The OEM outsourcing trend continues:
Copyright 1998 The Columbian Publishing Co.
The Columbian (Vancouver, WA.)
February 18, 1998, Wednesday
H-P WORK SEEN GOING OVERSEAS
By CRAIG BROWN and THOMAS RYLL ; Columbian staff writers
Look for subcontractors around the world and Hewlett-Packard Co. workers in southern China to take up the screwdrivers and soldering irons being taken away from Vancouver workers.
The company says its plan to eliminate 1,000 jobs in Vancouver is part of a new manufacturing strategy which reflects the growing global demand for low-end products, saving itself $ 100 million per year in the process. H-P now makes inkjet printers in Vancouver, Singapore, Barcelona, and San Diego.
The company is still in the process of lining up its manufacturing capacity and subcontractors, says Beth Quartarolo, a company spokeswoman. But analysts say H-Ps new DeskJet manufacturing facility in Shanghai, China is likely to get some of the work being eliminated here.
If cost is the issue, they arent going to go to Spain and Singapore. Theyll go to China, thats my bet, says Charles LeCompte of Lyra Research, a Newton, Mass.-based company that publishes The Hardcopy Observer, a newsletter for the computer printer industry.
Definitely, if products can be built in areas with low labor costs, that will happen, said LeCompte. Even if its only 10 percent savings, its enough to drive production overseas. In the future, he expects U.S. factories to turn out only the most complicated and highest-priced goods.
LeCompte says H-P has been quietly shopping for factory sites for six months or more, looking at India, Malaysia and China. China was the winner.
Ill bet my bottom dollar the decision to build this plant is connected to the decision to close the plant in Vancouver, says LeCompte. From a business case, it makes sense to outsource (contract out) what they can, and the rest theyll move overseas. They certainly arent going to abandon the Vancouver site. Theyre just going to move the low value-added stuff overseas.
Quartarolo said it is possible that some of the work formerly performed in Vancouver will happen in the new Chinese plant.
World leader
Hewlett-Packards inkjet printers designed, made and marketed in Vancouver enjoy the status of being the world market leader, and sales and profits continue to grow.
But Tuesdays move to shed more than 1,000 company jobs and about 400 temporary workers is a pre-emptive move to cut costs as the printer market becomes ever more competitive. The company says it will save more than $ 100 million a year by outsourcing and consolidating printer manufacturing in North America. The one-time cost of the outsourcing is estimated at $ 75 million to $ 100 million.
Frankly, I think it is commendable. If you can outsource to reduce costs, thats the way manufacturers are going, said Angele Boyd, a market analyst for International Data Corp., a high-tech market research and consulting firm based in Framingham, Mass.
I would say the analogy is to putting your belt on in the morning and its a bit tight, said Boyd. In this case, H-P needs to lose a few pounds or costs in order to remain the toughest competitor in the inkjet market.
The changes come as the company announced solid first-quarter earnings, and said in a news release that its inkjet business posted solid revenue growth and strong growth in units shipped.
However, the company is faced with a major price squeeze. The Vancouver divisions first DeskJet printer, introduced in 1988, sold for a little less than $ 1,000. Todays H-P DeskJets sell for as little as $ 150.
As low as the price is, however, H-P is being undercut by upstarts like Lexmark, which offers a $ 99 inkjet built overseas by contractors.
Im sure Lexmarks $ 99 printer really got H-P thinking, said LeCompte. Its cheaper to rely on foreign and contracted labor. In the ultracompetitive high-tech world, if it saves $ 10 per machine, theyll do it, says LeCompte.
Another potential problem is a glut of Asian-made computers flooding the market as Asian nations try to export their way out of economic doldrums. Richard C. OBrien, H-Ps chief economist, recently told Business Week magazine that the company fears 5 million too many printers will be made in 1998.
Contractors cheaper
Also, H-P admits, contractors can do the work more cheaply than the company.
High-volume contractors can do the work very efficiently and at a lower cost, said Quartarolo, an H-P spokeswoman.
Gary Cutler, general manager of the companys Vancouver printer division, said manufacturers of personal computers have almost universally gone to third-party contractors. This has been evolving at H-P over the past three to four years, he said. The sheer size of the Vancouver site created inertia that slowed the process here.
The company also saves on tooling cost. A few years ago, the machines were easier to build. These days, it requires a lot of specialized tools and training.
Its a serious investment just to build a board, said analyst LeCompte. H-P could make the investment they have the money but why bother? Many other companies can do the work, and H-P can play contractors off each other as it searches for the lowest-cost supplier.
Cutler said that in addition to lower costs, contract manufacturers can offer such advantages as better location and quicker response to inventory needs.
Asked whether H-P would look for more production from its Singapore plant, Bob Weis, Vancouver division general manager said, Well step back and take a look at where this will happen. I dont think we have looked at those numbers yet.
H-P calls its changes a one-hub strategy that mirrors a manufacturing methodology already in place in Europe and Asia. For some time, we have recognized that our current North American manufacturing strategy was not yet the most efficient, despite the excellent work done by Vancouver employees, said Antonio Perez, an H-P vice president and Consumer Products Group general manager, in a press release.
The companys strategy is a good one, said analyst Boyd, adding that looking at outsourcing manufacturing is what healthy high-tech companies need to do to stay healthy. Another example is the companys announcement last month that it will close its printed circuit board division, slashing another 200 jobs.
I dont think its a sign of gloom and doom, Boyd said. It would be more dangerous for H-P to keep its high-cost manufacturing in place, and then suffer as cheaper, more nimble competitors eroded its market share. Similar strategies earlier in the 1990s landed once-great companies such as Apple Computer and Digital Equipment Corp. on the critical list. No matter what happens in Vancouver, thats one place H-P vows not to be.
At miday on the New York Stock Exchange, H-Ps stock was trading at 62 13/16, up 1 3/16.
LOAD-DATE: February 18, 1998 |
