Oct 31, 2001
The sector's biggest player, Solectron Corp., is forging ahead with its vertical integration model while using the soft market conditions to rationalize its holdings. In an interview with EBN, Phil Fok, Solectron's senior vice president and chief administrative officer, talked about the Milpitas, Calif., company's inventory issues, supplier requirements, and the shift in emphasis from global growth to the acquisition of specific technology expertise.
EBN: How is Solectron responding to the market slowdown, and how are you going to take advantage of the upturn?
Fok: One of the unique characteristics of the EMS industry is that, collectively, we see a very broad picture of what's going on in the electronics market. That unique perspective ... gave us some early warning signs of what was coming. The first half of 2000 was wild. ... In the second half of the year-with the downturn coming-we took the opportunity to make some of the consolidations we had wanted to do for a long time but couldn't earlier because of the rapid ramp.
All of the top-tier EMS companies and some of the tier-two and tier-three companies are doing the same thing-regrouping and positioning for the next wave. This is a classic Silicon Valley cycle. The difference is that, rather than it occurring over a number of years, we're going to compress it into maybe a year.
We do fully expect a turnaround in many segments. I haven't seen too many people who have decided to give up their cell phones or their Palm Pilots or stop surfing the Internet.
EBN: Talk about your global footprint and about how you're consolidating along product lines or geography.
Fok: Our strategy hasn't changed from a decade ago. We've strived to establish regional supply chains in North America ... and Europe and Asia. We have a variety of sites that can satisfy the small, prototype engineering design work that is located close to customers, as well as a low-cost, high-volume regional solution for each of those areas. If you look at the very long term, we believe global economics are going to shift the center of mass more toward Asia in terms of demand and population. In particular, there's a growing market presence in China and India, so we have positioned quite a bit of our recent activity in those areas.
When you look at the long-range plan over the last decade, our focus was on global footprint acquisition, so we were acquiring sites to gain a geographic presence. Right now our focus is on capability and filling that supply chain matrix.
EBN: What are the criteria you use in choosing your suppliers?
Fok: It's recognizing that there is a different path to the whole notion of bringing a product to market, and that there is a definite differentiation between the design portion and production portion of the supply chain. In some cases, it can get a little more complicated for a supplier if they don't recognize what the relationship is between an OEM and an EMS company. But if they do it well, it makes life easier for them as well.
EBN: Can you elaborate on the difference between the design and production portions of the supply chain as it relates to supplier selection?
Fok: A lot of suppliers used to prefer to deal directly with the design group or the design customer, and the manufacturer was kind of ... an auxiliary wheel. That didn't give proper credit to the production arm. This is a fundamental change where the OEM may not actually work out the details of the design. They may have a concept in terms of a functional layout, but when it comes to the point of selecting components and choosing who the suppliers will be for the ultimate production design, that, in a lot of cases, is being turned over to the EMS companies.
Those suppliers that have really recognized the benefits of [a more sophisticated supply chain] have benefited tremendously. Those early adopters who got in line by promoting some of the standardized tools that help the optimization of the whole supply chain have realized the benefits in terms of cost reductions and [supply chain] simplification.
EBN: As you grow, you're having to assimilate disparate IT systems. How are you reconciling the differences?
Fok: We've settled on a uniform structure. We chose an outsource provider [IBM Corp.] to execute the IT implementation on a global basis. It is to a large degree rather new for the IT industry to deal with this kind of complexity. When you're implementing it for a single OEM, typically they have a single structure-one set of part numbers and process definitions and so forth.
The EMS industry is very different in that we have to be a bridge between many systems. Each Solectron customer has its own unique system; each of our suppliers has its own unique system. All EMS companies are functioning kind of like networking bridges, translating different protocols from one client to another, so it's a tough process to be going through.
EBN: Solectron has accumulated a lot of manufacturing infrastructure. Do you anticipate following a path of vertical integration, or could we see Solectron in turn outsourcing itself?
Fok: Right now, I don't see us doing that because this is a game of efficiency and how many touches it takes to get a product from concept to customer. In simplistic terms, the more touches that are involved, the more it's going to cost.
EBN: What are you doing to improve your return on invested capital? According to the most recent figures, that number is at 4.4%, which is about half the industry average.
Fok: For us, the biggest element of that is the inventory. We pride ourselves on being customer sensitive. ... When we have a customer tell us that they're sure they have 50% of the market, we ramp capacity to support that-even if, in some cases, we have eight customers telling us they each have half the market.
So, this was a learning experience for the industry, for us, and for the OEMs in terms of forecasting. We're still in the process of turning around the inventory and getting that properly allocated. Over the last two quarters, we shed over $1 billion in inventory and we're continuing down that path. It takes time to work that off.
