The Great Survival: EMS Fraternity Fools Recession

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After the dawn of the eco­nomic slowdown in 2008 that spread across nations and continents like a virus, there has been a complete turnaround in the practices and procedures of manufacturing industries in terms of lower capacity utilisation and in­creased layoffs. The Indian electron­ics manufacturing services (EMS) industry is no exception and is also facing the music of recession directly and indirectly. However, it is faring reasonably well on the whole, con­sidering the current global economic scenario.

By Jesus Milton Rousseau S

Tuesday, June 16, 2009: Positive impact of recession

Although recession has brought with it a tide of negative consequences, it has worked in the favour of the EMS community in some aspects. Some of the original equipment manufacturers (OEMs) have started insourcing and may prefer to manufacture their prod­ucts internally rather than outsource them to fill up the excess capacity of their manufacturing plants. This can decelerate the growth of the EMS and original design manufacturer (ODM) industry. However, there are good chances that the outsourcing rate of OEMs may increase as they want to find means to adjust their cost struc­tures further and wish to focus on sales, marketing and other core activi­ties. The EMS industry will benefit as a result of this occurrence.

Export to the US has diminished but the demand for products in the domestic market has not been influ­enced much. On the contrary, many companies are announcing invest­ments in infrastructure equipment, a strong driving force for growth. “In the future, India is expected to be better placed compared to devel­oped US, European Union and Asian economies as the country harbours lesser dependence on exports,” says Sukhvinder Kumar, general manager, Elcoteq Electronics India Pvt Ltd.

Jarmo Kolehmainen, MD, Incap Contract Manufacturing Services Pvt Ltd, reveals, “The EMS industry has grown by 14 per cent in India since recession struck. This is mainly because many European companies have started outsourcing to India now. The present industry growth is more or less the same and recession has not created much of a ripple either way.” Kolehmainen goes on to share, “We admit that some of our orders have slipped schedules and been postponed to the next quarter. We are seeing a slowdown, no doubt, but overall, business has not suffered miserably. We grew by about 20 per cent last year and envisage a growth in excess of 40 per cent this year.”

Kalpana Naagaraj, director, EMS operations, Micron EMS, begs to differ, “In my opinion, the EMS industry’s percentage of growth has receded by 25-30 per cent in India. We are witnessing a slower incoming order queue. Customers who hitherto were giving us orders have now become extremely cau­tious about quantities and increased their payable time lines, which has effected us negatively.” Naagaraj adds, “On the positive side, raw material suppliers have reduced costs due to the reduction in excise duty. This has, in fact, abated the cost of products in some cases. Fur­thermore, in the non-recessionary days, people used to go to China as it has a huge minimum orderable quantity (MOQ) due to economies of scale. Now, the same customers are approaching organisations like ours as we are highly flexible on our MOQs.”

Desperate times, desperate measures

Every company has devised its own unique strategem to deal with the prevailing situation. Kolehmainen shares, “We have been able to com­bat the situation owing to our good relationship with customers and transparency in business practices. We are paying attention to the return on investment (ROI) before investing and are not discontinuing any critical expenditures. On the productivity front, we are improving efficiency. We have, as a matter of fact, in­creased our efficiency in operations by realigning our workforce. During this process, a small percentage of the non-performing workforce had to be asked to leave but we have hired people in core areas like sales, design, project management and sourcing and have abstained from diluting salaries. We have expanded our manufacturing facility by invest­ing in a new plant and machinery and have not ceased promotional activities.”

“The present situation is largely a banking slowdown—holding cash is extremely essential because the capital market is fairly inaccessible today. So, the primary strategy should be to have a strong balancesheet and protect the cash flow. The next self-preserving contrivance should be to protect the profit and loss. There must be no abrupt alterations in long-term objectives. Every company has stra­tegic frameworks and none of these should change, including inorganic growth activities. Purchasing should follow the just in time strategy, which directly has a bearing on payables and yields tighter receivable manage­ment,” Naagaraj advises.

Kumar informs, “In January 15, 2009, Elcoteq announced the global launch of an intense restructuring plan. The plan consists of several courses—streamlining of opera­tions and workforce retrenchment as well as other cost-saving meas­ures. This plan is a step towards the company’s drive to increase profitability, cost-efficiency and operational excellence. The re­structuring plan merely consists of preparatory measures to adjust to the anticipated changes in market conditions and to secure profitabil­ity in 2009 and beyond. In its India operations, Elcoteq is focusing on productivity improvement and em­ployee engagement enhancement, so that it can take advantage of the growing domestic demand. It is very important to remain competi­tive in tough times. We pay special attention to operational excellence in all our operations. Our ultimate goal is to reduce the total cost of ownership for our customers.”

Most recession survivors have their far-ranging customer bases to thank. Subhash Goyal, MD, Digital Circuits Pvt Ltd, affirms, “Due to our sturdy and voluminous customer base, we have not been affected by the global recession and expect to achieve 20 per cent growth in 2008-09.”

Suryanarayana T Hebbar, presi­dent, Rangsons Electronics Pvt Ltd, agrees, “We were able to escape the heat of recession as we have clients in various industries such as health-care, defence, telecom, aerospace, medical, automotive, etc. A number of these segments have not and may never be buffeted by recession and thus, the demand or volumes of our products are not impacted. The varied concoction of customers has helped us survive this economic meltdown.” “Companies should refrain from storing all their eggs in one basket. They should consciously venture into a low-volume, sweeping client base, derisking the business by not invest­ing too much in one client alone,” opines Naagaraj.

EMS companies are able to main­tain the cost of products even during times of recession due to reduction in excise duty and smart sourc­ing tactics. Kolehmainen conveys, “In our business, typically, 80 per cent of the cost of the final product is the material cost. By sourcing components competitively and by controlling the payment terms with our suppliers, we are able to retain the cost of our products. Larger vol­umes in orders while sourcing also help one to acquire components at cheaper rates.”

The end or just the beginning?

When will recession end? It is dif­ficult to estimate the duration of these economically turbulent times but there are strong positive signs apparent in the form of stimulus packages, relaxation of interest rates and indirect taxes. Naagaraj states, “This is a demand slowdown, driven by the global credit crunch. There are stark differences between this downturn and that of the early 2000s. In the early 2000s, we had a period of overspending and when the bubble burst, it was payback time. In the years leading to 2009, there was no excess spending and the industry was running at rela­tively high utilisation rates. Now, we are going into a decline, with no excess inventory and inflated prices. Going by historical evidence since the 30s’ recession, one can assume that we may start recovering in two years’ time and come out totally in about five years. However, this is pure speculation. My prediction is that by 2011, we would have recu­perated entirely from the blows of recession.”

Recession’s Destruction

According to K Bharath, research analyst, electronics and security practice, South Asia and middle east, Frost & Sullivan, the indus­try faced some major setbacks.

Jabil Circuit India had invested over $100 million in a new facility in Chennai, housed in the Nokia telecom special eco­nomic zone (SEZ), where over 600 workers were employed in the first quarter of 2008. Jabil is now wrapping up its operations and shifting base to China. In its international operations, the company is abridging its workforce by 3,000, nearly 4 per cent of its entire employee base, in an attempt to keep ahead of its losses.
Elcoteq India, which had an employee base of 1,144 in Janu­ary ’08, had sliced it down to 885 by December ’08.
Nokia has slackened its manu­facturing operations in its facility in India. This move is impacting companies such as Foxconn and Flextronics, for whom Nokia is a key cus­tomer.

Flextronics is also expected to lay off a percentage of its staff in its Chennai plant.

How to handle recession

DO

  • Be flexible on minimum orderable quantity
  • Build strong relationships with customers
  • Demonstrate transparency in business practices
  • Ensure vast customer base, spanning various industry segments
  • Have a strong balance sheet and protect cash flow
  • Protect profit and loss
  • Focus on productivity improvement, employee engagement enhancement and operational excellence
  • Pay attention to return on investment before investing
  • Retrench non-performing/under-performing workforce
  • Purchasing should follow the just in time policy
  • Aim to reduce ROI for customers
  • Source components competitively
  • Monitor payment terms with suppliers

Don’ts

  • Do not stop promotional activities as “out of sight is out of mind”. You have to show yourself in order to make clients aware of your presence, more so when times are tough
  • Do not halt expansion plans. This is the opportune time for mechanisation because capital goods are fairly cheap
  • Do not be solely dependent on any one region or industry segment. Having clients across sectors will ensure you have an industry to fall back on when another collapses
  • Do not mutate long-term objectives. Don’t let recession fluster you—stick to the original plan.
  • Do not reduce salaries as employees are carefully trained valuable assets. Reduction in salary will only demoralise the staff and lead them to seek greener pastures
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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