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Competitive PWB manufacturing...What is needed to maintain a viable PCB industry in Europe? (April 2000)
April 18, 2000 |Estimated reading time: 16 minutes
Competitive PWB manufacturing... What is needed to maintain a viable industry in Europe ? by Philip Britton
Philip L.BRITTON (Dip. I.M.; F.Inst. C.T.) Marketing & Technology Manager DuPont International S.A. Geneva, Switzerland
Phil Britton has worked in the Printed Circuit Industry for over 26 years. Initially involved in process development in the military/avionics fields, he joined the Electrionic Materials Division of DuPont in 1978. He is currently European Marketing & Technology Manager for DuPont's Printed Circuit Materials Division.
Abstract
There are an increasing number of predictions on the future of the European PWB manufacturing industry which state that Europe is becoming uncompetitive in the field of PWB manufacture. As a result, these prognosticators say, the European PWB manufacturing industry will collapse as OEMs and assemblers seek to source their PWBs from other regions of the world. This paper will review the competitive position of Europe in the global marketplace. Global technology, differing regional manufacturing cost structures, individual company financial expectations and other influencing factors -such as governmental policy and environmental legislation- will be discussed in detail. Reasons both "for" and "against" an indigenous European PWB source will be developed, compared and contrasted. This paper will then seek to develop potential "winning" business strategies to ensure the survival of PWB manufacture in the region.
Introduction
The printed circuit board, which is now over 30 years old as an interconnect technology, is a mature but still growing business. Over the past 10 years, the PWB market and its dynamics have changed significantly. By the end of 1998, only six European fabricators ranked among the world's top 50, the first one being in 24th position, with a revenue of less than 22% of the leader. By the end of 1999, Europe is expected to derive $6.587 million in revenues, a two-year CAAGR of 8.3%, accounting for 19% of global PWB manufacture by value (figure 1). We can expect the rate of change in the industry to accelerate as regional strongholds diminish and global sourcing accelerates. The environment is becoming increasingly competitive at all levels of the value chain, not least the PWB industry. Major emphasis is being placed on cost reduction, which is driving consolidation on a global basis. All this in an environment where technology is continuing to advance rapidly. To survive, European PWB fabricators will need to continuously seek ways to reduce cost and differentiate their offerings.
The European PWB Market
The number of PWB manufacturers in Europe has been shrinking for many years. In the late '80s and during the '90s, some 1,850 PWB fabricators were listed. Today that number is below 800 and diminishing. With current activity focused on consolidation, the big are getting bigger, and the middle tier are either being bought out or closing as they are no longer able to compete. This trend is expected to continue. There are today only six European PWB companies listed in the top 50 PWB fabricators (figure 2). Consolidation is the "name of the game" in any mature market, the "big" getting "bigger" in the process. When we look at the market projections, however, the prediction is that whilst the overall share of revenue as a percentage of the global total will decline from 19% to 18% in the next three years, growth will continue. The question then becomes, "How can European fabricators retain, or, in some case, recapture this growth?". The starting point to answer this question might well be, "Why would any assembler or OEM not want to source PWBs locally?".
Key Reasons Not To Source PWBs in Europe
Clearly a key element not to source PWBs from Europe is price. One has to be price competitive. Determining what "price-competitive" means to the purchaser is another matter! The second key element is ability to source one's PWB needs locally. This is especially the case in specialty or leading-edge technology applications where the technology is more advanced in one region (e.g., currently HDI in Japan). However, today technology leadership is usually not maintained in one region alone for any long period of time, and the element of price comes back into the decision-making process quickly. The third reason not to purchase locally is one's sourcing policy, if approved suppliers are not located in the region. Today, this is highly unusual, as competency in PWB manufacture varies widely throughout the world. Government legislation/policy is another; however, like approved suppliers, even the most "difficult" or "sensitive" PWBs can usually be manufactured on a global basis quickly. The final key reason is currency. This, of course, comes back to price. Today, one can become very price competitive or the reverse -price uncompetitive- simply by the movement of currency. A number of people have become very rich on currency speculation; however, this is a very risky business strategy, and carries with it a lot of potential problems, including relationship building, understanding of customer needs, and time to educate your suppliers. This type of strategy is usually only applied to mature, relatively simple work.
The profit pool
A very interesting book on the subject of "profit pools" was released in 1998. It focuses on successful business strategies and uses case histories of successes in business. Called "The Profit Zone," by Adrian Slywotzky & David Morrison, this book outlines some major success stories and analyzes why the business strategy employed was successful. It also clearly illustrates the fact that one must really understand the cost structure of not only one's specific business, but of the complete value to chain to build a potentially winning business model. Some 22 basic models are outlined in the book, which has become so successful that Mr. Slywotzky has certainly become something of a celebrity at multinational corporate executive meetings.
One clear question arises for the PWB industry. Do we have a good understanding of the value chain, the current profit pools, and the trends/opportunities? For example, how many know that the PWB accounts on average, for only 10% of the assembled board and only 2.1% of the final item as sold to the end-user? Even more importantly is how this is distributed over the electronics market segments, and what the trend is in any given segment. Understanding the cost structure of even just our own PWB portion can prove difficult for many, as costs are often allocated at a far too high level to understand profitability (or lack of it) at the specific job level. An ABC (Activity Based Costing) type of accounting is one method that helps understanding, but more than this is really required to look at one's current business model and evaluate potential alternative business designs to compete.
Changing Business Design
Business designs, like products, have finite life cycles (figure 3). As the PWB market matured, value migration was inevitable. Globalization has compounded the problem of "fixing" the situation in our industry, because the massive advances in communication have opened up the market to global competition, making it necessary to understand the business globally rather than regionally. Unfortunately, a lot of fabricators have seen this value migration too late, and have not been sufficiently aware of the global environment to make an informed decision quickly enough.
Business theory suggests that there are only three possible strategy options for any business. The first is Technology Leadership, driven by technical innovation and the ability to have leading edge capability. The second is Operational Efficiency, which is a cost-driven strategy, where one strives for the lowest cost position. The third and final is Customer Intimacy, which is segmentation driven, meaning one differentiates one's offering from that of his competitors. All can be effective, but only one can be pursued at any time. Trying to mix strategies is usually ineffective and inevitably leads to a poor competitive position. Ultimate liquidation through financial non-performance is usually the result. Clearly the one that is of most concern to the European market at this time is the "low-cost" strategy currently being employed by South-East Asian competitors, specifically the Taiwanese. To counter this threat, a new business model is required. This new model needs to take into account the situation across the entire value chain. At this point in time, adopting in Europe, a "low-cost" strategy is not likely to be a winning one, so what is the next move? Management is, therefore, challenged to answer two deceptively simple questions to gain the value growth necessary to survive. The first is: Where will we be allowed to make a profit in this industry? THE PROFIT ZONE. The second is: what business design will enable us to capture that profit? VALUE DRIVEN BUSINESS DESIGN.
Figure 4 outlines the potential business designs, what these designs need to encompass, and which regions are driving these business designs. It immediately becomes clear that there is no one single business design that will win globally. It does highlight, however, the fact that specific companies -when one looks at the world's top 100 fabricators- have each selected a business design and are pursuing it. For success in this increasingly fragmented market, clearly one needs to select the market(s) to play in and focus on those markets. As a number of centers-of-competence (C-of-C's) are European based, one suggested target is to focus on these. Another clear target are large OEM's seeking to have local manufacture for whatever reason. These are certainly not the only targets, but they are clearly prime opportunities.
Key Reasons To Source PWB's in Europe
The major reason PWBs will continue to be sourced in Europe (figures 5 & 6) will be that the "center-of-excellence" of some businesses lie in Europe. This is specifically the case in telecommunications and some areas of Aerospace and Automotive electronics, where names such as Alcatel, Philips, Siemens, Ericsson, Nokia, Airbus Industrie, BMW, Mercedes, Porche and Bosch are all globally recognized leaders in their respective fields.
Most of these companies have manufacturing in other regions of the world. Several of them have R&D in other regions of the world, but in the end, the center point of the business resides in Europe. The proximity of the PWB fabricator to these OEMs-and, indeed, other global companies with manufacturing facilities in Europe-will tend to use local PWB fabricators where possible as it makes for easy communication, more flexibility and faster turnaround if given a choice. Local manufacture minimizes the impact of currency fluctuations and avoids duties on imports than can be severe in some cases. Of course, governments (EC, Country, and local government) will continue to make it financially attractive to manufacture in some European regions and -whether one likes it or not- there is always an element of the customer base preferring "locally produced goods," to the extent that this can even impact on specific countries in Europe.
Benchmarking European PWB Manufacturing Capability
As with any business, to continue to be successful, the PWB manufacturing industry must be competitive on a global basis. As highlighted above, reasons for, or not choosing to source PWBs from Europe are not only based on price, although this is clearly a major element in the decision-making process. It is often the case that in the face of fierce competition, the human being can sometimes "accept" defeat; not see any way to overcome the obstacles; believe there is no solution. Figure 7 is an assessment made by the IPC in its Technology Roadmap. It positions Europe in the global PWB marketplace. I have selected five key areas necessary for business success, these being:
- capability in technology
- factory integration, an element for technology but more importantly, for cost positioning
- the ability to design for manufacture, an important element to those companies that have a "centers-of-excellence" in Europe
- environmental awareness, an increasingly important element in business thinking, and one that can impact the manufacturing cost position significantly
- government support for the industry
It clearly demonstrates that Europe is at least competitive in every key field. Despite the fact, for example, that some of the world's toughest environmental legislation is already in place in Europe -this clearly having a cost impact on manufacturing- European PWB fabricators remain able to differentiate their offering sufficiently to continue to grow the revenue in fabrication despite the option to source from lower-priced alternatives. Other regions consider this to be the case. It is up to the European PWB industry to exploit this to its maximum.
Business Models of European PWB Fabricators in the future
There is little doubt that PWB Fabrication is a truly global business and that, with modern communications, in theory at least, one could choose to source PWBs from almost anywhere in the world. Some examples of why the author believes PWBs will continue to be sourced from Europe have already been highlighted. From the IPC benchmarking study, it can clearly be seen that European fabricators are indeed in the process of adapting their business models to remain globally competitive. There is no general trend toward any one business model and there is one model that is unlikely to succeed in Europe and has not been adopted-namely the "lowest cost" model in its purest sense of "lowest price." With the social and governmental restrictions alone placed on European industry, this would be an ultimate losing strategy, as Europe cannot compete with areas such as S.E. Asia. Having stated this, many areas of Asia are today seeing escalating manufacturing costs. Cost of labor and elements such as environmental restrictions are beginning to be enforced, all of which are raising manufacturing costs and moving prices closer to western manufacturing costs. The reverse is also in the process of being implemented.
The European PWB industry recognized over five years ago the need to become truly cost competitive to survive. OEMs have essentially exited PWB manufacture as a core business in the western world. PWBs are no longer considered "core." As such, the PWB business is today being run by specialist companies without the restraints of being a small part of a major corporation or conglomerate. Better decisions result, and the time taken to reach and implement them is shortened significantly, which in any fast-moving industry is an essential element to survival. In addition, as with any mature but still growing business, the PWB business is today run by financial people not, as in the past, by engineers. In short, the industry is getting its act together.
Radical changes in the business environment are needed. One can today see consolidation happening on a massive scale. Small businesses with a niche strategy are continuing, but are fewer in number. The bigger players are building new business models and putting in place the necessary strategies to compete on a global basis. Some of these are already demonstrating that they have developed a winning strategy, despite aggressive competition from Southeast Asia. Perhaps by taking a look at such companies, one can glean potential business models that will sustain one's own business in the future. The successful business models of some of the top European PWB fabricators (figure 8) are different, but their models are working for them and they are able to generate the financial returns necessary to provide funds for continued investment and for expansion to maintain the critical mass necessary to compete (figure 9). One will not be successful by employing the same business model as the majority of one's competitors. Differentiation is the name of the game.
Conclusion
Both the electronics industry and governments have economic and political reasons for keeping the PWB industry alive in the region, and with a stake in its global development, to support the "centers-of-excellence" based in Europe. This is a key element in the future survival of the European PWB industry. It is up to European fabricators to consider their position in the global marketplace and -however painful it may be- to develop and implement a new business model. The key will be "focus" (figure 10). No longer can a model win that tries to accommodate a broad spectrum of requirements. It will be a gamble. Fabricators will need to select the segment(s) in which they wish to play and develop a business model to differentiate their offering in these selected markets. It will be necessary to focus on the entire value chain and to understand the cost structure, the profit pools, and where differentiation can be achieved versus other regional competitors. The key is financial success, not technological success (figure 11). The author is suggesting that there are few areas in which Europe has the ability to lead on a global basis, as our industry is driven by the component industry, whose center lies in other regions. Being a "fast follower" can and has been a very financially successful strategy. One only need look at Matsushita's strategy opposite to Sony to see this. One also needs to consider that while they are direct competitors, both Sony & Matsushita are very successful financially. Timing is a key element. Move only when necessary. Avoid the burden of excessive R&D. Most importantly, base decisions on commercial success, not technological success. It is a fact that people still buy from people. Despite the rapid increase in e-commerce, people are still involved in the buying process.
There is no doubt that consolidation as a result of this restructuring will continue, but the net result will be a much more streamlined and cost-efficient industry, better able to compete in the global marketplace. Inevitably, the fabricators in the middle will become increasingly squeezed as they try to compete with the better equipped, more automated, major players. It is this author's view that Europe's number of PWB shops will, over the next 3-5 years, shrink to where some 10-12 major fabricators accounting for over 85% of PWBs manufactured in Europe. The small, specialist fabricators will remain, providing fast turn-around and specialty services to the OEMs and assemblers.
As the world sees it, European PWB manufacture will, in terms of percentage of world production (figure 12), decline but will continue to grow in terms of both volume and revenue at a rate close to that of North America. And, it will exceed that of Japan. Europe is seen by others as "competitive" in all key areas. A decreasing percentage of European-produced PWBs will inevitably be exported outside of Europe, but the restructured European PWB industry will be in a position to compete effectively for the home (European) markets. Others do not see the European PWB industry ceasing to exist through pressure from other regions; why should we? Europe has its fair share of world-class people with business competence equal to none. It is this strength that will lead companies to succeed by modifying their business designs to meet the needs of their customers.
On a closing note, one theme continually raised is that "big is beautiful." Certainly there is an element of truth to this, but it is not the only way. The Taiwanese are certainly making "big is beautiful" their slogan. But when one looks back into history, perhaps a lesson can be learned. The Roman Empire foundered shortly after the birth of Christ. The British, Spanish and Portuguese Empires have declined, and continue to decline, since the 1800's. The Hughes Empire went into oblivion in the '50s. Digital disappeared in the '90s. In the fast-moving world of electronics, will the "big-is-beautiful" business model continue to thrive? Our industry structure must change; adopting new business models that are competitive in the global marketplace is an essential element for continued success. It's up to us!