Outsourcing in Japan
Outsourcing of electronic assemblies by Japanese companies has always been considered one of the “final frontiers” for EMS suppliers. Japanese OEMs have always considered manufacturing one of their core competencies, and for a long time resisted engaging EMS companies. Additionally, the supply chain was well established for the parts and mechanical assemblies that are essential to mechanical products like copiers, fax machines, and other office automation equipment. But a number of factors conspired to bring the Japanese to the outsourcing table. First, there were the rising costs of labor, land, and taxes that made manufacturing in Japan unaffordable. Electronic products coming out of Japan had always been expensive, but starting in the 1990s, they were becoming even more costly. Japanese OEMs watched as their Western competitors gained competitive advantage in price, supply chain, delivery, and repair as a result of their relationship with EMS subcontractors. Even worse, asset utilization was abominable—sometimes as low as 10–15%—as expensive manufacturing equipment sat idle and facility space was left empty, making for a very poor return on invested capital. The old business model of vertical integration was not holding up to a new world of the extended enterprise that hedged against changing technology and provided better expertise, thereby offering a solution to managing in-house capacity loads. More important, it made economic sense though it went against the grain of quality. Japanese OEMs were known for their intense dedication to 100% total quality and didn’t trust any third-party suppliers to live up to their standards. And there were cultural issues that involved language and behaviors that were unique to the Japanese, resulting in these OEMs simply being more comfortable working with Japan-based companies. Breaking into the Japanese EMS market was like trying to break into Fort Knox for many Western EMS firms.
Yet today, EMS in Japan is quite pervasive, though it did not happen overnight. The large Japanese OEM firms like Sony, Toshiba, NEC, Fujitsu, Hitachi, and others experimented with outsourcing end-of-life products such as office automation and consumer electronics products. These commodity products never made much money for the EMS companies and were often engaged to open the door to more lucrative opportunities. Yet by 2015, the EMS market in Japan was estimated to have grown to $6.3 billion in revenue, according to a New Venture Research report, The Worldwide Contract Manufacturing Services Market – 2016 Edition, indicating that a fair amount of outsourcing was taking place (see Table 1). Foxconn is the largest supplier (see Table 2), with an estimated 2.5 million square feet of manufacturing capacity, followed by other Tier 1 EMS suppliers such as Delta, Flex, Jabil, Pegatron, and Sanmina. But it is the domestic suppliers that are of interest; these include Di-Nikko Engineering, SIIX, UMC, and a recently discovered EMS company named Kaga Electronics.
Kaga Electronics is a sizable $3 billion conglomerate consisting of the EMS division ($700 million); a parts, components, and power supply business named Taxan; and various other enterprises in the electronics sector. MMI hadn’t even heard of the company until the Director of Sales, Terry Kearney, and the General Manager/Sales, Virgil Chen, called us up to tell us about Kaga and how the EMS business in Japan works. Kaga maintains low-cost manufacturing facilities all over the globe, including in China, Thailand, Malaysia, and the Czech Republic, in addition to two facilities in Japan.
The company was founded in 1992 when EMS was just starting to take off. The people at Kaga found it very difficult to get OEMs to agree to outsource, yet the company was able to convince firms like Oki, Sharp, Sony, and Olympus to subcontract office automation PCB assemblies. However, Kaga had a secret advantage via its parts, components, and power supply business, which had sold products to these companies for many years.
“We’re in it for the long run,” states Kearney, who says that longevity and trust were the most important factors in getting Kaga’s customers to embrace outsourcing. In fact, treating the customer first is a philosophy preached widely by the company. And Kaga being a Japanese company was critical, in that the culture and language were the same, and once it was established that it could achieve 100% quality on a reliable basis, the doors began to open. “Once one cow crosses the river, the rest will follow,” declared Kearney. Trust made it easy to transition other programs into the pipeline.
Kaga has grown into a Tier 2 supplier in Japan, focusing on low-volume, high-mix assemblies in the industrial (HVAC), automotive, and medical industries. The company is seeing strong growth in the electronics assemblies in these industries as OEMs embed sensors, intelligence, and Internet of Things devices into transportation and other industry products.
The old captive subcontracting partnership system, commonly known as keiretsu, has been falling into obsolescence over the last 20 years. This has proved difficult for certain sectors where costs are forcing OEMs to look abroad for further reductions. In traditional consumer electronics, leading Japanese OEMs like Sony, NEC, and Mitsubishi are increasingly engaging EMS providers and ODMs as primary subcontractors to manufacture their products.
Outsourcing has come to be an accepted practice in Japan today, but the domestic EMS companies definitely have the edge, as it is not uncommon for heterogeneous cultures to prefer to work together (e.g., Europeans, Asians, and Americans). Therefore, penetrating EMS in Japan will require an indigenous operation. There appears to be significant potential for this, as the world continues to embrace the benefits of outsourcing.
Despite this, the APAC region experienced a decrease in revenue growth compared with the other regions in 2015–2016. While it dominated the world in terms of total production (accounting for almost 70 percent of all assembly), the downturn in demand for digital TVs, desktop computers, and, to a certain extent, notebooks contributed to this decline. The region continues to attract high-volume electronics assembly, mostly for the IT and consumer electronics industries. Of greatest concern, however, is the steady rise in base wage rates—all across the board—particularly for the common assembly worker.
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