Quickening of Change Stresses Manufacturing

While Nicolas Chauvin struggled alone following the Napoleonic wars, he would have had more company if he lived today. His single-minded devotion to his cause – a dying cause – would have fit well in today’s political and economic climate. Too many leaders and people of influence think the future will somehow resemble the past; they are stuck on simple rules of thumb that used to guide their decisions believing that they remain valid in the future. Nicholas would have liked a different name to be associated with concepts like chauvinist and chauvinism.

My first Canadian Electronics blog on the acceleration of everything emphasized the quickening of change. Anyone working within the Canadian electronics marketplace is feeling the change but many may not have thought through the implications. They have not visualized alternate futures preferring instead to try to make the status quo work. This takes more and more energy for less reward.

To illustrate my point, let us consider what has happened to an electronics component supplier in Canada. The term supplier could mean a manufacturer, distributor or manufacturer’s representative. Many continue to act as they always have whereas the world has changed dramatically.

The value of production for computer and electronic products from 2001 to 2010, as reported by Statistics Canada (see Figure 1 below), shows a trend of dramatic and concerning decrease in revenue along with a relatively flat value-added curve. The same report for electronic components (see Figure 2) shows a similar decrease in revenues and a less aggressive, but still disturbing, decrease in value-added.

NAICSFigure1NAICSFigure

What does this mean for suppliers? I think there are several key points:

The opportunity to sell in Canada to support Canadian production is about half of what it was only a short decade ago. Compensation based on a commission structure for Canadian sales has no-doubt created severe hardship.

The relatively flat value added suggests that while production is down in Canada, the management of production has remained relatively constant. The decision makers may still be here but the manufacturing and supply is elsewhere which separates the supplier’s workload from the actual supply of materials to the manufacturing floor. Increasingly the visibility to commission eligibility on sales with a foreign manufacturing strategy is limited.

Canadian electronic component manufacturing has been reduced significantly. Canadians are more dependent on foreign manufacturers. Commissions are down.

Fewer high technology components are made in Canada. This shifts the mix towards lower technology, lower value devices. The high margin, high intellectual property devices are being made and used elsewhere. Local design requires more technical support; reward may be hard to realize.

One can argue the relative importance of these points but the fact remains that outsourcing to low cost regions has reduced manufacturing revenue. It has kept the cost of management (purchasing, planning, and engineering) in Canada while shifting the value of production and revenue to foreign locations. Recognizing that what established these white-collar jobs in Canada in the first place was manufacturing and R&D to support manufacturing; what is going to keep them here? These white-collar skills were developed by running plants that are now run by others, somewhere else. Knowledgeable workers are here because Canadian manufacturing enabled them to develop their expertise and skills, so the value added stability may not be sustainable. One could argue that it was not manufacturing which drove the creation of skills but the business itself. While this is true to some degree, the acquisition of Canadian businesses by foreign corporations increases the long-term risk of employment within these sectors.

From a supplier’s perspective, this shift is decoupling their work effort (supporting quotations, engineering, etc.) from their reward (commissions based on supply). They are losing sight of their sale as it goes through an ever increasingly complex supply web. Add to this the constant push by manufacturers to reduce commissions and the picture looks bleak. Clearly, the way forward does not resemble the past.

The change to outsourcing has been accompanied by rapid changes in business processes with often unanticipated outcomes. In some cases, the acceleration of the business process has gotten ahead of the law; at least in the sense of perception about what can be done. Take the recent Xilinx vs. Flextronics lawsuit as an example. In oversimplified terms, Flextronics is being sued for selling Xilinx components (at a profit) that Xilinx thought were being purchased according to a particular customer’s contract for price. Usually when you buy something and take title, it is yours to do with as you like unless there is a contract like a financing agreement that puts restrictions on you. I don’t know how this will play out but Xilinx thinks Flextronics doesn’t have the right to sell and Flextronics thinks it does.

In modern supply chains EMS companies like Flextronics buy components and own them until they are sold to the customer in final product assemblies. The customer negotiated the price with a company like Xilinx and everyone (except EMS like Flextronics and some others) assumed that price belonged to the customer. Suppose a Canadian representative also sold these devices to a Canadian customer with outsourced manufacturing somewhere else. If the EMS company bought devices like Flextronics appears to have done, how could the representative ever be commissioned on his customer’s contracted sales? Things are not what they used to be!

While this is bad for the representatives, what about the rest of us?

Is Canada losing its high technology edge? The charts suggest so, or am I reading too much into them? Nortel and Bell Northern Research are gone, Blackberry is struggling,Tundra (IDT) and Zarlink (Microsemi) are now foreign owned. Where does this put the future of high paying electronics industry jobs in Canada?

While I believe that the Canadian electronics industry has improved since 2010, the trends are still there at least as a warning call. What has been lost is lost forever. What does the future hold for us? In my next blog, I will share my thoughts.

By Ken Bradley – Lytica Inc. Founder/Chairman/CTO

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