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Please note: This "open letter" to the industry was supplied to PCB007 by a PCB fabricator in the U.S. who is deeply concerned about the current and future state of the industry. The writer of this letter wishes to remain anonymous.
A crisis is looming in the PCB industry that not only threatens the profitability of OEMs and EMS providers, but also puts our national security at risk.
Problem: Tightening Margins Driving Domestic PCB Companies out of Business
Thirty years ago, approximately 1,700 to 2,000 PCB fabricating firms existed nationwide. Currently, approximately 350 firms continue operations around the world and companies are closing their doors at the rate of 30 per year. What is even more remarkable is that approximately 200 companies average $3 million in total revenue leaving a mere 150 companies to address the high technology needs of a nation.
While PCBs have evolved from simple two- and four-layer technology to extremely sophisticated, high-technology laden devices, they are still perceived as a commodity--with commodity pricing by OEM and ECM purchasing departments. Also, raw material costs, especially gold, silver, tin and a variety of oil-based products, continue to rise as these finite resources are shared with other growth-minded countries over the world. PCB buyers, it appears, have not fully accepted the realities of this supply/demand equation and are adverse to accept justifiable price increases.
As a result, PCB fabricator margins have been squeezed to low, single-digit numbers. Today, PCB fabricators with a 5% margin would be deemed world class. Unable to survive at those profit levels, PCB fabricators are going out of business at an alarming pace.
Closed PCB Companies Disrupt Supply Chains
The closing of PCB companies is not a problem for the PCB industry alone. If you're a CFO or executive of an OEM or ECM firm, one of your primary concerns is managing risk. One key risk is ensuring that your supply chain remains intact and that deliveries to your customers stay on schedule.
The PCB is often the most critical component--and the most expensive--in most electronic products. Unfortunately, the decision by the PCB company to terminate its operation is often made with little or no notice, causing customers to scramble to qualify a replacement.
In addition to the potential supply chain delays, substantial expense is incurred in qualifying a new PCB supplier, creating new artwork, re-tooling systems for all part numbers and enduring quality issues as the new supplier fine-tunes their processes to meet the more technically challenging PCB configurations. Meanwhile, at risk is the potential disruption to your customers' delivery schedules. The impact could be disastrous.
Can We Risk Outsourcing Critical Military Electronics to India or China?
As more and more domestic PCB companies close, a still unresolved question is: Who is going to produce the PCBs for military applications? In the interest of national security, can we afford to have the critical, top-secret circuitry for sophisticated military weapons and instrumentation built by unfriendly countries? The prospect is almost unfathomable, but, unless current trends are reversed, such an outcome may be inevitable.
The Solution: Allow Your PCB Partner to Recoup Some of Their Rising Costs No business or industry can survive when expenses continue to rise uncontrollably without passing such increases on to the customer in the form of higher prices. I fully recognize the objective of OEM and EMS purchasing teams is to obtain cost reductions for all commodities, but, in the long run, such a strategy is self-defeating for this particular custom-built component and for several other reasons:
1. Today, only a handful of well-financed OEMs are providing PCB technology developments and improvements for the industry. Independent PCB fabricators, operating with single-digit profit margins, along with their supply chain partners, have been executing the technology changes driven by component manufacturers and customers' design and CAD layout teams.
2. Investments, such as those demanded by compliance to RoHS, are, and continue to be, funded by the independent PCB fabricator whose ROI is erratic and uncertain. Failure to invest has equally disastrous consequences as the PCB fabricator may likely become the weak link in the new product development process--hastening the movement of business to well-financed and aggressive Far Eastern organizations.
3. As the center of gravity shifted from once-powerful, U.S.-based PCB suppliers to Far Eastern countries, so has much of the PCB infrastructure, namely laminate and chemical suppliers. With few exceptions, most of the "cost of goods" material supplies used in fabricating PCBs is no longer made in the U.S., but is being supplied by companies whose names are unrecognizable to us today. The PCB companies no longer have the competitive leverage they once enjoyed.
4. Deposits of gold, tin and silver and oil are finite resources. The emergence of China, India and others will impact the world supply like no other time in human history. Price increases for these precious and limited commodities will continue to increase. The refusal by the OEMs and EMS purchasing teams to accept these realities only exposes them to even greater danger in the future.
5. Most PCB fabricators today are niche players and fully capable of addressing the technology demands in their respective niches. But, as margins deteriorate, PCB fabricators tend to try pushing themselves just outside their niche, thus increasing their exposure and possible self-destruction.
6. The few pennies saved by forestalling reasonable, timely price increases will be dwarfed by the potential expense and damage to customer contracts and relationships of having to find, qualify and get a new PCB fabricator up to speed because the existing fabricator was forced to close its doors.
7. If the current depletion of PCB companies continues, the industry will ultimately be left with just a few firms still in operation--shifting the supply and demand equation from favoring buyers to favoring sellers. The result of this action will be significantly higher prices.
As a PCB fabricator for the past 30 years, I have come to know and understand the character of my associates and peers while attending various IPC functions. We're a proud and dedicated bunch, as evidenced by our willingness to persevere in a business sector under attack by many forces. I can say with confidence that none of my associates is looking for a handout--only a fair chance to compete.
We simply ask that buyers recognize an 18 layer board with 4 mil technology can no longer be characterized as a commodity component, but as a sophisticated, high-technology component. Secondly, recognize that low operating margins cannot support unavoidable rising material costs increases.
I would encourage working with your supplier in accepting only the incremental change in COG material cost (not markup). With these simple changes, you will have dramatically increased your PCB supplier's chances of being a supplier for you in the future. With such acceptance, you will be making the right decision for your company, for all those in the PCB industry and for your country.
For more information, or to comment, contact Raymond Rasmussen, at firstname.lastname@example.org.