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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (4906)	5/25/2005 11:41:17 AM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Probably made in China -- by someone else CUTTING AND OFFSHORING JOBS THE KEY IN BATTLE TO CUT COSTS By Karl Schoenberger Mercury News You'd be surprised at how many electronics products you use aren't actually made by the tech company whose name they bear. Contractors build Microsoft's Xbox as well as the Sony PlayStation. Hewlett-Packard doesn't need to touch its personal computers because contractors do it all. The so-called electronics manufacturing services industry makes just about everything -- from components to completed products -- for U.S. technology companies. Conservatively estimated to post more that $100 billion in annual sales, the industry grew by leaps and bounds during the tech boom of the 1990s. That's when major brands from Dell to Cisco Systems became increasingly reliant on outsourcing to lower their costs. But ever since the technology bubble burst in 2001, these fiercely competitive mega-contractors have been struggling to stay alive. One of the big three -- Milpitas-based Solectron -- announced at the end of April a $100 million restructuring plan that involved cutting 3,500 jobs. But that was the tip of the iceberg. Solectron has had a succession of restructuring plans and has eliminated tens of thousands of jobs in recent years. So have its rivals, Sanmina-SCI of San Jose and Flextronics, which is incorporated in Singapore but managed out of San Jose. All three companies were caught with huge overcapacity in high-cost locations when the technology business went sour. The price of restructuring in the industry has been dramatic. Sanmina-SCI posted a $1 billion restructuring loss in the six-month period ending April 2. Flextronics and Solectron have taken their lumps, too. Flextronics had $300 million in net profits in the year ending March 31, but reported $587 million in losses the previous year. At the same time contractors are shedding their oversupply of factory capacity in North America and Western Europe, they're being pressured by bargain-hunting customers to open plants in low-wage areas such as Eastern Europe and China. The American electronics manufacturing services industry has joined its Taiwanese rivals as an engine that offshores technology hardware production to China -- on a scale that dwarfs the highly publicized offshoring of software jobs to India. Sanmina-SCI has moved about 12,000 jobs from the United States to Mexico, but its clients are asking it to trade off the advantages of the proximity to the U.S. market for the advantage of much lower labor rates in China. ``We don't necessarily want to do this, because there's a huge cost to us in shutting down a plant here and starting one up over there,'' said Randy Furr, Sanmina-SCI's president and chief operating officer. ``But if we don't do this, they'll go to another competitor. If your client is competing against Dell, you have to take advantage of the low-cost environment.'' During the 1990s, the biggest contracting companies were competing on the basis of revenue growth instead of efficiency and profit. They got caught up in the exuberance of the technology bubble and built too many factories in North America, said Flint Pulskamp, an analyst with the market research firm IDC. ``But since then there's been a scramble to move from the high-cost sites to the low-cost sites in China,'' said Pulskamp. ``In the late 1990s, Solectron used to make motherboards for Intel right here in Milpitas, in the heart of Silicon Valley. That's unthinkable now.'' The American electronics manufacturing services companies see their salvation in the way their Taiwanese rivals do business. Start the relationship with the client at the design stage and then make the product for them exclusively, instead of competing for the job. Sometimes this involves keeping the intellectual property rights to the technology and making the same product for several brand- name companies. Instead of grinding out commodity electronics such as cell phones on thin margins, the contractors are looking to provide high-value added services, such as taking over the entire product cycle of a high-end computer system, from design and manufacturing to distribution and repair. Contractors are offering their customers ``soft'' services to keep ahead of competitors, such as the capability to adapt to new European guidelines aimed at reducing lead and cadmium from products. In addition to green marketing, they are following Solectron's lead in embracing a code of conduct that would set labor and environmental standards at international factories. Most telecommunications, networking and consumer electronics production is already in the hands of the contractors. But there are untapped markets. Outsourcing production of medical instruments and diagnostic machines is a promising area for new business, said Solectron Executive Vice President Craig London. ``The U.S. medical instrument industry is starting to get worried about new competition from Chinese companies,'' London said, ``so they are coming to us and asking if we can make their products cheaper in China, beating them at their own game.'' The contracting industry may be at the center of the technology offshoring boom in China, but it's not in the driver's seat, said London. ``We follow our customers' lead. We really don't have a choice in the matter.'' mercurynews.com