The 'pack' mentality may drive companies to ignore locations best-suited for their business or customers.

Just as EMS customers like to add significant rating weight based on a contractor’s experience with projects of similar size or scope, EMS companies often add weight to locations recognized as EMS cluster zones. Initially, this mentality made sense, particularly as the industry moved into regions with limited electronics manufacturing infrastructure. But in today’s crowded EMS market, following the pack can translate to similar labor costs and less differentiation. Worse, the pack mentality may drive companies to ignore locations best-suited for their business model or the needs of a niche customer base.

Evaluating a Site A robust evaluation methodology should look at the hidden costs associated with: Logistics cost (including flexibility in transport options and transit times). Maturity of supply base infrastructure. Access to required third-party technical support services. Quality of life issues for transferred employees (including housing cost and access to schools). Actual vs. assumed labor market cost-drivers. Regional security issues. Regional cost structure variances in utilities, real estate or taxes. Ease of doing business. Attractiveness of location to customers. Potential long-term disadvantages likely to develop as market matures.

The optimum solution in expansion strategy is an evaluation model which weighs most heavily on alignment of location with key elements of the contractor’s business model and relevance of location to key customer needs. That may lead to an established EMS cluster zone or may suggest less developed options. Finally, any expansion model must include a management strategy which addresses potential location disadvantages and recognizes that as regions evolve, the factory’s business mix or operational formula may need to adapt.

Mexico is one country whose cluster zone focus has been driven by pack mentality. An interesting dynamic is Ciudad Juarez. The headquarters of one of Mexico’s first EMS providers in the mid ’80s and a location best-suited to just-in-time, cross-border logistics, Juarez is the latest area in Mexico to evolve into an EMS cluster zone. In the late ’80s and most of the ’90s, Tier One EMS providers investing in Mexico were influenced by customers to focus on Guadalajara, Monterrey and Tijuana. Border towns perceived to be lower cost such as Reynosa also grew faster than Juarez initially, even though Juarez had the shortest commute to a larger U.S. city with interstate highway, rail and air access.

Some companies focused on the region ahead of the pack. Jabil and Solectron have a presence in Chihuahua, just south of Juarez. KeytronicEMS had EMS operations in Juarez since 1997. However, between 1999 and 2005, the EMS base in Juarez has quietly become a cluster zone. Companies that have moved to the region either through acquisition or greenfield plants include Elcoteq, Plexus, EPIC Technologies, Foxconn and Mack Technologies. Flextronics also recently announced greenfield investment in Juarez.

Infrastructure characteristics that make this region attractive – a skilled labor pool, proximity to U.S. transportation links, proximity to a U.S. location with acceptable quality of housing/life for U.S.-resident management, availability of technical educational facilities and access to a developed supply base – have been in place for over a decade. OEMs making electronics for consumer, automotive and computer peripherals have found the region attractive. In short, the competitive advantage of the region was ignored for close to two decades by a majority of the EMS market, often in favor of more popular, yet higher total cost Mexican locations.

Increased EMS focus has dovetailed with enhanced supply base infrastructure growth. According to Bernie Sargent, president of the Border Group, an El Paso-based manufacturer’s representative firm, the area’s supply base has improved significantly as the EMS market has grown. “There are now nine to 10 distributors serving the area including four major distributors,” he notes.

As the region becomes an EMS cluster zone, there will be winners and losers as competition for qualified labor will increase. Some business models will be more cost-efficient than others. The companies that excel in this and other developing regions will likely be those that lead either in terms of location adoption or business model adaptations. To better illustrate this dynamic in Juarez, two companies have been interviewed: Keytronics EMS and EPIC Technologies. Keytronics was an early adopter of the region, while EPIC has a unique business model in terms of acquisition methodology and operations standardization. Both have multiple facilities in Juarez and use strategies that can apply in any geographic expansion strategy.

KeytronicEMS

Keytronics acquired manufacturing capability in Juarez in 1993 by purchasing a facility from Honeywell. Originally this facility focused on OEM keyboard manufacturing. In 1997, EMS operations were added to the mix and the company’s name changed to reflect that focus. Today, the company’s Mexican presence includes three facilities in Juarez and one in Reynosa. The Juarez facilities employ approximately 2,300 people. The operations serve a variety of OEM segments including: industrial, medical, consumer products, printers and telecommunications. Capabilities in Juarez include: plastics injection molding, board-level manufacturing, mechanical assembly and complete system build. Project complexity ranges from high-end electronics including chip-on-flex to simple assembly projects with no electronics content. Flex-circuit fabrication was moved to Juarez from Las Cruces, NM, this year. Design and repair depot operations are still handled by the company’s Spokane, WA, headquarters.

“The market in Juarez is growing. It is much better than last year or the year before,” said Efren Perez, vice president of Southwest operations. This, he says, translates to labor availability issues. “Our electronic harness and mechanical products business can be very labor intensive. In the softer labor market we could easily hire several hundred people in three weeks. Today, labor availability is becoming more difficult and we have to recruit more aggressively.”

EPIC Technologies

EPIC Technologies also chose acquisition as a point of entry into Mexico. It initially purchased the assets of IEC Electronics’ Reynosa operation and then moved that business into a leased facility in Juarez in 2002. In 2005, it acquired a second facility in Juarez from a consumer electronics customer. Its current Mexican manufacturing footprint is now approximately 200,000 sq. ft. with 1,000 employees. The operations support OEMs in medical, automotive, industrial, communications and consumer electronics. The company also operates a distribution center across the border in El Paso.

According to John Sammut, EPIC’s president and CEO, the Juarez location was selected for its advantages over other areas they evaluated in Mexico. “Cross-border logistics ease, complementary technology within the region, access to a good technical base, strong enclosure supply base, availability of reasonably priced housing and good schools in El Paso for our U.S. resident managers and the great climate were all key elements in our choice to select Juarez over other locations in Mexico.”

“The cross-border logistics element was of key interest given our focus on Lean manufacturing. Product shipped from Juarez by noon is typically in transit in the U.S. on the same day,” he adds.

While EPIC Technologies does not have dedicated plastics molding capability, it does share some common investment backing with Millennium Plastics Technologies. Millennium has molding operations in El Paso and Chihuahua, and shares a headquarters location in Rochester Hills, MI.

“Millennium gives us a strong relationship with a plastics molding company that shares our Lean philosophies and business culture. At the same time, because it is a separate company we have the ability to use a range of molding houses to meet varying customer needs. The end result is a strong molding partner and a high degree of supply base flexibility,” Sammut says.

Turnover is a potential concern. EPIC addresses this issue in two ways: extensive training/advancement opportunities and a strong focus on employee quality of life issues. Employees are cross-trained in several operations, and a pay-for-skills program increases compensation as new skills are acquired. The acquisition of the second Juarez facility also provided a management advancement path for a number of employees who started with the EPIC de Juarez Plant no. 1.

From a quality of life standpoint, benefits enhancements have been carefully evaluated. The cafeteria is employee-run vs. subcontracted and employees have input into menu preferences. The work schedule uses 12-hour days to provide longer weekend breaks, which allows employees more uninterrupted blocks of family time. The company also sponsors soccer teams, has upgraded employee recreation areas and sponsors several employee recognition and social events during the year. While relatively simple benefit enhancements, the combination is effective in a workforce which highly values recognition, socialization and family time.

An interesting point in EPIC’s model is that acquired operations are immediately standardized to a Synchronous Flow Manufacturing system. There is no lengthy transition time or allowances for variance in operations methodology by region. In the Juarez acquisitions, this “overhaul” generated enough revenue from the liquidation of excess equipment to actually pay for the initial launch investment.

No ‘Single Best Way’

These examples illustrate some varying strategies in market entry, vertical integration strategy, customer base and operations philosophy, proving that differentiation can be a component in site selection and expansion methodology, as well as in service delivery philosophy.

In a crowded EMS market, innovative expansion strategies are a necessary part of maintaining competitive advantage. While customer interest will always be a key component of site selection in the EMS market, evaluation methodologies should consider likely drivers of infrastructure costs in considering the relative merit of specific locations. Market entry strategy and degree of vertical integration advantageous to a given region should be carefully analyzed. Finally, a focused implementation plan should consider training required in a given labor market, likely patterns in competitive long-term compensation and likely technology enhancement needs, as optimum strategies in these areas may vary by location and front-end planning is less costly than abrupt course corrections as problems arise.

 

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), providing strategic planning, training and market positioning support to companies in the EMS industry; smucha@powell-muchaconsulting.com.