Interview – Charlie Barnhart

You presented a really interesting paper yesterday morning, which pretty much went over the past, present and future of the contract manufacturing industry. You think that the model is actually broken and that there would be some major changes coming down the pike. Can you explain to our readers what your vision is?

Charlie_BarnhartAbsolutely. In this presentation I gave the historic provenance of this industry, going all the way back to the early 1970s. During this period of time, as we have come forward, we have gone through a series of cycles in the industry. I explained those and why we have brought forward some good stuff, some really good stuff and also some burdens and baggage.

We talked about what is happening today. We are collectively businessmen looking at what is going on. We are looking to see what we want to keep and

what we want to get rid of. That is kind of where we are at today. Everyone knows that there is some associated risk. There is a really high probability of failure in this industry today. We have a lot of people who are almost not profitable, they are really scraping by – one or two percent net profits. Those are the leaders of the industry. These are not the bottom-of-the-barrell. These are the best people out there doing this.

We looked at what the probable out-comes of some of these situations were. We looked at what the customers, the OEMs around the world, what they were thinking, and how they were viewing all this. To call it an adversarial relationship over the last ten or 15 years would be a gratuitous statement. Some of these relationships are pretty toxic. Interestingly, they are pretty big relationships, too. It is not unusual in the Fortune 500 to have EMS relationships around a billion dollars. So this is a big deal thing, right?

I made a forecast for the next three to five years. The whole world is not going to collapse. It never does, though we always think it will. The trees fall down every once in a while when they get ice on them. I think that is what is probably going to happen. We have some very tough weather in New England today, a good example. You put that much snow and ice and misery into a bunch of tall vertical things and pretty soon they start falling over. They are going to start collapsing, That is what I think is happening today. I think this is self-reconciling situation.

This will bring some clarity back into the electronics industry. We have done a remarkable job. The world today is producing electronics that were inconceivable even ten years ago We are all collectively doing it together, and were doing a really super good job at it. What we need to do is figure out how to get this supply chain, the manufacturing process, and the distribution of products globally out to the end-user in a way that is systemically productive, not destructive. I think that is what we are going to do.

I also made the forecast during my presentation that in the early 2020s, we are going to see another big giant boom in this industry. There are a lot of reasons for that, because as we plot and study our dataset, we look to see where the major indices start to crossover each other and it looks like it is going to be the early twenties. I think we are going to have repeat of the boom years of the 1990s.

Of course it being the twenties, I go back to my expression about the roaring twenties which was about a hundred years ago. We are going to have another period of the roaring twenties. The electronics industry is going to benefit from it. It is going to be an opportunity to expand not only the technology, but our capability to provide and fulfill not just toys, but useful, productive equipment into the marketplace. Not only for consumers, but also on a B2B basis. We have seen a lot of growth in the consumer space over the last ten years, and not much growth over on the B2B side. I think that as we embrace new and more productive technologies into our businesses, we are going to make them way more effective.

You covered a awful lot of ground there. Let’s backtrack over some of it. You mentioned driving down the risk. Part of that has been the re-shoring, shortening of the supply chain.

Rather than “re-shoring,” it is not just going from here back to some place. What we done, if you really study the way the stuff has been redistributed, we are going back in the region for the region. In other words, it is not just China back into North America, not just China back to Europe. It is work coming out of China or other locations that is going to be manufactured in the region where the product will be sold.

OEMs have really figured out and started to embrace this concept that if you want to have the highest level of return, lots of flexibility, good relationships with your customers, you get those capabilities in front of them, you keep them close together. In Canada, the United States and Mexico, you build in that region. Same thing in Europe, Western Europe and Asia, it is just a good solution. Then you focus that.

The economies of scale are not so much in manufacturing. I do not really believe that, I do not see the data that substantiates that. The benefit is the ability to service your customers and understand what it is they need and when they need it. Remember, the vast majority of the cost of our electronics today is not in manufacturing, it is in the material. We have got the cost of manufacturing down really, really low.

Another thing that may play into that is taxation or future taxation. The G20 passed new legislation, that in 2015, they are all going to share tax information. Their goal was to have the tax pay for the product at the point where it is delivered.

Yes. That changes the strategy, the paradigm for a lot of these companies and it is about time, to be honest. We all know that in the OEM community, they have been gaming this situation for a long time. It is about time somebody stepped in. I am glad G20 did, because something had to happen. That was a destructive behavior for this industry.

You mentioned before that a lot of the Fortune 500 companies are actually looking at strategies to basically take back in their manufacturing. They have essentially driven the cornet model into the ground.

That is right. I am not really saying that they are going to in-source one-hundred percent of it. I do not think that is going to happen. I do think that they are going to repatriate the capabilities to produce stuff for themselves. Everyone is disappointed in the level of IP protection that has drifted away from them in the last ten or fifteen years. They want to regain control of that. In the last thirty years, OEM has divested a whole lot of their operations. We are going to go in a reverse cycle of that.

They are going to go back and look at some of these relationships they have with contract manufacturers that are under capitalized and everything else and say it would be better for us to buy them and use those resources, all those skills, the deep level of technology manufacturing, and bring it back into our house and let us control it. It probably will not be one-hundred percent of the requirement, but I think they are going to start to pick up assets at a progressively increasing rate. They will use these for select, specific reasons.

They also know that there is a high level of risk. If you lose a big contract manufacturer, you could spend millions of dollars to replace them. It then it may take many months to come back up to speed. It could be a major business disruption. In this business, technology is moving fast. Yesterday’s hot product is today’s history lesson. You want to be on the leading edge. It does not matter if it is consumer products, military, aerospace or B2B. It is a highly competitive business. That is what makes it so successful.

Our evolutionary pace continues to increase. That is the only way the electronics industry is going to drive itself forward. We have to put ourselves out of business every year or two and go into something better.

Fascinating information. Thank you Charlie, I appreciate your views on this very interesting space.

– TREVOR GALBRAITH

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