The top five factors electronics executives should consider in 2006

By Eric Miscoll, PhD
Jan 11, 2006

Looking over the research TFI conducted in 2005, a handful of issues standout as key points-of-focus for the electronics industry in 2006.

ENVIRONMENTAL COMPLIANCE:
Environmental compliance has been compared to Y2K, but in this case the implications are real, not imagined. The deadline for RoHS compliance is July 1, 2006. Yet, based on studies conducted with both our Quarterly Forum members and individual clients, we know that many companies are unprepared. Why? Perhaps it's because the industry as a whole - with notable exceptions - has approached compliance on legislation such as RoHS, WEEE, and EuP in a piecemeal fashion. Thus resulting in a series of disjointed, start-and-stop activities that have failed to create momentum and leverage synergies within their organizations.

And while 2006 will be a landmark year for environmental legislation, which is good news, the bad news is that TFI expects regulators to find and make an example of some violator soon after deadlines are past. Becoming this poster-child should be every executive's worst nightmare and motivation to get their organization into compliance. TFI has volumes of research available on best practices and strategic planning to help our clients stay ahead of the global legislative curve. If you need help, get it now.

INNOVATION OF PRODUCTS AND BUSINESS MODELS:
Standing still in business is a recipe for failure. To succeed, companies need to be open to change in product lines, business models, and supplier networks. Thinking ahead of the competition is not only the first step but a step in the right direction.

Alternative business models: Whether you adopt a virtual model leveraging strengths and assets from around the globe, like TFI's team of industry experts, or adopt a fresh approach to an old challenge - such as the successful joint venture (called NUMMI) between GM & Toyota who profitably manufacturer cars in the Silicon Valley of California by applying Lean Manufacturing principle - opportunities abound.

The challenge is to be open to the possibilities and skeptical of the status-quo. Remember, a competitive strategy based around industry benchmarking versus innovation might bring you to market parity, but it will never accelerate you into the lead. There are no silver medals in business; coming in second-place just makes you first loser.

Technological solutions: Opportunity for the application of new technological solutions in business doesn't always knock. Sometimes it makes the high-speed "rushing" sound of a FAX connection or the staccato beeping noise of a Blackberry. In the case of Dell Computers it was "you've got mail".

By perfecting and integrating web-based online sales solutions for PCs, Dell propelled themselves to a market leadership position, while their competitors missed the mark and spent the rest of the window of opportunity playing catch-up. Or consider the contrary case of Gateway Computers (remember them?) who decided to go backwards in approach rather than forward and built a brick and mortar retail network, that they have since closed-down and written-off.

ADDRESSING RISK:
Risk is part and parcel of doing business in this industry. If you are risk averse, go work for the post office (oops, there is risk there too!). If you are in business you need to assess and manage risk. Risk comes in many guises, but two that we feel are especially noteworthy are China and high energy costs. Both have the potential of creating serious headaches for the electronics industry in the next few years.

China: Given the shift to China for both cost-savings and market opportunities, it is time (or past time) to take a serious look at the level of risk that has been imbedded in a large percentage of the outsourcing solutions being executed today. We see risk arising from:

The still relatively low-level, but escalating geo-political tensions between China and most of their Western trading partners,

The inevitability of future fluctuations in the Yuan and the rate of inflation in China,

The general lack of transparency of potential impacts like the bird-flu, infrastructural/resource issues, civil unrest, etc., and

Last but by no means least, the high level of supply-compression in most outsourcing solutions being applied within this geography.
On the last, we are particularly concerned about the shocking number of risk mitigation plans we see that are shaped around a second source (or recovery source) being another Chinese company. Which despite being in a different part of China, draws from and/or depends on an overlapping source of component supply, common human/infrastructural resource pool, and sources most of their liquidity from the same well. That type of strategy is not risk mitigation, but rather risk escalation.

High Cost of Energy: At the advent of nuclear energy, 40-50 years ago, the forecast was that electricity would be too cheap to meter. Well, that didn't happen. Today the forecast is that energy prices will slowly fall to pre-crisis levels - another improbability. The fact is we are paying more for energy than we did this time last year, and it is reasonable to assume that we will be paying more for energy next year.

With the electronics industry's love of geographically remote supply solutions (as a primary means of remaining cost-competitive) coupled to the inevitabilities of the expanding global marketplace and the escalating cost of discovery and conversion of new sources of energy supply ~ we have not seen the last of this issue.

Plus, as higher energy costs translate into higher costs across the entire supply chain, companies must revisit and recalculate their true total cost of ownership. You've heard us say it before, and you'll hear us continuing to say it in 2006.

PLANNING FOR GROWTH:
Businesses are beginning to make their come-back from the economic town-turn post Y2K, and need to shift both emotionally and operationally from focusing on minimizing down-side to maximizing the up-side. This includes doing things like:

Preserving your best and brightest people (as they'll be the first to be stolen by savvy competitors),

Re-visiting your asset allocation models, business process, and operational procedures, and

Updating your product offerings and re-aligning your outsourcing strategy.

As you plan for growth, remember it's the bottom-line that counts. In recent years it's been (primarily) the smaller contract manufacturers who have managed to remain profitable. Maybe in 2006 this will change, as the time seems right for the larger CMs to once again crack the nut on profitability. We'll see.

RECONNECTING WITH CUSTOMERS:
Customer relationships are always important. But in these times of increased competition and price pressure it is absolutely critical to stay connected with your customers and to anticipate their needs.

We've reported many times that our OEM clients regularly tell us their contract manufacturers are not hearing and responding to their needs. We've also reported that when this breakdown occurs OEMs regularly go out and start looking elsewhere. A true shame, as most OEMs also report they would prefer to stay with their existing CMs and make the relationship work. Something I'm sure the CMs would prefer as well.

The key of course is for the CM (who after all is the provider of the service) to re-tool their relationship skills-not just at the program manager level but throughout their entire organizations (including the executives)-and begin effectively managing both customer communications and expectations. The fact is that it simply costs less to maintain a current customer than to find a new customer.

So that's our top-5 list of things to consider in the New Year and we look forward to doing our part to help our clients meet theses challenges.

Have a safe and prosperous 2006 and keep in touch!