Harry; thank you - helpful in separating the tiers.
Article from WSJ on contract manufacturers. Do we have that as a sector ;)
How a Need for Speed Turned
Guadalajara Into High-Tech Hub
By JONATHAN FRIEDLAND and GARY MCWILLIAMS
Staff Reporters of THE WALL STREET JOURNAL
GUADALAJARA, Mexico -- On trips back home to California, Brad Knight likes to pop into the local Circuit City store.
He'll stride down the aisles, stopping in front of a stack of Sony Web TV set-top boxes. He'll pause at a counter full of 3Com PalmPilots. Then, he'll check out the Hewlett-Packard printers to see how they're selling. On his way out, he might straighten a rack of Johnson & Johnson blood-glucose monitors. And he'll do it all with a sense of pride: That's because all these products came out of his Guadalajara factory.
Mr. Knight opened the one-million-square-foot facility here in 1997 for his employer, Flextronics International Ltd. In its first eight months of production, the plant had $12 million in sales; revenue is now $140 million a quarter and is growing 68% annually. And Mr. Knight just bought 75 acres of nearby cornfields to triple the plant's size. The tall, sandy-haired manager says his Guadalajara experience shows "that the standard manufacturing model for the high-technology industry isn't standard anymore."
Indeed it isn't. A revolution has swept the nuts-and-bolts ends of the information-technology business. Companies such as Flextronics, Solectron Corp., Jabil Circuit Inc. and SCI Systems Inc., barely known just a few years ago, have emerged as highly efficient manufacturers and supply-chain managers that operate factories around the globe. The electronics giants whose names their products carry -- Compaq Computer Corp., Telefon AB L.M. Ericsson and Cisco Systems Inc. -- are just as quickly getting out of the business of making things, concentrating instead on developing new products and persuading consumers to buy them.
Soaring Exports
Ground zero of this structural shift is Guadalajara, a graceful city of 3.3 million known for its fiery tequila and its mellifluous mariachis. Since the North American Free Trade Agreement took effect in 1994, contract manufacturers, their suppliers and some of their customers have invested about $2 billion here. Over the same period, Guadalajara's electronics exports have soared fivefold to $10 billion.
While that's still a drop in the bucket compared with the electronics industry's world-wide annual sales of $600 billion, Mexico's No. 2 city is on its way to supplanting China and other Asian countries as the principal manufacturing center for electronics products sold in the U.S. Guadalajara, the capital of Jalisco state, "is the convergence point for several different trends at a time of intense change in the way business is being done in our industry," says Charles Parks, SCI's senior vice president in Mexico.
One of these trends is the explosive growth of contract manufacturers themselves, both in real and relative terms. According to BancAmerica Securities, their revenues as a group are projected to grow 20% annually over the next few years, reaching $149.2 billion in 2003, compared with $60 billion in 1998. By then, their share of global electronics output, now less than 20%, is expected to double.
Fueling this structural change is the accelerating life cycle of new electronics products -- often just a few months from conception to obsolescence. That makes it tough for even deep-pocketed companies such as International Business Machines Corp. or Philips Electronics NV to invest the sums needed to produce their new products globally and still provide a decent return on shareholders' investments. Instead, they are letting contract manufacturers do it for them.
Globalization was supposed to mean that most of the world's manufacturing jobs would gravitate to low-cost Asia. But nowadays, technology companies can't afford the two weeks it takes to deliver their products from Asia to the U.S., or vice versa, by ship, and air freight on such long hauls is prohibitively expensive. That means locating factories close to customers, and that's why "the old wisdom of locating in the lowest-cost part of the globe just doesn't apply anymore," says Christopher S. Gopal, a supply-chain expert who recently left consulting firm Ernst & Young LLC and is now a vice president of communications start-up Cmetric Inc.
Following the Leaders
Hence the new focus on Guadalajara. Seven of the 10 biggest electronics contract manufacturers have set up shop here. Their futuristic factories, some of them encompassing dozens of buildings, have sprung up on the farmland ringing the city. Flocking in behind them are suppliers of stamped metal, molded plastic and logistics services.
As darkness falls each day, planes owned by cargo handlers Federal Express and United Parcel Service take off from the airport here for a short hop to U.S. cities, their bellies full of modems, routers and other essential paraphernalia of the Information Age. "What you are seeing here is what happened in Taiwan and Malaysia in the late 1980s," says Mr. Knight, the Flextronics manager, "but in a supercompressed format."
"Chinese labor is cheaper, but the real issue now is speed," says Alejandro Gomez, Solectron's general manager here, as he surveys the construction of a hangar-size truck-docking facility for Solectron's vast Guadalajara plant. When the docking facility is completed, trucks will be packed with goods that have already been vetted by Mexican customs to be delivered directly to the airport tarmac a few miles away. "The faster you get something through the production chain, the longer it will be on the market," Mr. Gomez says.
Sergio Garcia de Alba thought this fact could work to Guadalajara's advantage when he took over as Jalisco's secretary of economic promotion in 1995. At the time, the city was suffering the devastating aftermath of Mexico's 1994 peso devaluation. Traditional local industries such as shoemaking were in trouble. Banks were folding. And thousands of workers were being laid off.
Economic Promise
One bright spot was the electronics industry. Lured by tax breaks, a plentiful supply of golf courses and the city's springlike climate, IBM, Motorola Corp., Eastman Kodak Co. and Hewlett-Packard Co. had all set up plants here in the 1970s and 1980s. In general, they imported components from Asia, assembled them into printers, computers and other products, and then shipped them off to the U.S. Not much value was added in Guadalajara. But for Jalisco, the electronics industry was the most promising source of jobs that weren't subject to the ups and downs of the Mexican economy.
"We saw the electronics industry changing from a high-end, complicated and specialized manufacturing business into one which was essentially a commodity business with a big emphasis on cost containment," says Mr. Garcia. "That's why we focused on attracting the contract manufacturers."
Mr. Garcia had several things going for him. The peso devaluation had made Mexican labor about 40% cheaper in dollar terms. Nafta meant that manufacturers could feel secure that they wouldn't one day face punitive U.S. tariffs on their products. And a privatization and infrastructure-spending binge by the outgoing administration of President Carlos Salinas de Gortari had cut transit times to the U.S. border 600 miles away. Jalisco Gov. Alberto Cardenas sweetened the pot by making low-cost state land available for new investors to build on and by offering subsidies to companies for giving workers technical training.
Guadalajara also benefited from the fact that it isn't too close to the U.S. Employee turnover in border cities such as Tijuana and Ciudad Juarez can top 100% annually, and workers, who arrive there from southern Mexico, are often poorly educated. Guadalajara, by contrast, has a more stable and better-schooled work force. The city boasts seven universities and dozens of technical schools, a critical consideration for contract manufacturers, who use more sophisticated machinery than other kinds of assembly operations. "Here, we get the best and the brightest," says SCI's Mr. Parks.
Mr. Garcia's sales pitch was well-timed. In the mid-1990s, global demand for information technology was soaring as personal computers became more affordable and wireless telephony became ubiquitous. The fall of communism in Eastern Europe and the rise of free-market policies in Latin America were opening up new markets. What's more, some big technology companies such as IBM and Apple Computer Corp. had recently been shaken by costly marketing miscalculations.
One-Stop Shopping
More practical issues also came into play. Humberto Uquillas, Jabil Circuit's manager for new-business development here, recalls a U.S. customer who was buying 40,000 circuit boards a month from plants in Scotland, India, China and Mexico. "This guy was on planes all the time. He never slept. He was miserable," Mr. Uquillas recalls. "Finally he said, 'Why should I be doing this to myself if I can do it all in Guadalajara?' "
By the mid-1990s, the electronics industry was coming to the conclusion "that customers could care less who actually makes a product," says Jabil Circuit President Tim Main. "What they care about is size, quality and price."
Looking out over the ranks of workers assembling Cisco Systems networking gear and other products at his Guadalajara plant, Flextronics's Mr. Knight explains why operations like his can survive on razor-thin margins. High-technology giants such as Cisco "face the cost of the factory set-up, the learning-curve problem, the potential for big, expensive miscalculations," he says. On the other hand, Flextronics, which is based in San Jose, Calif., can scale up and down at will not only in a single factory, but in several scattered across the globe. "If one of my customers loses market share," says Mr. Knight, "I can make it up with the other guy who has taken that market share away."
That doesn't bother Cisco. In an effort to stay ahead of rivals such as Lucent Technologies Inc., it is introducing new products almost daily and replacing them with newer models within a year. To keep up with this manic pace, it has woven a tight-knit group of contract manufacturers into its design and production schemes. Take its experience with ultra-high-speed communications gear. In 1998, it acquired a small company that specialized in digital subscriber line, or DSL, technology. Cisco knew customers including U S West Inc. would want to rapidly roll out DSL services, and needed a supplier able to deliver tens of thousands of DSL devices almost overnight.
Crucial Relationships
Carl Redfield, Cisco's senior vice president of manufacturing and logistics, says that after acquiring the DSL technology, the company immediately turned to its contract manufacturers. "We needed that high-volume expertise," he says. Cisco's relationship with these contractors has become so intimate that they not only alert it to problems, but also collaborate among themselves to fix potentially costly glitches.
That kind of cooperation led Cisco to bet its future on its contract manufacturers. While today it gets 35% of its revenue from products built entirely by contractors, it expects as much as 65% of its business "will go that way in the long term," Mr. Redfield says. Given that Cisco's biggest market is the U.S., a lot of that business will end up in Guadalajara.
That presents some challenges for local manufacturers. The cargo and customs infrastructure is already buckling under the strain of exploding demand. And in spite of all the schools here, there is a growing shortage of managers and, particularly, of logistics personnel such as master schedulers. The electronics industry now employs 60,000 workers in Guadalajara, up from 5,000 in 1995.
Mr. Knight, for one, is trying to cope by training his own people. He recently got permission from Mexico's Education Ministry to run his own junior high school and high school at the factory because he can't find enough graduates to fill a shop floor set to triple in size over three years. "Some of our guys two years ago were managing a $1 million manufacturing operation," he says. "Now they are each responsible for $40 million in sales. Not a lot of people can handle that kind of growth."
Write to Jonathan Friedland at jonathan.friedland@wsj.com and Gary McWilliams at gary.mcwilliams@wsj.com
Close T2113 54.68 T2106 -2.24 T2109 19.07 (improving)
Dorothy |
