EMSNOW’s Icons of Industry Series

EMSNOW’s Icons of Industry Series

 

This is the first in a series of articles entitled ‘EMSNOW’s Icons of Industry’ where we look back at the history of the EMS industry and tell the stories of those key individuals with the vision and determination to bring this new business model into reality.

Why bother telling these stories? Of course, there’s always the old adage that those who don’t learn from history are doomed to repeat it. There are things to be learned: we are at a turning point in globalization. No matter what the politicians say, those who are following this know that 2019 could be either really challenging – basically a repeat of 2001 (see Mike Buetow’s piece) or the year the industry finally achieved the potential of Industry 4.0. Or maybe both things are on the horizon.

Hardware for some is considered a commodity, and even the most technologically advanced manufacturing innovation tends to be met with a yawn from millennials and the geek community. The industry faces a ‘silver tsunami’ where those with the tribal knowledge of how to make electronic products will or have retired. There is a serious skills gap and the way we train the next generation must adapt quickly.  Perhaps that is one of the reasons we should tell these stories – to help young people see that manufacturing is really not so easy but can nevertheless be a rewarding career.

These founding fathers were fascinating humans. Their stories are worth telling because electronics has transformed the world, and it wouldn’t have been possible without these men.

Much of the inspiration for this series of articles comes from a report originally published in 2012 by Charlie Barnhart and Associates, entitled, “Beyond Outsourcing”. This first article will include some background material from that report, including the next section, written by Charlie Barnhart.

Background

Originally, OEMs designed, developed, and manufactured most —if not everything—that went into their products, hence the name ‘Original Equipment Manufacturer’. Then as technology evolved and became more pre-packaged and ubiquitous (e.g. integrated replaced discrete logic and modular construction supplanted elemental designs) product differentiation shifted from a matter of functionality to an issue of cost-versus-performance.

This created a high-degree of ‘product churn’ in the market place and life-cycles began to shrink. As a result, sales forecasts became increasingly unreliable due to demand fluidity brought about by shifting user preference. In reaction, OEMs looked for methods to shift their fixed-costs to a variable basis, as utilization rates in their internal factories became progressively more difficult to predict and control.

The outsourcing industry, initially on a consigned basis, began as a means by which to ‘buffer’ these peaks and valleys in the OEM’s manufacturing requirement, but these companies soon gained greater responsibility as their service offerings expanded. OEMs continued to shrink investment in internal capabilities and outsourced more functions, more often. Eventually they began to dismantle their internal operations and launch large scale divestiture programs.

These actions, coupled with the impact of globalization, and an unprecedented economic downturn post Y2K, created a supply-demand imbalance in the EMS industry (favoring the OEM) and prices for manufacturing services dropped precipitously.

This advantage was embraced broadly by OEMs who quickly came to rely upon this recurring windfall to prop up their eroding margins. So when EMS pricing ultimately hit the bottom of the pricing curve, they saw little choice but to abandon their existing supply-base and transfer their outsourcing requirements to lower-cost solutions such as China.

This left many midmarket OEMs without a supportive, low-cost, local alternative for the early and late stage elements of their product life-cycle, and many simply resigned themselves to off-shoring these requirements to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography.

In many if not most cases, this provenance resulted in a cumbersome, expensive, and ineffectual solution that still plagues many of these OEMs, who continue to struggle with a cascading set of requirements that remain inadequately or totally unfulfilled. In short, the “baby was thrown out with the bathwater” a consequence certainly not intended but very real indeed. And while a sea-level change in outsourcing now appears inevitable, the question remains – will these shifting tides ultimately solve the issues that have resulted?

As we look at the ‘Icons of Industry’ we will share thoughts on where the industry seems to be heading next. Our first subject will be Olin King of Space Craft, Inc. (SCI).

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