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Contract electronic manufacturing in China: how to banish the risks and reap the benefits

Sydney - March 2009

The challenge for Australian contract electronic manufacturing companies has always been to stay competitive and build a successful business in an industry faced with ever decreasing margins, rising labour costs and increasingly sophisticated demands from customers globally.

The succession and disappearance of many contract electronic manufacturers on the Australian landscape is testament to the challenging nature of the business. The emergence of low-cost Chinese electronic manufacturing capacity – which is fuelled in part by low labour costs thanks to an enormous Chinese population – is defined by some as the final ‘threat’, the ultimate death knell to whatever remnants remain of Australian

According to the latest figures from Reed Electronics Research’s Yearbook of World Electronics Data, China became the largest producer of electronic products in 2006, and events in the country dominate the global electronics industry.

In 2006, electronic output in China increased by a further 20% to US$319 billion, following growth of 24% in 2005 and 33% in 2004. The rate of growth of production is estimated to have slowed to 19% in 2007 and will slow further in 2008, with initial forecasts projecting growth of around 9% as export demand weakens.

One Australian/New Zealand contract electronic manufacturer, however, has embraced the ‘threat’ that China presents, and has converted it into an opportunity for expanding an already successful business.

As one of the largest contract electronic manufacturers in the Australasian region, GPC Electronics has combined the benefits of China’s low labour costs with the easy communication and relatively low management costs in Australia.

By taking advantage of the benefits of operating in Australia and New Zealand to create competitiveness for customers, GPC has created an outsourcing model that is quite unique.

The result: a fresh and profitable way of doing business in the competitive contract electronic manufacturing market.

GPC Electronics has established a factory to manufacture electronic products in Shenzhen, Southern China. Co-located with the facilities of GPC Electronics’ sister company, Utilux South China, the plant formally began operating after Chinese New Year in March this year.

GPC Electronics’ Managing Director, Christopher Janssen, points out that although several Australian contract manufacturers have established relationships with Chinese counterparts, GPC is the only one that owns its own plant in China.

Managing product supply – and risk – for customers
The key to the successful operation of GPC’s outsourcing model has been the management of the supply of product and associated risks for customers.

GPC Electronics predominantly does what it terms ‘box build’, which means that finished products are fully tested and shipped directly to distribution channels. This reduces the need for customers to be involved, yet increases their confidence that promised delivery dates will be met because fewer parties will have handled the product during the manufacturing and distribution process.

If a customer needs a prototype, this is manufactured in Christchurch or Sydney. When the product is stable enough, or if the demand for the product increases substantially, manufacture of the product can then be shipped to China seamlessly and with lower risk because the same equipment, processes and supply chain continue to be used. The company’s Sydney and Christchurch plants continue to provide manufacturing services for products which are complex, or where demand is volatile.

“Perhaps the biggest challenge for US and Australian customers outsourcing to China is the difficulty of communicating with the factory,” explains Janssen.

Operators at GPC’s Shenzhen plant follow clear work instructions which are written in English and Chinese. Documentation and revision control – an area where many customers suffer when this process breaks down – is tightly managed and controlled from Australia. GPC's manufacturing manager in Australia, Steve Tebbutt, has relocated to Shenzhen to oversee the operation, and there are many inter-facility visits, says Janssen.

The Chinese facility is certified to ISO 9000 and ISO 14000 and complies with RoHS requirements. IPC soldering standards are rigorously maintained.

The systems in the Shenzhen factory mirror those of its sister plants in Sydney and Christchurch. Processes and supply chain strategies are developed as templates by GPC Electronics’ technical teams in Australasia, then implemented across the company using what Janssen likes to term a ‘cookie cutter’ approach. It also provides a proven template for the China facility to ensure that the same high-quality output is maintained as production is scaled up.

The system is based on SAP xMII and captures the manufacturing know-how, engineering solutions and business intelligence created by the company. When it has been implemented, it provides a direct connection between shop-floor systems and business operations.

All data that affects manufacturing is visible in real time. This includes information about orders, materials, equipment status, test results, costs, and product quality. Using the SAP xMII system, manufacturing data from across the factory floor is collected and integrated with GPC Electronics’ SAP ERP system.

It also allows the automation of factory quality systems. For example, any printed circuit boards that fail test or that have not been tested are unable to proceed along the production line. And xMII alerts engineering staff if processes move outside set limits.

All test data from the factory floor is captured and can easily be analysed by creating reports within SAP. Information is presented in graphical form from various departments in the company.

“We use the supply chain that we've developed in Australia,” Janssen explains. “We don't substitute any materials and we maintain reliability. This is a crucial aspect of any manufacturing process and one which we have been proud to uphold over the past 20 years.”

Traditional versus new model of outsourcing
The traditional outsourcing model relies on cheap labour and wringing the last cent of efficiency from the production line. The use of cheap labour often introduces significant risks into the supply chain because of the need to operate in developing countries. Although an efficient production line is important, too much focus on this can produce unresponsiveness and inflexibility.

“With this model, our IT systems and all management strategy happens in Australia and New Zealand. The customer enjoys our flexibility, our supply chain experience and overall lower costs without the usual difficulties that customers face when outsourcing in China,” Janssen says.

Janssen believes that the cost of Australian management is competitive by international standards. Figure 1 illustrates the relative cost structures of doing business in the US, China and Australia, and GPC China.

Equivalent salaries in Australia and New Zealand are less than in North America or Europe, and engineers in Australia and New Zealand cover broader areas than their North American and European counterparts.

According to Janssen, this means that when GPC embarks on a particular project, fewer staff at a lower cost than that of other countries are required. “It allows us to take on projects that are more difficult or that need greater responsiveness, and yet remain competitive,” he explains. “Usually when North American or European companies outsource to China, they save on direct labour, but not on the management aspect of the deal. Material prices are similar globally so that’s not a differentiator, unless they involve heavy bulky goods for which the transport cost is very high.”

And GPC's business model of combining the lower management cost with a lower direct labour cost can be applied remotely. “Most of our customers deal with us in Christchurch or Sydney, and rarely if ever visit our offices or facilities,” Janssen says. “They know that we’re actively managing and communicating the issues. And this is true not only for our small customers, but also for large global OEMs based in Europe and North America.”

For GPC Electronics, understanding what will make a customer more competitive in the marketplace is the hinge on which the business swings. “It could be reducing overall cost, winning greater market share, minimising working capital, fast time to market, being able to respond to a fast changing market, capturing high margin, short lead-time opportunities or some or all of these,” Janssen explains. “Once we understand that, we tailor our business and manufacturing processes to achieve the desired outcomes.”

Since setting up the Chinese facility, GPC has added new European and North American customers to its books. “These companies are taking advantage of our placement in China. Customers who have audited us know we have robust systems and processes in place,” Janssen explains. “This reassures them; they see that it's a sophisticated facility offering the quality and capability that they associate with a world-class contract electronic manufacturer.”

For more information, please contact:
Christopher Janssen
Managing Director
GPC Electronics
christopher.janssen@gpc.com.au
61 2 4737-6610