No place like home for high-end electronics
That's the view of manufacturers of complex equipment like servers and mainframe computers. They are staying put.
By James Carbone -- Purchasing, 11/16/2006 2:00:00 AM
There is no denying that most high-volume electronics manufacturing moved to China and other low-labor-cost countries after the crash of the electronics industry in 2001.
But government statistics suggest that electronics manufacturing in the U.S. is growing again after falling precipitously after 2001. That growth is driven by large global OEMs that still make high-end equipment in America because margins on the equipment are high in many cases and it's expensive to ship refrigerator-size equipment long distances. Small and mid-tier OEMs and electronics manufacturing services (EMS) providers that build higher-margin, more complex equipment are also driving growth. Building complex systems in America makes purchasing more challenging as it increases the need for suppliers that are responsive and flexible enough to handle changing forecasts.
After 2001, many OEMs saw a need to reduce their costs, resulting in a transitioning of manufacturing of much equipment, including personal computers, cell phones and consumer electronics to low-cost geographies. Consider: In the year 2000, the total value of computers, communications equipment and other electronics products built in the U.S. totaled $510.6 billion, according to statistics from the U.S. Commerce Department and Census Bureau. In 2001 that figure dropped to $429 billion and by 2003 it bottomed out at $352.6 billion.
While high-volume PC and cell phone production left the U.S., many computer OEMs still build lower volume, higher value equipment such as servers and mainframe computers in America. Medical equipment manufacturers also build state-of-the-art equipment in the U.S. including magnetic resonance imaging (MRI) and computed tomography (CT) systems. Defense and aerospace OEMs build their systems in the U.S. and are supported by extensive supply chains. White goods are also still manufactured in the U.S.
Electronics distributors often say much of their business is not with first-tier OEMs, but smaller and medium size manufacturers who build everything from pumps for gas stations to cockpit controls for a Boeing 747. That business never left the U.S. and is growing. And while many of the major EMS providers have transitioned the bulk of their manufacturing to low-cost countries, second-tier EMS companies continue to manufacture in the U.S. Those companies have higher margins than larger EMS providers although the volumes and total sales revenue are much lower.
While it is difficult to forecast with certainty the future of electronics manufacturing in the U.S., many analysts and industry executives believe that most electronics manufacturing that could have left the U.S., in fact, has left. They say the electronics industry will grow for the foreseeable future. Some statistics support that. Commerce Department figures show that manufacturing of computers, communications equipment and other electronic products grew to $361.9 billion in 2004 from $352.6 billion in 2003. Electronics products revenue grew to $395 billion in 2005 and should reach $434 billion in 2006.
Analysts say while high-volume manufacturing left the U.S., high-end computer and storage systems continue to be built in the U.S. For example, while IBM sold off its PC division to Lenovo in China, it still builds high-end servers and mainframes in the U.S. Sun Microsystems and Hewlett-Packard also build high end equipment in America. IBM develops and manufactures high-end products including its P and Z series servers and mainframes at its Poughkeepsie, N.Y. site.
“Typically in Poughkeepsie we have front-end manufacturing,” says John Longo, procurement brand manager for IBM's P and Z series products. “A lot of complex boards are assembled and tested here in Poughkeepsie. They integrate cards along with assemblies and feed that to the rest of manufacturing. At the back end of manufacturing is the system assembly and test, then final configuration to meet actual customer orders,” he says.
Equipment is shipped from Poughkeepsie to customers in North and South America. In some cases subsystems are shipped to facilities in Dublin, Ireland or Montpelier, France for final configuration for customers in Europe.
Get involved
Longo says for those high-end products built in the U.S., purchasing plays an early and important role. “I start my contribution to the process of bringing product to market by getting engaged early on in new programs,” says Longo. Typically he gets involved when a product starts being designed.
“At that stage, we are coordinating a lot of the early sourcing which we refer to as early user hardware. I manage a team of folks who are assigned by individual products to take a new product development activity through early testing, through production ramp and then into production,” he says.
Once in production, there are different purchasing challenges for high-end equipment than for high-volume equipment such as PCs and laptops.
“A mainframe computer is the size of a refrigerator,” says Longo. It has hundreds of assemblies as opposed to a desktop which may have 10 to 15. In addition with high-end machines, customers have their choice of several thousand configurations compared to a PC which may have a few dozen.
As a result, a lot more supply chain coordination is needed. With so many subassemblies and configurations, there are more opportunities for scheduled delays if suppliers can't deliver needed subsystems on time.
Adding to the challenge is turnaround time. The P series has to be turned around in four days. “With that complexity and time frame, it is challenging,” says Longo.
To meet the challenge IBM constantly manages leadtimes of various suppliers “because a delay at one supplier could gate the build of a server or mainframe,” he says.
IBM also must update configuration forecasts frequently. “We are one-on-one with contract manufacturers to make sure they have current view of what we need and when we need it,” says Longo. “We are not in the position of generating a tremendous amount of inventory.”
Meet the challenge
Hewlett-Packard, based in Palo Alto, Calif., faces similar configuration challenges in building its high-end enterprise servers and storage systems in the U.S. either at its own facilities or through its EMS providers. HP has configure-to-order (CTO) centers where systems are built for customers. Such centers allow HP to provide a higher level of customer service and to meet strict, but changing delivery requirements.
“We do a fair amount of manufacturing postponement,” says Jack Faber, supply chain vice president of enterprise storage and servers for Hewlett-Packard. “The rationale of doing that in America or any geography is that you can provide a much higher customer service level.” Postponement is configuring a product at the last minute before it is delivered to the customer.
Often customers for high-end servers and storage systems order equipment that had special service requirements. “They may want special software loaded,” says Faber. “They may want custom racking or they may want their images loaded. Often there is additional testing and assembly.” That is handled at the CTO centers.
Faber says it is more efficient and less costly to build such systems in the regions where they will be sold.
“There is a significant landed cost issue,” he says. “We have the capability in many cases to take a product and have it built in another region, but it's likely you'd have to airfreight that product to the customer. These products have a lot of cubic feet so that can be costly.”
He says postponement in the U.S. allows HP to ship in subassemblies via ocean or ground. The final build can be done at the last minute with the “fastest possible transit over the shortest distance. That is important because HP sometimes gets delivery slots that are down to 30 minutes,” says Faber.
“We may bring in a motherboard that can be used in four different chassis sizes depending on how many slots the customer wants in their servers or how many hard drives they want in their mass storage equipment,” says Faber. “We can take those building blocks, configure them to fit in different chassis or racks.”
So competitive
He says there is a need to build products regionally because the marketplace is so competitive. Ten years ago that was not the case.
“A product could be built, boxed, labeled and moved into the retail space,” says Faber. “Now concerns about inventory obsolescence and risk have grown greater and greater. The need for postponement through CTO has become much stronger because it allows you to avoid obsolescence,” he says.
With postponement, HP has changed the way it builds products for customers.
“We used to load chassis up with printed circuit boards and power supplies,” he says. “But then customers asked to have their images and special software loaded and third-party hardware added.”
To meet that demand, HP could have added more facilities, but decided to outsource the more simple assemblies—such as those used in printers—to EMS providers and do the more complicated configure-to-order work for high-end storage and servers in-house.
Another company that does configure to order of high end products is Sun Microsystems, based in Santa Clara, Calif. It builds its mid-range and high-end E 69000 an E 25000 products at its Hillsboro, Ore. facility, says Cindy Reese, vice president of storage operations for Sun worldwide operations. These computers are used by banks and Fortune 100 companies.
“We also build all of our storage products in Puerto Rico. We acquired StorageTek a year ago. They build all of their products for the global market out of that facility,” says Reese.
Outsourcing high end
However, Sun is moving more high-end equipment to EMS providers. Solectron has taken over manufacturing for the products in Puerto Rico and new products that would have been built at the Hillsboro facility will be outsourced.
“For many years, we thought no one else in the world could build a high-end server like Sun could,” says Reese. “It took us until two years ago to finally try to outsource the high complexity part of the server, which is the printed circuit board,” she says.
She said Sun decided to outsource the server's primary printed circuit board, including Unix testing. “We realized the EMS provider was able to do it and the board is the hard part of the build.”
The capabilities of many EMS providers have increased to the point where many OEMs find there is little advantage to having internal manufacturing of boards and subsystems. That is one reason why second-tier EMS providers in the U.S. are thriving.
Adam Pick, an EMS industry analyst for researcher iSuppli, says second-tier EMS providers derive much of their revenue from serving high-mix, low-volume industries. In the U.S., that would include aerospace, military, medical and communications. He says second-tier EMS providers have sales of between $500 million and $1.5 billion.
“Much of the manufacturing that is done abroad is lower mix, high volume,” says Pick. “The tier-two guys are trading off volumes for margins. They are saying we are willing to give up a lot of the volume business because we'd rather high-margin stuff.”
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