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Global Trends in Assembly Equipment Strategy
December 31, 1969 |Estimated reading time: 7 minutes
With CMs acquiring more and more OEM facilities, there is a plethora of two- to four-year-old equipment on the global market that is available for leasing.
Dana Wentworth
As the new millennium begins, it is time to review old trends and look toward the new trends that are driving strategies in the management of electronics assembly equipment. Today, there are seven distinct trends that are reshaping the equipment landscape. To survive and prosper, electronics companies must recognize these changes and reshape strategies accordingly.
Trend 1
Return on equity (ROE) is becoming one of the key indicators used to measure the performance of a company. How much money a company makes compared to the amount of equity or capital tied up in the business is becoming increasingly important. The attention investors pay to this drives both the contract manufacturers (CM) and the OEMs to keep a careful eye on this ratio, looking for ways to positively change it.
This trend is one factor that drives OEMs to shed capital assets (buildings and equipment) and develop outsourcing programs. For example, if an OEM pays a CM less or even the same price that it would have incurred to build a given number of products, the gross profit margin is improved, or at least remains the same on a per-unit basis. If the OEM compares this amount of profit margin to the amount of capital invested in the business before and after eliminating entire factories, the improvement in ROE can be dramatic.
Trend 2
The acquisition of former OEM factories by CMs is driving an increase in both the new and used assembly equipment markets. One side effect of the transition from the OEM assembly of electronics hardware to outsourcing assembly to the CM community is the need for new equipment. This new equipment is needed not only to differentiate one CM`s capabilities from another, but also to handle the new designs and technologies that OEMs are incorporating into their products. The OEM is no longer limited by their own manufacturing capabilities and can now shop around to find a company that has the exact technology (and price) they need. This trend has resulted in mass replacement of older technology tools - a legacy of the OEM factory ownership - in favor of state-of-the-art manufacturing tools.
While this may seem like good news to new equipment suppliers, it is bringing to market substantial quantities of two- to four-year-old machines that may not fit a given CM`s equipment preferences. In an earlier generation (about two years ago), both OEMs and CMs would have kept equipment in production and trickled their older-generation products onto older-technology machines. This might have happened within a factory or as an equipment move to a factory producing less sophisticated products.
Now, as the largest CMs buy multiple factories from various OEMs, they find themselves with a wide variety of equipment. The major CMs usually prefer to limit their placement equipment supplier base to less than three manufacturers. This is next to impossible, as the acquisition of OEM facilities continues, without removing and replacing at least some equipment prior to the end of its useful life.
By bringing enough late-model machines to the market, this trend has created a truly viable used-equipment market, that actually allows companies to plan used-equipment acquisitions in the same orderly manner as in acquiring new equipment.
Trend 3
The availability of compact, advanced component technology continues to enable designers to shorten product life cycles. New consumer products (cell phones, laptops computers, etc.) have sustained the need to shrink active and passive components. This has kept the pressure on assembly equipment manufacturers to come up with faster, more accurate machines that can place 0201 chip resistors, flip chips and microBGA components (Figure 1). More components per substrate drive increased speed requirements; thin margins now make increased yields the "Holy Grail" of production engineering (and accounting). While these trends are not news to anyone in the industry, the effects are far reaching and ripple into the assembly equipment strategic planning process. New generations of machines are coming into many companies in 18-month cycles to meet technology demands.
These same pressures on the CM and OEM communities have been passed directly on to the assembly equipment suppliers (several of which are parts of larger companies who also face these same challenges in their consumer product divisions). As a group, the equipment suppliers have responded by continually improving machines, with significant new models being released in roughly the same 18-month cycle, matching the cutting-edge product life cycles.
The challenge now becomes how to keep the best match of technology and capacity in the factory.
Trend 4
Many CMs and OEMs are planning equipment exit strategies as part of the equipment acquisition process. As CMs acquire factories from OEMs, as OEMs consider outsourcing and as they both come under increasing ROE pressures from shareholders, the long-term commitment to keeping manufacturing equipment on the company balance sheet is evaporating. The technology and capacity issues that go with the electronics assembly territory only exacerbate the need to acquire, use and reallocate equipment with as little disruption as possible.
The equipment turnover that is sometimes desirable in a factory acquisition can be a slow and difficult process. To remarket masses of production equipment, while running tight production schedules, can be a factory nightmare. This is why, as equipment is being acquired, CMs and OEMs are using a variety of off-balance sheet operating leasing terms to plan for the future transition of equipment out of a factory.
The structure of an operating lease is essentially an equipment rental contract for a given period of time (as short as a few months to perhaps four or five years). At the end of the contract, the equipment is either returned or possibly kept in place for the additional period of time that the equipment is needed, on a month-to-month basis. When the equipment is no longer needed or no longer technically suitable for its application, it is simply returned to the leasing company.
Many CMs are finding this to be a convenient way to acquire the equipment that comes with the acquired factories. The machines are bought by the leasing company and leased back to the CM for time periods that fit the equipment transition plan. This provides a method of orderly transition, instead of the chaotic free-for-all that can culminate in a mass equipment auction. An additional benefit to this strategy is its avoidance of steep book-losses on equipment that may have been brought in higher than "fair-market value."
Trend 5
More OEMs and CMs are finding short-term equipment rentals useful in bridging technologies. Seasonal demand, speculative manufacturing runs to acquire new business and bridge periods (the time between new equipment announcements and their actual arrival in the factory) can be smoothed over with short-term rental contracts. Entire lines can be brought in for periods as short as three months to bridge the gap when issues arise that prevent a long-term capital commitment to new equipment, or until the latest technology is available for delivery from the preferred equipment supplier.
Trend 6
The global migration of manufacturing continues toward low-cost areas of the world, but the definition of "low cost" is changing dramatically. It used to make sense to select a country with a low cost of labor, build a factory there and then ship products all over the world. This worked very well while the CM industry was in its infancy, and the vertical OEMs had profit margins fat enough to cover the transportation cost and carry the inventories that the shipping and distribution time required. Now, as CMs tighten the supply chain to reduce inventory, it becomes necessary to bring the factories and their suppliers as close to the market being served as possible. This has driven the development of huge areas of relatively low-cost manufacturing near, or within, the consumer markets being served.
It is not necessarily cheaper to make products in Asia for the North American market. The flourishing CM community in Guadalajara and Monterey, Mexico, is proof of this. It is, however, cheaper to serve the massive Asian market from Asia. This scenario is true in South America (Brazil in particular) and in Europe, with huge campuses springing up in Hungary and Romania.
As top assemblers span the globe, they are finding that moving equipment in and out of countries can present some unique tax and regulatory events. They are also discovering that if the equipment is under lease with a global leasing company, it is not their problem anymore. The leasing company typically takes care of the import/export requirements.
DANA WENTWORTH is vice president of electronics assembly products at Comdisco Electronics Group, a division of Comdisco Inc., 6111 North River Road, Rosemont, IL 60018; (800) 321-1111; Web site: www.electronics. comdisco.com.
Figure 1. Accelerating changes to device technology and fluctuating capacity requirements make flexibility more important than ever.
Questions to Ask a Potential Lessor
- Can I trade up machines?
- Can I do an extension?
- Can I do short-term rentals?
- How quickly can it be done?
- Can I move machines to other countries?
- Can the equipment supplier be paid directly?