In late December, this author penned a guest blog commentary on the Supply Chain Expert Community site titled: More Definitive Signs of a Changed Contract Manufacturing Model in High Tech. The premise of my commentary was that as the advantages of cheaper direct labor rates continue to evaporate in low cost manufacturing regions such as China, existing contract manufacturers have no choice but to move more upstream in the customer’s value-chain to maintain profitable margins.
My takeaway for high tech and consumer firms was that if these firms feel that continuous product design and innovation, coupled with close proximity and communication with manufacturing is of strategic advantage, than they may want to re-think strategic direction regarding use of a CMS. If on the other hand, individual product design alone is perceived to be the sole strategic advantage, with the majority of the value-chain outsourced to an offshore, full-service CMS provider, than continue to pursue the full contract manufacturing services model such as Apple and other consumer electronics brand owners employ. A recent evolving example of this strategy is Sony, who after many years of unprofitable results in its consumer electronics businesses such as televisions, has finally shed its strategy for owned design and manufacturing and is transitioning quickly to a contract manufacturing services strategy for production.
A slightly different variation of this model is underway in Europe. The Financial Times has featured an article concerning Turkish television contract manufacturer Vestel, a subsidiary of Zorlu Holding, which currently produces 18 percent of the TV’s purchased in Europe, second to Samsung. This contract manufacturer hosts one of the largest single production sites of televisions in Izmir, which employs upwards of 12,000 workers.
Vestel does not sell many televisions under its own brand names but rather dedicates roughly 80 percent of its production to other consumer electronic brands for retailers such as Dixon’s, Sainsbury’s, Tesco and Argos. Surprisingly, this manufacturer was rather slow to embrace newer flat-screen technology, concentrating instead on lower-cost cathode ray tube technology. Not surprisingly, the company is losing market share in an increasingly challenging European consumer market. Revenues have remained flat and operating earnings have declined 79 percent.
Vestel has now embarked on plans to get more involved in the design phases of the value-stream, positioning itself as more of an original design manufacturer with plans to more than double its staff of engineers to 2000. The goal is to be positioned to produce one in four televisions sold in the EU by 2015.
In the FT article, its CEO declares that the company remains more comfortable in positioning itself as a manufacturer, but does not rule out opportunities for further brand expansion. Its current owned brand includes Telefunken. The company is also exploring entry into manufacturing of smartphones and electronic tablets as well.
The contrast to global based CMS providers such as Foxconn is obviously quite different in terms of scale and presence. Reliance on regional retailers offering private brand consumer electronics is quite different than the likes of a global based consumer electronics brand. At the same time, providers such as Foxconn understand the very important relationship they have with their OEM brand owners, where trust and collaboration are very important, and where any threat of producing one’s own brand comes with its own risks. That risk lies in scale and volume, as well as automation and labor costs advantages.
Turkey may well have current labor cost and some manufacturing scale advantages but product innovation, value-chain adeptness and consumer brand loyalty are becoming more weighted advantages.