Vol. 16, No. 4: April 2006

Lean Outsourcing: It’s Coming

Lean outsourcing. Think about it. Here are two terms that are, on their face, contradictory. Outsourcing, of course, means that an OEM requires a supply pipeline in place of internal manufacturing. But an external pipeline is antithetical to lean manufacturing, where conveyance is considered a form of waste. Yet the combination of lean manufacturing and outsourcing is on its way. How is this possible? The answer is two words – Cisco Systems.

Starting in its fiscal Q3 ending in April 2006, Cisco will embark on a six- to eight-quarter transition to a lean manufacturing model. Since Cisco, a pioneer of virtual manufacturing, is heavily outsourced, converting to a lean manufacturing model is tantamount to creating lean supply lines of outsourced product. In published remarks, Cisco’s CFO stated that the transition “will be a controlled process, planned in close cooperation with our contract manufacturing partners.”

It is well known that Cisco has consolidated its manufacturing supply base to four EMS providers. MMI Top 50 data show that Celestica, Foxconn (Hon Hai Precision Industry), Jabil Circuit and Solectron all manufacture for Cisco (March, p. 2). Is it a coincidence that two of these providers, Celestica and Solectron, already have well-publicized lean initiatives of their own dating back at least two years (April 2004, p. 1-2)? Since Cisco declined to be interviewed for this article, it is unclear whether some of Cisco’s providers influenced its decision to go lean. Still, an OEM like Cisco cannot shift to a lean model without having all of its outsourcing partners on board.

Cisco’s adoption of lean outsourcing, to coin a phrase, is significant because Cisco has been an early adopter in the outsourcing world. If Cisco’s lean model yields reductions in core manufacturing inventory and improvements in inventory turns, as Cisco expects, these results will not be lost on competitors and other savvy OEMs.

As a concept, lean manufacturing has been around for decades, and many leading businesses, including well-known OEMs such as Apple, Dell, Delphi and GE and HP, are practitioners. Yet indications are that the lean model has not been widely applied to outsourced supply chains as they exist today.

Why? An OEM when outsourcing, especially to places like China, creates a pipeline in which goods are moved but value is not added. In other words, the OEM has created waste. Thus, the OEM has gone in a direction opposite to that prescribed by lean manufacturing, explains Eric Olsen, Ph.D., an assistant professor at California Polytechnic University and a senior consultant at Venture Outsource Group (San Jose, CA), where he helps clients adopt lean manufacturing solutions. “You’ve added a bunch of waste essentially into the process by putting that huge conveyance pipeline into the process,” he says.

Nevertheless, many OEMs have opted for longer pipelines in order to tap low-cost labor sources in various parts of the world. “Now the thing is, there’s probably a lean way to do that a non-lean way to do that,” says Dr. Olsen. “Lean would say I’ve got to work very closely with my suppliers.”

The most direct way to achieve this relationship is through the physical proximity of a regional supply chain. “I think lean points you to that regional model. Still, if that regional model doesn’t give you that ultimate low-cost situation, somebody who sort of cracks that nut and figures out how to do that well with a longer pipeline by using some of these lean techniques and concepts and still gets as much waste out of the system as they can could potentially out-compete you,” says Olsen. He suggests that use of electronic communications may offer a substitute for proximity to circumvent some of the difficulties in long-distance supplier relationships.

One method that OEMs can apply in a lean outsourcing model is to examine the operations of currently used EMS providers, particularly those in low-cost regions. If any providers “are still using old-fashioned or mass-productions techniques where they have tons of inventory, wasted labor in their production lines,…you’re essentially leaving some money on the table,” says Olsen.

“If you head down that lean path as an OEM, it’s almost a prerequisite that eventually you’re going to lean out your entire supply chain. And all your contractors are eventually going to be lean in some way,” he says.

When an OEM converts to lean outsourcing, it can impact EMS providers in the supply chain. Take Jabil. The company recently reported that its production levels in the networking segment are expected to drop by about 25% in the May quarter followed by a 100% increase in the August quarter as a result of the lean manufacturing initiative of a communications customer. It is widely believed that this customer is Cisco. The 25% decrease stems from inventory being taken out of the supply chain as Jabil and its customer collapse a two-stage manufacturing process into one. The 100% increase in the following quarter reflects a conversion of business from consignment to turnkey.

EMS providers with a track record in lean manufacturing may have a competitive advantage with OEMs looking to go lean. “When you implement lean, you’re going to want some kind of access to expertise,” says Olsen. He adds, “I would be distrustful of a contract manufacturer that said, ‘I just implemented lean six months or a year ago,’ as far as being able to get expertise from them.” According to Olsen, it generally takes two to five years to achieve a lean culture in a company.

Implementing a lean outsourcing model is not without its challenges. If OEMs are to switch to a pull system called for by lean manufacturing, they must get a better handle on the demand of their customers. Only then can their EMS providers change from build to forecast to build to order.

Then there’s the matter of where inventory ends up in lean supply chains. “Because the OEMs have the power, they pass it down to the subcontractors. And the subcontractors are the customer so they pass it back down to the component folks. But ultimately, somebody has to pay for that,” says Olsen. “You’re either going to pay for it with your component folks holding huge amounts of inven-tory….Or you’re going to work with your component folks to reduce it to a level that is commensurate with the capability of the process.”

Lean outsourcing may not be easy, but Cisco’s lean program is a major endorsement of the concept.

Market Data

IT and Comm Still Dominate

Although the traditional EMS markets in IT and communications are no longer the growth engines they once were, they show no signs of being overtaken any time soon. Computer-related business and communications infrastructure together accounted for about 60.4% of 2005 sales from 43 MMI Top 50™ EMS providers. These two segments lost no market share when compared with 2004 data from 44 providers, which generated the same percentage of combined sales from IT and comm infrastructure. (One can even make that case that the market share for IT plus comm went up because 2005 data excludes the Top 50’s largest company, Foxconn, which derives the largest portion of its sales from the IT sector.)

From MMI’s annual Top 50 survey, the newsletter obtained sales percentages by market segment for 43 Top 50 providers representing $78.3 billion in 2005 revenue. Percentages are tabulated on page 3. Market share for a segment was calculated by adding up sales in that segment for each of the 43 providers.

As in the past, the segment comprised by computing, storage and peripherals took the largest piece of the outsourcing pie constituted by the group of 43 providers. Last year, this computer-related segment accounted for approximately 35.0% of aggregate sales for the Top 50 group. Market share was nearly the same as that produced by the 2004 group of 44 providers (34.8%), but could have been higher had market segment data been available for Foxconn.

Communications infrastructure came in at 25.4% of group sales, almost the same as that calculated from 2004 Top 50 providers (25.6%). It is probably safe to say the comm infrastructure still holds on to about a quarter of the EMS market.

As a pie wedge, consumer and handheld devices narrowed slightly from 2004 results. This newer segment amounted to a 22.9% slice of the revenue pie handed out by the 2005 group of 43, compared with 24.1% from the 2004 group of 44. The comparison might be misleading, however, because of the absence of Foxconn in 2005 data. (Foxconn is strong in consumer products and handheld devices.)

Unfortunately, the remaining segments – industrial, medical and instrumentation, automotive and military/aerospace – have been combined in this analysis into a single “other” category out of necessity. Three tier-one providers still do not break out sales in some or all these nontraditional categories. This “other” category represented 16.7% of 2005 sales for the 43 Top 50 providers, up from 15.5% in the 2004 analysis. Again, this change in computed market share may not be telling because adding Foxconn probably would have diluted the share. Still, when combined the four nontraditional categories now amount to a significant portion of the EMS market, well into double digits.

Although industrial equipment is considered a nontraditional segment with lots of room for growth, it is well penetrated by smaller companies in the Top 50. Out of the bottom 30 providers on the list, 25 reported that the industrial percentage of their sales was in double digits. Furthermore, 13 of these smaller providers generated 20% or more of their sales from the industrial segment. Industrial contracts often involve low-volume, high-mix programs well suited for smaller providers who cater to such requirements. But some of the larger providers have also penetrated the segment. Five or six companies in the top 20 derived 10% or more of their 2005 revenue from industrial customers.

Medical devices comprise perhaps the hottest segment of late. This sector remains largely virgin territory for outsourcing as only ten Top 50 providers listed a double-digit percentage of sales from the medical sector. Just two of these were top-ten companies.

Word to the wise: Note that the above market segment percentages are approximations. They cannot be more precise for several reasons. In the case of three providers, market segment data did not correspond to the period (calendar or near calendar) on which sales were based for this analysis. Also, some companies either lumped together sales from more than one category or introduced a category that did not exactly fit the segments being analyzed.


Flextronics To Sell Software Business

Flextronics (Singapore) has signed a definitive agreement to sell its software development and solutions business to an affiliate of private equity firm Kohlberg Kravis Roberts & Co. (KKR) in a transaction valued at about $900 million. The EMS company will retain a 15% equity stake in the software business, which will operate as an independent entity as yet unnamed.

This is the latest, and perhaps last, in a series of transactions Flextronics has made to divest itself of holdings that were not part of its core EMS business. Last year, the company sold off its semiconductor design unit and 70% of its network services business.

From the sale of the software business, Flextronics plans to receive more than $600 million in cash and will get a $250-million note at 10.5% interest. The company expects the after-tax gain on the on the sale will be about $175 million.

Based in Palo Alto, CA, the software business maintains operations predominantly in India under the banner of Flextronics Software Systems. The business employs about 6,100 people worldwide.

Michael Marks, the non-executive chairman of Flextronics, joined KKR in January upon his retirement as Flextronics’ CEO. Bloomberg news service reported Ash Bhardwaj, CEO of the software business, as saying that Marks did not act as an adviser to KKR in this transaction.

Flextronics expects the transaction to be slightly accretive to its fiscal 2007 GAAP EPS. Subject to customary closing conditions, the deal is expected to be completed this summer.

Meanwhile Flextronics’ board has authorized the repurchase of up to $250 million of its common stock. A stock buyback is one of the options Flextronics is considering for the use of above cash proceeds.

Another investment in India

Although Flextronics is cashing in on its software investments in India, the company continues to make other investments in the country. The company is already spending capital on the development of a new industrial park near Chennai. Now Flextronics has signed a memorandum of understanding to invest an unspecified amount in SemIndia, a $3-billion chip manufacturing project in Hyderabad.

Under the MOU, Flextronics will become a preferred manufacturing partner for SemIndia. Flextronics will manufacture electronic products for SemIndia, and SemIndia will manufacture semiconductor components for the various types of products that Flextronics manufactures in India. These include cell phones, set-top boxes and personal computers.

One of India’s shortcomings as an electronics manufacturing center is the lack of a supply base, particularly in components. Aimed at creating India’s first world-class wafer fabrication unit, the SemiIndia project is presented as paving the way for a complete ecosystem for product manufacturing in India.

The project is backed by a consortium working with Advanced Micro Devices, Government of India, Government of Andhra Pradesh, and India Semiconductor Association.

India deal done…Jabil Circuit (St. Petersburg, FL) has completed its acquisition of India-based Celetronix, but the company’s memory division was not part of the deal (Jan., p. 5).

DSP Company To Acquire EMS Provider

Publicly held Lyrtech (Quebec City, Canada), a supplier of DSP (digital signal processing) solutions, intends to acquire a Canadian EMS provider, Innovator Electronic Assembly, which is based in Montreal.

Operating in a 50,000-ft2 facility, Innovator specializes in complex electronic assemblies for a diversified clientele. Its offerings include rapid prototyping, NPI services, turnkey assembly and box build. For the fiscal year ended Jan. 31, Innovator generated sales of Can$14 million, EBITDA of Can$1.5 million and net income of Can$300,000. Started in 1999, the EMS company has grown revenue over 40% in each of the past three years.

The purchase price for the acquisition is Can$5.4 million, with Can$3.6 million payable in cash and Can$1.8 million payable in Lyrtech common stock. Of the stock to be issued, Can$1.2 million will be payable in full only if the acquired business achieves a specified level of revenues in each of the two years following the acquisition.

“This acquisition combines two high-growth companies that serve a similar client base with different, yet complementary product and service offerings. Following the acquisition, Lyrtech will be able to offer its clients advanced DSP engineering solutions coupled with a state-of-the-art electronics manufacturing capability,” stated Migüel Caron, president and CEO of Lyrtech.

Lyrtech offers a full range of DSP-FPGA development platforms, as well as design, prototyping, and manufacturing of electronic products. Customers include BAE Systems, Defence Research and Development Canada, European Aerospace Defence and Space Company, Fujitsu, Harris, ITT, Neural Audio, Nissan, Nokia, NTT DoCoMo, Samsung and Sony.

Completion of the transaction is conditional upon Lyrtech obtaining private placement financing of at least Can$4.0 million and a new banking facility of about Can$9.5 million. The company also plans to issue a subordinated non-convertible debenture of Can$2.0 million. Closing of this financing and the acquisition are expected to take place on or about April 28.

Lyrtech also announced the closure of its manufacturing facility in Quebec City. This move will affect 19 employees, the majority of which will be offered other jobs within the company.

Kimball Takes Over Bayer Operation

Kimball Electronics Group (Jasper, IN), an MMI Top 50 EMS provider, has acquired the Bridgend, Wales (UK), manufacturing operation for Bayer HealthCare’s Diagnostics Division (Tarrytown, NY). The provider said the UK facility supports growth and diversification.

Kimball purchased the equipment and inventory and hired the 164 Bayer employees working at the site, which the provider will lease. The Bridgend plant under Kimball will continue to supply Bayer with products currently manufactured there. Kimball will also seek new medical customers for the facility.

“We are very excited about the growth opportunities in the medical market, and the Bridgend team and their capabilities will significantly add to our package of value that we offer to our medical customers,” stated Don Charron, president of Kimball Electronics Group.

“Bayer and Kimball have had an excellent partnership over the past eight years, and our Bridgend agreement further deepens our relationship,” added Charron.

Kimball Electronics Group, a subsidiary of publicly held Kimball International, specializes in durable electronics with applications in the medical, industrial controls, public safety and automotive industries. EMS operations take place in the US, Mexico, Thailand, Poland, and a soon to be completed new facility in China.

Other new programs…Wavesat (Montreal, Canada), developer of WiMAX chips and software, has engaged Sanmina-SCI (San Jose, CA) for manufacturing of WiMAX 3.5 Ghz Mini-PCI modules….Waters (Milford, MA) will use Solectron (Milpitas, CA) for production of high-performance liquid chromatography systems in Singapore. Solectron recently opened a dedicated medical manufacturing facility in Singapore (Dec. 2005, p. 5-6)….PCTEL Antenna Products Group, a subsidiary of PCTEL (Chicago, IL), has awarded Elcoteq (Espoo, Finland) a contract to manufacture variable-tilt base station antennas along with certain land mobile radio antennas in Elcoteq’s new St. Petersburg plant in Russia. PCTEL is a supplier of wireless broadband solutions….Nam Tai Electronics (Tortola, British Virgin Islands) has landed Hitachi Maxell as a new customer, for whom Nam Tai will manufacture digital pens….MMI Top 50 EMS provider Kitron (Lysaker, Norway) recently announced several program wins. Through its Lithuanian subsidiary, Kitron has entered into an agreement with HemoCue AB (Ängelholm, Sweden) for production of three blood analyzers. The contract has an estimated value of about NOK 40 million ($6.3 million) over three years. Under another new agreement, Kitron will assume responsibility for production of a biotechnology-based system developed by Biosensor Applications Sweden AB (Sundbyberg, Sweden) for detection of explosives and narcotics. This contract is worth an estimated 30 to 40 MSEK ($4.0 to 5.3 million) over three years. Finally, Kitron, through its subsidiary, Kitron Microelectronics AS, has signed agreements that will double annual production value of products for Kongsberg Automotive AB (Mullsjö, Sweden), a subsidiary of Kongsberg Automotive Holding ASA. Valued at an estimated NOK 25 million ($3.9 million) over five years, the agreements include industrialization and production of electronic modules for gearshift systems.…LaBarge (St. Louis, MO) has received wiring harness orders totaling about $10 million for a new, very light jet made by Eclipse Aviation (Albuquerque, NM). Also, LaBarge has landed a $2.3-million contract from BAE Systems to produce power control enclosure assemblies for a lightly armored vehicle that functions as a mobile command post for the US Army….IEC Electronics (Newark, NY) has won a contract to manufacture a battery charge indicator module for Ultralife Batteries (Newark, NY). The charge indicator goes with a non-rechargeable lithium-manganese dioxide battery used by the US Department of Defense…. As sole source, Axis Electronics (Bedford, UK) will manufacture a cell phone RF management unit for the AeroMobile system, which allows aircraft passengers to safely use their mobile phones in flight. AeroMobile is a joint venture between ARINC (Annapolis, MD) and Norway’s Telenor.

Flextronics in $1-billion deal… Several news sources reported that Flextronics is involved with the largest of the deals recently signed in Los Angeles by US and Chinese companies in advance of the US visit of China’s president, Hu Jintao. These agreements amount to more than $4 billion in purchases of US goods for China, with Flextronics participating in the biggest piece, a $1-billion deal. However, doubts have been raised as to whether this deal represents a large chunk of additional revenue for Flextronics. If Flextronics were to secure a billion dollars worth of new business, it would seem that the deal would be material and Flextronics would be required to disclose it. But so far, Flextronics has been mum on the subject. Something else may be going on here. Analysts at Bear Stearns recently wrote that they believe the deal does not represent incremental revenue to Flextronics, “but rather reflects FLEX’s China ops intentions to source more materials from the US.” Likewise, a report by Ingalls & Snyder analyst Alexander Blanton asserted, “Flextronics’ Chinese subsidiary has signed contracts to procure certain components and materials from the U.S., which would help the Chinese trade balance. The contracts have nothing to do with new business for Flextronics.”

Celestica and customer part ways…C&D Technologies (Blue Bell, PA) and Celestica (Toronto, Canada) have agreed to terminate their agreement by which Celestica manufactures DC/DC and AC/DC power suppliers for C&D. This decision is in line with C&D’s strategy of consolidating its supply base to companies concentrating on power manufacturing. C&D plans to complete the transfer of operations from Celestica by the end of September. In September 2004, Celestica sold its Power Systems business to C&D and entered into a three-year agreement to supply C&D with certain power products.

New facilities…The Electronics Manufacturing Solutions (EMS) business of CTS (Elkhart, IN) is setting up manufacturing operations in Matamoros, Mexico. Production is slated to start in mid-2006 and will focus on electromechanical and system integration. CTS has manufactured components and sensors in Matamoros for nearly 40 years. Utilizing CTS’s existing Matamoros facility allows the EMS business to expand its operations by further capitalizing on CTS’s existing infrastructure. The Matamoros operation will become the fourth EMS site in North America and the first in Mexico….In China, Benchmark Electronics (Angleton, TX) is constructing a new building, expected to be operational in the early part of 2007. It will be used for PCBA and system integration. Currently, Benchmark operates 115,000 ft2 in Suzhou….Nam Tai Electronics has embarked on a vertical integration plan to add flexible printed circuit manufacturing to its existing FPC subassembly capability. The first phase of investment for this FPC project amounts to about $30 million. Trial production of FPCs is expected to start at the end of Q3. Nam Tai believes that this vertical integration will not only increase its profitability, but will also strengthen its competitiveness. In addition, the company recently entered into an agreement with the Guangming Hi-Tech Industrial Park in Shenzhen, China, for the purchase of about 1.3 million ft2 of land for future expansion. The factory expansion plan remains on schedule, with construction of new manufacturing facilities to begin by year end. Nam Tai expects that the first phase of construction will be completed in the summer of 2008. Capital expenditures for the first phase of investment are projected to exceed $150 million, including construction of the new facility and purchase of equipment….Vanguard EMS (Beaverton, OR) has completed its facility expansion to 70,000 ft2. The enlarged facility allows manufacturing, prototyping, system integration and test to colocate in one building. Vanguard said it greatly increased efficiencies by not having to move product from one facility to another. Such movement is treated as a form of waste by the lean principles that Vanguard is implementing. The expansion also enabled Vanguard to launch an expanded service called Vanguard Velocity, handled within the company by a separate group focused exclusively on quick-turn prototyping and NPI for regional OEMs. Vanguard reported increased regional and domestic demand for its manufacturing and prototyping ser-vices.

Benchmark Raises 2006 Guidance

Benchmark Electronics has increased 2006 guidance, whose midpoint now corresponds to annual growth of 14.1%. The top-10 EMS provider currently expects 2006 sales of between $2.55 and $2.60 billion, up from prior guidance of between $2.47 and $2.54 billion. The projection for 2006 GAAP EPS is between $1.46 and $1.51. Benchmark follows Jabil Circuit as the second provider to raise guidance for its fiscal 2006 (Jabil’s fiscal year ends in August).

What’s more, Benchmark’s results exceeded its guidance for Q1 2006. Sales for the quarter came in at $651 million, compared with guidance of between $590 and $615 million. Q1 sales were up 27.6% from the year-earlier quarter, while net income rose 56.7% to $26.5 million. Excluding special items, the company posted EPS of $0.38, versus guidance of between $0.33 and $0.36. All of Benchmark’s industry sectors grew more than 20% year over year. Operating margin (GAAP) for the first quarter stood at $4.0%.

“The marketplace for outsourcing remains very strong as we look further into 2006. We’re both positive and optimistic about the continued opportunities for 2006 including those which we see outside our traditional marketplace,” said Gayla Delly, Benchmark’s CFO, in a conference call with analysts.

Earlier in April, the company completed a 3-for-2 stock split.

More financial news…Hong Kong-listed Foxconn International Holdings, the majority-owned handset subsidiary of Hon Hai Precision Industry (Tu-Cheng, Taiwan), recorded 2005 sales of $6.36 billion, up 92.4% from a year earlier. Net profit after tax (including minority interests) amounted to $382.9 million, representing an increase of 111.2% from 2004….Suntron (Phoenix, AZ), an MMI Top 50 EMS provider, sold its building and land in Sugar Land, TX, and received net proceeds of about $16.8 million, which was used to repay a portion of its outstanding debt. At the same time, the provider took a seven-year lease on about 50% of the building. Suntron also completed a refinancing of its credit facility. The company entered into a new three-year, $50.0-millon facility, with an outstanding principal balance of about $24 million and an unused borrowing availability of about $18 million at closing. In addition, Thayer Equity Investors IV, L.P., an affiliate of Suntron’s majority stockholder, agreed to lend Suntron $10 million in the form of a secured subordinated note. Thayer also agreed to make additional loans of up to $5 million should Suntron fail to comply with the financial covenants in its new credit facility….Texas Prototypes, Inc. (Richardson, TX), a provider of pre-manufacturing services, plans to go public by merging with Stock Market Solutions, a publicly traded company with no revenue….For the fiscal Q2 ended March 31, publicly held IEC Electronics reported sales of $5.6 million, or growth of 19.2% from the same quarter a year ago. Q2 revenue increased by more than 50% from the previous quarter. The company posted a net loss of $168,000 for the March quarter, compared with net income of $73,000 in the year-earlier quarter. “Our sales growth continues to gain momentum, and we expect further growth during the balance of this fiscal year,” stated W. Barry Gilbert, IEC’s chairman of the Board and CEO. He also said, “We expect that with further sales growth and as our new customers move beyond the start-up phase, profitability will follow.”…Publicly held ZTEST Electronics (North York, Ontario, Canada) is seeking $1.44 million in private placement financing through the sale of common stock and warrants. The company offers EMS through its wholly owned subsidiary, Permatech Electronics.

Certifications Follow Thrust in Nontraditional Markets

It’s one thing to say you’re going after EMS business in nontraditional markets with lots of growth potential. It’s quite another thing to bring in the orders. Segments such as medical, automotive and aerospace have their own requirements that EMS factories must satisfy. To seriously engage with OEMs in one of these industry segments, providers must be able to demonstrate that their factories can build in accordance with the practices of that industry. In short, factories must be certified to that industry’s standard for quality systems.

But there’s more to it. Tier-one and other providers who want to build for these segments in various regions, including low-cost geographies, must have a plant certified in each desired region or location. Hence, a spate of international certifications have recently been announced, and more are likely to come. Providers seeking such nontraditional customers with regional or global manufacturing needs will need a network of plants certified to the standards recognized by those customers.

• Take the medical sector. In the last month or so, two providers stated that one of their Asian facilities achieved certification to ISO 13485:2003, the quality management standard for designers and manufacturers of medical devices. Solectron’s Suzhou, China, plant received the medical certification, while the Singapore facility of CTS’s Electronics Manufacturing Solutions unit earned the ISO designation.

Solectron has made clear that it is offering global solutions for medical device customers including expansion into low-cost regions like China.

For CTS, Singapore is the company’s second facility in Asia to be accredited to the medical standard and its fourth worldwide.

• For manufacturing on behalf of automotive customers, Sanmina-SCI’s Kunshan, China, facility has passed the registration audit for ISO/TS 16949 certification. This international certification for automotive quality systems aligns existing US, German, French and Italian requirements.

• In the aerospace segment, Solectron’s plant in Bordeaux, France, has been certified to EN 9100:2003. This standard for quality management applies to design, NPI, manufacturing and test activities within the aerospace industry.

According to Solectron, this new certification is a key differentiator for the company.

Repair is another area where aerospace certification comes into play. Jabil Circuit’s facility in Singapore has been granted FAA (Federal Aviation Administration) repair station status. Singapore is the second Jabil facility to become certified to provide repair and support services on products utilized in commercial aircraft.

With this new certification, the Singapore facility can now support the entire aerospace production life-cycle, Jabil reported.

The company said its aerospace

Last Word

New Law Attaches Strings to Chinese Labor

Companies of all stripes have pursued the low costs of China with abandon. The country’s vast labor supply and emancipated economy were opportunities too good to pass up in spite of the central government’s Communist affiliation. After all, the central government was encouraging foreign investment, and one dealt with local authorities, not party officials in Beijing, when opening new facilities. In many eyes, China was no different than any other low-cost destination, except that it was cheaper. As investment poured into China, little attention was paid to an essential irony: Western capital was utilizing, some might say exploiting, Communist-governed labor.

But China’s central government has not lost sight of this irony. The Chinese government has proposed a new labor law that will strengthen protections for the country’s workers. In drafting this new law, the government seems to have taken a page from labor regulations in Western Europe. Under one provision, if a company wants to lay off more than 50 workers, it must reach an agreement with the workers or their union. This regulation reminds one of the worker council consultations that are required in Europe. For EMS companies, it’s also a reminder of the hurdles that they’ve encountered when restructuring operations in Western Europe.

According to the international law firm of Baker & McKenzie, the draft law strengthens the position of labor unions. In a review of the law posted on the web, the firm writes that the law requires companies to obtain input from a labor union before ending a labor contract and generally bans unilateral actions by an employer. The firm reports that the law also bolsters a union’s right to bargain on behalf of employees. EMS providers won’t like this part either because they see unions as a threat to their low-cost model.

The proposed law sets forth other labor protections such as mandatory severance pay. What’s more, according to a report from the China Economic News Service, the law stipulates that for each temporary worker used an employer make a 5,000 yuan ($624) deposit as security against any back pay to be owed. Both of these measures have the potential to increase labor costs, another unpleasant prospect for the EMS industry.

From the EMS corporate point of view, the law as drafted will interfere with management’s ability to implement decisions in a company’s best interests. But to expect that the central government would never have a say in management-labor relations was, in hind sight, asking too much. Remember that in political terms China’s workers are the Communist Party’s number-one constituency.

EMS providers in China can’t be happy about the proposed labor law. Will it cause them to reconsider their options in China? Probably not. Although the law may make management’s job harder, China will likely retain its cost advantages, which have more to do with materials than with labor.

Still, the law shows that China is joining a group of developed countries where it is easier to hire than to lay off.

Copyright 2006 JBT Communications. Unauthorized distribution is prohibited.

MMI March 2006

MMI May 2006

Return to Index page