Vol. 27, No. 5 May 2017 Outsourcing in Japan Outsourcing of electronic assemblies by Japanese DNA. There was also the issue of Foxconn is the largest supplier (see Table Japanese companies has always been quality. Japanese OEMs were known for their 2), with an estimated 2.5 million square feet considered one of the “final frontiers” for intense dedication to 100% total quality and of manufacturing capacity, followed by EMS suppliers. Japanese OEMs have didn’t trust any third-party suppliers to live up other Tier 1 EMS suppliers such as Delta, always considered manufacturing one of to their standards. And there were cultural Flex, Jabil, Pegatron, and Sanmina. But it their core competencies, and for a long issues that involved language and behaviors is the domestic suppliers that are of interest; time resisted engaging EMS companies. that were unique to the Japanese, resulting in these include Di-Nikko Engineering, SIIX, Additionally, the supply chain was well these OEMs simply being more comfortable UMC, and a recently discovered EMS established for the parts and mechanical working with Japan-based companies. company named Kaga Electronics. assemblies that are essential to Breaking into the Japanese EMS market was Kaga Electronics is a sizable $3 billion mechanical products like copiers, fax like trying to break into Fort Knox for many conglomerate consisting of the EMS machines, and other office automation Western EMS firms. division ($700 million); a parts, components, equipment. But a number of factors Yet today, EMS in Japan is quite pervasive, and power supply business named Taxan; conspired to bring the Japanese to the though it did not happen overnight. The large and various other enterprises in the outsourcing table. First, there were the Japanese OEM firms like Sony, Toshiba, electronics sector. MMI hadn’t even heard of rising costs of labor, land, and taxes that NEC, Fujitsu, Hitachi, and others the company until the Director of Sales, made manufacturing in Japan experimented with outsourcing end-of-life Terry Kearney, and the General unaffordable. Electronic products coming products such as office automation and Manager/Sales, Virgil Chen, called us up to out of Japan had always been expensive, consumer electronics products. These tell us about Kaga and how the EMS but starting in the 1990s, they were commodity products never made much business in Japan works. Kaga maintains becoming even more costly. Japanese money for the EMS companies and were low-cost manufacturing facilities all over the OEMs watched as their Western often engaged to open the door to more globe, including in China, Thailand, competitors gained competitive lucrative opportunities. Yet by 2015, the EMS Malaysia, and the Czech Republic, in advantage in price, supply chain, market in Japan was estimated to have grown addition to two facilities in Japan. delivery, and repair as a result of their to $6.3 billion in revenue, according to a New The company was founded in 1992 when relationship with EMS subcontractors. Venture Research report, The Worldwide EMS was just starting to take off. The Even worse, asset utilization was Contract Manufacturing Services Market – people at Kaga found it very difficult to get abominable—sometimes as low as 10– 2016 Edition, indicating that a fair amount of OEMs to agree to outsource, yet the 15%—as expensive manufacturing outsourcing was taking place (see Table 1). company was able to convince firms like equipment sat idle and facility space was left empty, making for a very poor return on invested capital. The old business model of vertical integration was not Some articles in this issue holding up to a new world of the Cover Story…………………………………………………………………………………….1 extended enterprise that hedged against Outsourcing in Japan changing technology and provided better Decent Start for US‐Traded Group…….……………...…………………..……………….…3 expertise, thereby offering a solution to Some Quarterly Results.……………………………………………………..……………….……4 managing in-house capacity loads. More Foxconn Invests Another $1.5B in Robot Development……………………………..7 important, it made economic sense though it went against the grain of Table 1 industrial (HVAC), automotive, and cultures to prefer to work together (e.g., EMS/ODM APAC Revenue, 2015 medical industries. The company is Europeans, Asians, and Americans). seeing strong growth in the electronics Therefore, penetrating EMS in Japan Country Rev. ($M) Percent assemblies in these industries as OEMs will require an indigenous operation. Australia 175 0.1% embed sensors, intelligence, and Internet There appears to be significant potential for this, as the world continues to Cambodia 65 0.0% of Things devices into transportation and other industry products. embrace the benefits of outsourcing. China 230,932 77.3% The old captive subcontracting Despite this, the APAC region India 7,346 2.5% partnership system, commonly known as experienced a decrease in revenue Indonesia 2,045 0.7% keiretsu, has been falling into growth compared with the other regions in 2015–2016. While it dominated the Japan 6,335 2.1% obsolescence over the last 20 years. This has proved difficult for certain sectors world in terms of total production Korea 15 0.0% where costs are forcing OEMs to look (accounting for almost 70 percent of all Laos 50 0.0% abroad for further reductions. In assembly), the downturn in demand for Malaysia 15,813 5.3% traditional consumer electronics, leading digital TVs, desktop computers, and, to a Japanese OEMs like Sony, NEC, and certain extent, notebooks contributed to Philippines 757 0.3% Mitsubishi are increasingly engaging this decline. The region continues to Singapore 6,620 2.2% EMS providers and ODMs as primary attract high-volume electronics subcontractors to manufacture their assembly, mostly for the IT and Sri Lanka 25 0.0% products. consumer electronics industries. Of Taiwan 20,973 7.0% Outsourcing has come to be an greatest concern, however, is the steady Thailand 4,978 1.7% accepted practice in Japan today, but the rise in base wage rates—all across the Vietnam 2,808 0.9% domestic EMS companies definitely have board—particularly for the common the edge, as it is not uncommon for assembly worker. Total 298,937 100% heterogeneous Oki, Sharp, Sony, and Olympus to subcontract office automation PCB Table 2 assemblies. However, Kaga had a Leading EMS Companies in Japan, 2015 secret advantage via its parts, components, and power supply Company Location Sq. Ft. (Est.) business, which had sold products to Delta Osaka 50,000 these companies for many years. Delta Tokyo 80,000 “We’re in it for the long run,” states Kearney, who says that Di‐Nikko Engineering Tochigi (4 facilities) 348,000 longevity and trust were the most Flex Ibaraki 137,000 important factors in getting Kaga’s Foxconn Nagano 1,000,000 customers to embrace outsourcing. Foxconn Sakai 500,000 In fact, treating the customer first is Foxconn Yokohama 1,000,000 a philosophy preached widely by Jabil Gotemba 38,000 the company. And Kaga being a Japanese company was critical, in Jabil Hachiouji 24,000 that the culture and language were Katolec Kagawa (2 facilities) 162,982 the same, and once it was Nippon Mfg. Mizusawa 367,648 established that it could achieve 100% quality on a reliable basis, the Nippon Mfg. Mizusawa 264,825 doors began to open. “Once one Nippon Mfg. Mizusawa 112,399 cow crosses the river, the rest will Nippon Mfg. Mizusawa 110,441 follow,” declared Kearney. Trust Pegatron Tokyo 300,000 made it easy to transition other Sanmina Jasu 150,000 programs into the pipeline. Kaga has grown into a Tier 2 SIIX Sagamihara 200,000 supplier in Japan, focusing on low- UMC Ageo 50,000 volume, high-mix assemblies in the UMC Miyazaki 54,955 UMC Saitama (2 facilities) 77,530 Manufacturing Market Insider, May 2017 2 Decent Start for US-Traded companies, GAAP gross margin in Q1 exception. In the year-over-year Group was a combined 9.2%, down 90 basis comparison, total GAAP net income points sequentially and down 130% year for the three companies sank 10% over year. Flex, Sanmina, and Plexus despite sales growth of 1.6%. Jabil Combined first-quarter 2017 revenue succeeded in raising their gross margins bore nearly all responsibility for this for the six largest US-traded EMS from 4Q2016, while only Flex and decline. Q1 net margin for the GAAP providers rose 2.3% year over year, a Plexus were able improve their margins reporting companies was 1.36%, down solid start on which a growth year could from the year-earlier period. 750 basis points sequentially and 170 be built. Together, the five companies in Q1 basis points year over year. In Q1, the six providers generated produced a GAAP operating margin of sales totaling $14.63 billion, up from 2.7%, down 40 basis points sequentially $14.3 billion in the year-earlier period. and flat year over year. Two providers— The prime reason behind this increase Sanmina and Plexus— turned in Robust First Half Projected was Celestica, which increased its sales increased GAAP operating margins, by 8.6% year over year; next was above 3%, led by Plexus with a 5.9% Combined revenue growth of the Sanmina, which posted a 4.4% result. Flex, Sanmina, and Plexus were six largest US-traded EMS providers increase. Despite the group’s the only providers to increase their in the first half will be encouraging, respectable 2.3% growth from a year GAAP margins from the prior quarter, if MMI’s estimates hold true. MMI is earlier, sales performance varied widely, and Flex and Plexus boosted their projecting that the group’s first-half ranging from Celestica’s 8.6% growth to margins from a year earlier. As for the sales will total $29.42 billion, up 7.5% Plexus’s decline of 2.3% (Table 3, lone IFRS reporting company, Celestica year over year.