The secret's out

The secret’s outThe stigma of contract manufacturing has been washed away. Alex Mayhew-Smith explains why
Sometimes secrets find a way of being told. For a long time contract manufacturing has been such a secret, its fame curtailed by a need to remain silent on customer’s identities.
Many well-known brands of electronics products are produced by contract manufacturers and whereas there was a fear among companies that it would in some sense discredit them to be found to have outsourced their manufacturing, now it is becoming an acceptable practice, with Hewlett-Packard and IBM as prime examples.  
  Caroline Dowling,
Dovatron’s European sales and marketing manager.“
Outsourcing is growing 25 per cent a year globally.” Enrique Farne, Flextronics’ vice-president of sales and marketing in Europe. “To survive, one has to compete in Europe.”
However, the secret is only half out of the closet and there is still a reluctance among some contract manufacturers and their clients to name some of the parties in outsourcing agreements. Just take a look at the recent story about Apple Computers outsourcing production of its iMac computers. Why is Apple so reluctant to say what is going on?
Anyway, according to Enrique Farne, Flextronics’ vice-president of sales and marketing in Europe, contract manufacturing has grown rapidly through the recession. “If we were simply providing extra capacity, you would expect OEMs to pull production back in house during periods of softer demand,” he says. Flextronics has seen 69 per cent growth in 1998 and expects the trend to continue.
“In the electronics sector, already more than 15 per cent of all products are outsourced and this is forecast to grow to at least 25 per cent by 2001,” says Derek Fulluck, managing director contract manufacturing firm AWS Electronics. Estimates put it at a $100bn business worldwide.
“Outsourcing is growing 25 per cent a year globally. In Europe the trend has been much slower to start and it has got going in the last 12 to 18 months. European OEMs, such as Nokia and Ericsson have led outsourcing in Europe. CEMs [contract electronics manufacturers] have less than 5 per cent of the global market – there is a huge potential for development,” says Caroline Dowling, Dovatron’s European sales and marketing manager.
So, contract manufacturing is booming, with an outsource motor chugging into life and driving it forward. It is snapping up work as OEMs increasingly outsource their production and there is now a consensus among contract manufacturers about what it is the industry offers.
Speak to the leaders in the industry, companies such as Dovatron and Flextronics, and each of them will try to tell you that the services they provide are unique. The concept is that you can go to Dovatron with an idea and the company will design a product and manufacture it. You can now produce electronics but have no manufacturing facilities, according to Dovatron.
Flextronics says that it can organise services for a client from design and productionisation, through manufacturing to packaging and distribution. Farne foresees a time when end-customers will be coming direct to the contract manufacturer and ordering via credit card.
The problem is that contract manufacturers have been saying they want to become a one-stop shop for years and now that is what they are, no one is surprised. It is a little like the toothbrush industry bothering to advertise: we all know what a toothbrush does and that twirly, bendy or angled, they all perform the same function, despite various claims to uniqueness.
However, that is not to say the industry is standing still. The latest move among leading contract manufacturing companies in the last few years has been into central and eastern Europe; Flextronics in Hungary, Celestica and Dovatron in the Czech Republic and Solectron in Romania.
So why go there? The straight answer is that it is cheaper to manufacture in these areas, labour costs are much lower. It is not because it is these very regions that the sites are manufacturing for. Most of Flextronics’ goods made at its site in Hungary go to western European countries like Spain. Dowling says most of the output from Dovatron’s Czech Republic facility go to the UK and Ireland and much of the rest to countries like France and Germany.
“Central and eastern Europe are like Mexico’s Guadalajara, which serves as another silicon valley to the US,” says Dowling. David Powell, v-p for sales and marketing in Europe for Solectron, agrees. “There are regions like this worldwide. Mexico – a low cost area on the doorstep of the US. In Europe it will be central Europe,” says Powell.
The move may seem cynical but can you blame them? It is a fact of business that in a global market, you have the globe to find the most advantageous area to set up your operations. Perhaps the only reason why such a question is considered in the UK is because such strategies can lead to the UKloosing out. “To survive, one has to compete in Europe, if you don’t, you will always be vulnerable to a competitor that does,” according to Farne.
Another strategy that has been adopted by the contract manufacturers is to set up a dedicated industrial park with partners. Flextronics’ has such a site in Hungary, designed for the very highest volume products, says Farne. The firm invited six or seven strategic suppliers to co-locate on its site to simplify the logistical problems associated with operating in a non-westernised cultural environment, he adds.
The relationship with these suppliers remains on business terms, with the suppliers compared to companies outside the industrial park. “The attraction of the industrial park concept is that both Flextronics customers and suppliers can draw the benefits of operating in a low-cost region, without being faced with the huge costs of establishing a presence there,” says Farne.
The firm’s strategy is to build parks next door to each of Flextronics’ markets: Sarvar, Hungary, for Europe, So Paulo, Brazil for South America, Guadala jara, Mexico for the US, and Doumen, China for the Asiapac region.
Dovatron has also gone in for the industrial park style of manufacturing centre. “Our advantage is that we [DII Group] own the companies that have set up within our campus. It is not a new idea and one we decided to follow about three years ago, our site in the Czech Republic is also set up like this,” says Dowling.
So, as the contract manufacturing industry takes off there is perhaps a need for more openness, an understanding by CEMs that we now know what they do but we’d also like to know whom they do it with.

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