Commentary by Praveen Gupta

Success Through Innovation Conference – Part I

Success through Innovation: “Profitability and Competitiveness
in the European and World Markets” - The EIPC Management Council Meeting

Copenhagen, Denmark, Oct. 10, 2007 (www.eipc.org and www.ipc.org)

Electronics industry has been the driver for dramatic progress for over last twenty years. Remembering about Motorola envisioning year 2000 in 1985, rate of change in the electronics industry has been phenomenal. No other industry can claim price reduction of as much as 90% of products. For example, DVD players used to cost over $400 about five to seven years ago, today it can cost practically nothing. Cost of laptop computers has come down from over $3000 to below $500 today. As a result the industry has been going through dramatic changes, shifts, and continual relocation to lower cost countries. For example, Chicago, Illinois (USA) used to have roughly 100 PCB manufacturers, today we have about 20.

It is impressive that EIPC and IPC (USA) have taken the initiative to explore opportunities for the electronics industry to sustain profitable growth. Electronics industry has been very innovative in its own rights, but it also represents the field open for accelerating dramatic innovation. The EIPC Management Council Meeting was held to address topics of management, market, status, and innovation. (http://www.ipc.org/calendar/2007/ipc-eipc-conf-1007/IPC_EIPC_conbro1007.htm). The picture below shows members of the organization team at IPC.

(l to r: Thomas Berger, Kirsten Smit-Westenberg,
Anouk Seeverenn, Susan Filz, and Sharon Starr)

Susan Filz, Director of Executive Programs, IPC welcomed executive delegates to the EIPC Management Council meeting.

The keynote presentation was given by Stefan Herr of Simon Kucher & Partners, who said, “Success in the electronics industry was defined as profitable growth.” The extremely market-share-oriented industry has experienced a significant adverse relationship between the price and market share. Stefan mentioned the following equation about relationship between the price and profit:

Profit = (price – variable cost) x volume – fixed assets

Slight increase in the price to improve margin leads to fear of losing the market share. Pricing is a major issue thus emphasis was given to learning how to price effectively. Smart profitable growth means price optimization and studying the entire value chain. Pricing excellence means pricing strategy, price analysis and optimization, price enforcement, and monitoring and controlling information. Stefan’s firm has identified about 40 levers to assess pricing, and determining areas for improvement. A question was asked about pricing lifecycle. Do we price the product for its entire lifecycle? Message was that the price should be determined based on the customer’s ability to pay, however, the challenge is that customer in electronics industry is getting used to pay less and less over time. One of the participants correctly said that market price is given, how can one increase the price?

Stefan Herr

Stefan demonstrated that many times discount offered to the client has been arbitrarily set, thus an optimal approach and discipline in pricing were recommended. For example, he showed his analysis of how the margins varied by sales representatives which could be as much as 10%.

The gap between the hope to charge more from the customer, and customer’s intent to pay less creates a conflict, which may be considered as an ideal opportunity for innovation. Actually, it is not an opportunity but it is the mandate to innovate.

The next presentation was titled The Global Electronics Market for EMS/ODM Suppliers. Charles Wade of Technology Forecasters, a think tank based in California, said that outsourcing to countries like China did result in cost savings, but there were additional costs that were overlooked. The electronics market is realizing CAGR of about 6.7% with a market of $1,617 Billion by 2011. Key segments growing in the electronics industry are medical, communication, instrumentation, computer, military/aerospace, automotive, industrial, and consumer from over 9% to 5%, in decreasing order respectively. Need for better healthcare, and miniaturization in telecommunication are driving growth in the EMS industry. Asia is controlling about 74% of consumer, 65% of computer, and 50% of communication products. It is not a surprise as growing customer base is in China and India, as well as the low cost manufacturing there.

Charles Wade

An interesting comment was made by a participant that Toyota makes about 90% of Toyota hybrid in house rather than outsourcing, thus suggesting that companies tend to produce innovative products internally instead of producing at low cost manufacturing centers around the world.

Work in progress

Low cost regions are not the answer, as other factors play a critical role in determining the overall cost of outsourcing:

• Local infrastructure
• Labor availability and skills level
• Productivity and quality
• Logistics

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