of everything from pagers and computers
to medical equipment to networking and
telecommunication devices. This trend made the
electronic manufacturing services industry the
fastest-growing profitable industry among the Silicon
Valley's 150 largest companies in 1998.
The five companies in this group on the Silicon Valley
150 list grew 56 percent in revenues to $7.7 billion in
1998 from $5 billion a year ago. This rocketing
growth was second only to that of Internet
companies, whose combined revenues grew 94
percent in 1998.
The growth of the electronic manufacturing services
industry reflects the increased adoption of
outsourcing by original equipment manufacturers,
called OEMs, and a wave of industry-wide
acquisitions.
The industry started nearly 20 years ago to handle
production when the plants of the OEMs were full.
Today, it's a $90 billion industry that's growing at
least 25 percent annually -- more than triple the rate of
the electronics industry it serves, according to
research firm Technology Forecasters Inc. in
Alameda. And electronic manufacturing services
companies are gearing up for even more growth.
Like many other OEMs, Cisco Systems Inc., for
example, uses these contractors to manufacture most
of its networking products, touting its business model
as that of a ''virtual manufacturer.'' The company
began outsourcing -- or using other companies to
manufacture its products -- roughly 12 years ago.
''We need to deliver (products) to customers, but it
doesn't have to be with Cisco hands, Cisco buildings
or Cisco equipment,'' said Pete Rukavina, director of
global supply manufacturing for Cisco. ''We design
the business process and manufacturing process, then
we find the best partners to do that.''
Despite OEMs' initial fears of losing control when
they hand over the manufacturing to other companies,
electronics manufacturing services companies have
proved they can deliver quality products at good
prices.
OEMs have also discovered outsourcing is a more
efficient and practical use of capital. As technology
becomes more and more complex, funding and
upgrading manufacturing facilities has proved to be a
considerable burden. With money not tied up in
inventory, OEMs that outsource can more heavily
invest in other parts of their businesses, such as
design. Materials costs are also greatly reduced if
companies use contract manufacturers, which buy in
bulk for numerous customers.
''Whatever fears OEMs have about outsourcing is
overridden by the fact that you have to get whatever
efficiencies you can get,'' said Keith Dunne, managing
director of BancBoston Robertson Stephens. ''As
manufacturing and (its) technology increased, it
further encouraged outsourcing because OEMs
couldn't keep up.''
OEMs also gain flexibility and responsiveness through
outsourcing. Manufacturers have parts on hand and
can adapt their lines to small runs or larger runs,
depending on the customer's needs.
''Contract manufacturers here have processes and
capabilities that are better than OEMs','' said Mike
McNamara, president of the Americas for Flextronics
International Ltd., the 27th-largest company on the
Silicon Valley 150 list. ''We have the capacity to do
this at a higher level of quality than the OEMs
themselves.''
In the industry's budding years, contract
manufacturers simply took care of the assembly of
products, mainly assembling printed circuit boards
and other innards of electronic products, whose parts
had been purchased and provided by OEMs. Today,
contract manufacturers provide more services, such
as acquiring parts, managing inventory and providing
repairs.
These additional services contribute to the
mushrooming growth of contract manufacturers. For
example, Milpitas-based Solectron Corp., the world's
largest contract manufacturer, earns $35 on an
OEM'S product sold at $1,000 if it only inserts
components onto the printed circuit boards. But if
Solectron provides the most comprehensive service,
which includes design, assembly, testing and
procurement, it can make $740 for the same product.
The growth of manufacturing services reflects
contract manufacturers' evolving relationship with
OEMs, from just an overflow manufacturer to the
elevated status of ''partner,'' in which the two
companies work closely together, from the design
process to repairing old products.
Sanmina Corp., the 38th-largest company in the
Silicon Valley with $723 million in revenues in 1998,
says it only works with companies that want to work
with the San Jose-based company long-term. The
manufacturer has been growing roughly 40 percent
for the last five years and currently employs 5,500
people globally.
Its relationship with customers is so extensive that the
company has opened plants to be next door to key
OEMs.
''Every customer we do business with wants us to
manufacture locally,'' said Jure Sola, Sanmina's
chairman and chief executive. Though the company
has facilities throughout the country, Canada and
Europe, half of the company's manufacturing is
conducted in Silicon Valley. The majority of its
business is centered around the telecommunications
and networking industries. ''If we're just next door,
we can help customers design products better
working with them very closely at every step.''
Contract manufacturers have even bought their
customers' manufacturing plants, making their
relationships with OEMs even more tightly woven.
Solectron, for instance, in February purchased a
high-tech plant in Austin that was owned by IBM, one
of its oldest customers for nearly 20 years. In return,
the deal made Solectron the exclusive motherboard
assembly provider of IBM's mobile products for the
next three years.
Such tight relationships between OEMs and contract
manufacturers will only continue as the industry
grows, analysts say.
''The contract manufacturing industry has proven
itself,'' said Eric Miscoll a senior consultant at
Technology Forecasters. ''OEMs are starting to see
the wisdom of outsourcing.'' |
