Trends in Printed Circuit Board purchasing
Jun 23, 2003
what are some of the key issues for the future Before turning specifically to PCB’s, it is interesting to look at Semiconductors, because it is to that sector that we look for the barometer of the industry. You can see the cyclical nature of the industry. In the period from July 1998 to September 2000, we experienced 135% growth in shipment values, and then in the following 12 months experienced the same decline. The beginning and end of the cycle represented the same levels of business.Today we are back to an industry that is generating monthly revenues at the same level as has been the average of all monthly shipments since 1994. Truly a cyclical industry. As in previous cycles, the recover tends to creep up without warning. If you’re not yet experiencing the recovery you should note that SEMICONDUCTOR revenues have actually been recovering since July 2001. PCB’s have probably suffered more, but we are certainly past the bottom of the market and in the recovery phase. If this industry cycle has brought record levels of both growth and decline, the major shift in demand towards Asia must be the other factor for which this cycle will be remembered. Despite the downturn, Asia has suffered less. In terms of semiconductor demand, Asia accounted for 23% at the start of the cycle. This increased to 30% by the end of the cycle in July 2001. Asia demand now accounts for 36% of the semiconductor market. If there is a beneficiary from this cycle, and particularly as the slow recovery process has begun, then it is Asia, and one of the main drivers is LOW COST SOURCING into Asia, and this is one of the main links with the PCB market. Turning to PCB’s, low cost sourcing of PCB’s is not new. Volume buyers from UK and Europe have been sourcing in Japan, Taiwan, Korea and now China for many years. What we have seen in this cycle is a reaction to increased competitive pressures at home, and the pace of off-shore sourcing accelerating as the barriers to entry, in sourcing terms have been eliminated. Almost any buyer can now source in Asia and domestic PCB producers, subjected to extreme levels of price pressure, have suffered as never before. As we saw in the semiconductor markets, PCB’s has also been a winner for Asian producers in terms of market share and revenues. Although many Asian producers are now struggling badly, they have managed to attract business through aggressive PRICING, and as a result, European producers have suffered. With hindsight, when we look back at this industry cycle, we will see that Asia took advantage of an opportunity to capture market share through PRICING.The question now is not so much about why things have gone the way they have, but what happens next. What is the future.To a large extent, the future of the PCB producing sector in UK and Europe is not even in the hands of the producers themselves. It is with those who make decisions about UK manufacturing. Those who decide if the board assembly or even the end-product is to be made in Europe. If there’s no production of finished products, there’s no demand for bare boards. This may seem obvious, but as this industry cycle has accelerated off-shore sourcing of bare boards, the same is true for board assembly and finished products. So on a background of a fast changing manufacturing landscape, and unrelenting competitive pressures, we need to understand what, in PCB terms, will drive future sourcing decisions. Also we need to understand if the UK and European producers can recover or if Asian sourcing will continue to dominate the market.To understand the future trends connected to bare boards, my company makes an annual survey of Purchasing trends. This is a commercial focused survey targeted at understanding what Buyers are looking for from their suppliers, how they make decisions, and the relative importance of the various criteria that are considered in sourcing decisions.Fewer Suppliers: Buyers continue to tell us that they want to work with fewer suppliers, principally for reasons of cost, quality and operational efficiency. We see evidence that this has been successful, but that switching suppliers of PCB’s is not always made easy by incumbent suppliers. By choice, buyers will use as few suppliers as possible. We recently worked with a contract manufacturer who was working with 47 PCB suppliers. Their target of 5 will be in place by Q3 this year.PRICE: It is not surprising that price carries most weight in the sourcing decision. Buyers are mostly measured on savings, so this drives their actions, and will continue to drive their decision making process, as long as there are cost reductions available in the market.SERVICE & PERFORMANCE: Where price is a not THE factor, Buyers change suppliers mostly because of poor service, late delivery, long lead times and poor flexibility. LEAD TIME etc: From the survey results, we believe that after a Buyer has decided on price, other factors become equally important. We mentioned service and performance, but we see that Buyers look increasingly to lead-times, technical support and service as their other main influences on sourcing decisions. UK PCB producers should be delighted to hear this, as these are the areas in which no overseas competitor should be allowed to have the upper hand. Our impression is however that many domestic producers continue to be relatively poor in these aspects, ( although there are many exceptions ). QUALITY: Compared with 10 years ago, PCB Quality has gone down. Not in real terms, but in relative importance as a decision making criteria. The position now is quite simple: you have it or you don’t. Any doubt on product quality and you’re not at the races. FUTURE: In terms of future issues, this is most interesting. If sourcing trends are to reflect the needs of the whole organisation, there will be significant change. Previous surveys have not emphasised the consideration of Total Cost as clearly as this one. At last some organizations seem to recognize that there is more to sourcing than PRICE, and may be ready to look at the bigger picture. So our survey emphasised 2 factors: Firstly PRICE: this drives sourcing decisions, and will continue to do so, and second TOTAL COST: What’s driving PRICES ?Too much capacity! The massive rate of growth in 2000 / 2001 signaled every PCB producer in Asia to add capacity. On top of that, every PCB producer in Asia wanted a factory in China. Add to that the fact that demand in Europe, USA and Japan was starting to shift towards Asia leaving factories operating below capacity. Then demand fell through the floor. The result, over capacity of 25% - 30%, and the end result: prices fell quickly as producers fought to keep what business they had, and capacity utilisation at levels that sustained a margin. If you think that’s the end of the story, then I’m afraid it’s not. Production capacity in China is continuing to grow, albeit much at the expense of capacity in Taiwan. The impact: not surprisingly is that the China share of the global PCB market is expected to grow from 11% to 18% by 2004, and in the process, overtake Europe in terms of share of revenues. This may not be a surprise given the circumstances of the past 2 years, but nevertheless, a milestone in the emergence of China as a major production force in the industry.So too much capacity ( and reduced demand ) has forced prices down. Depending where you sit in the industry, your experience on pricing will be different. Volume, technology, quality, service, payment terms, and a host of other factors influence the price you pay. What we can say is that prices are down, and are down dramatically, where ever you sit. This chart shows the price per square inch for s/sided to 8 layer boards. You may have seen more or less erosion than we have tracked, but to say that some Buyers have experienced a 50% decline in prices, is a measure of the steepness of the decline experienced by the industry.Looking forward, cost down opportunities are still available to those Buyers who have not woken up to the cost-down opportunity. Prices are lowest in China, and Buyers will continue to migrate business to Asia, and more specifically to China, as long as opportunities are available. This of course may not impact UK or European producers as much of this activity is 2nd generation sourcing, the loser this time being the Taiwanese factory that was the beneficiary when the business was first moved off-shore.The other factor that has played a part in the equation, is lead time. Buyers have been able to switch suppliers with relative ease. Lead times have been, and remain short, and this has enabled the more aggressive producers to penetrate customers whenever the opportunity has arisen. This position is not set to change as long as available capacity exceeds demand. So what is the future outlook ? Much depends on external factors – the economy, recovery, capacity, raw materials. We see demand recovering slowly. It is not a question of IF, it’s a question of WHEN. There is already evidence of demand recovery. Look to semiconductors. The bare board market will not recover until demand and supply are brought into equilibrium. Even if demand recovers, and it will, there is massive over capacity in the market. Prices of semiconductors may well feel the heat of recovery before the PCB market. For PCB’s, we see prices continuing to fall, although the levels will be much lower than in the past 2 years. Buyers will push to bring their pricing in each type of board to the lower end of the price range in the market. So for those Buyers paying "too much", there is still a savings opportunity to be realised. For those Buyers who have been on the cost curve, savings may still be available, but the bottom end of the price range is unlikely to drop dramatically. At the lowest levels of technology, s/sided and d/sided boards, there is simply no room for movement, and if prices fall further, producers may simply drop out of the market. At higher levels of technology, higher layer count, HDI etc, things may be different. There has been less price erosion, and as more producers enter these markets, price pressure will rise.So overall, we see prices continuing to fall, but nothing like we have seen in the recent past. PRICE was the first of the 2 issues that we identified as driving sourcing decisions. TOTAL COST and a focus on reducing the TOTAL Cost of Acquisition is the other.So what does TOTAL COST mean in sourcing terms ?In simple terms, sourcing or selecting suppliers based on TOTAL COST is a drive to improve all elements of supply by looking at all the costs associated with the process of material acquisition. Use too many suppliers and this has a cost. Hold too much inventory and this has a cost. Operate with long supplier lead times and this reduces flexibility and forces up inventory and COSTS. We also see many manufacturing organisations looking for ways to build products in days rather than weeks, and to build based on real customer orders rather than forecasts. These are all elements of TOTAL COST. This changes the criteria for selecting a supplier.In pure Purchasing terms, Buyers face a dilemma. On the one hand, sourcing decisions that are driven by PRICE attract Buyers to source in Asia. On the other hand, sourcing decisions based on TOTAL COST suggest domestic suppliers should be selected. Think about it, achieving short lead times, lots of flexibility, and a fast reaction to a customer order is difficult to achieve if you have placed your order on the other side of the world and the lead time is 8 weeks. The Buyer therefore has a potential conflict: PRICE or TOTAL COST. It is difficult to forecast what will happen. I believe that eventually, Buyers will be forced to focus more on TOTAL COST. Especially when the current levels of price erosion reduce. For manufacturing to be LEAN, equipment producers are going to have to be more reactive, more flexible, have very short lead times and be able to run their businesses with very low inventories. A focus on price will not be enough. Achieving these elements suggests that those producers who have entered the market on PRICE, must also eventually shift their focus to other elements in order for their proposition to remain attractive. When the PCB market recovers, there is likely to be a shift from PRICE based sourcing to TOTAL COST based sourcing, of which of course, PRICE is still an important element. As to timing, there is already a growing focus on TOTAL COST, but as long as the market remains a BUYERS market with significant price erosion, not much will change. However, as the market recovers, watch out for a change in sourcing patterns.I actually think that a change in sourcing patterns from PRICE to TOTAL COST will help the domestic producer improve their business opportunities. Lets look at what’s happening.Asian producers have priced their way into the UK and European markets. Price erosion, led by low labour costs, subsidies and low margins have reduced the share of the market enjoyed by UK and European producers. ( There are of course exceptions ) . The bottom line is that there are no European producers in the top 20 globally, and no UK owned PCB producers within the 1st division in Europe.PRICE is a battleground that has been lost.In response to market pressures, many UK producers have gone out of business. Many others have focused on niche positions to maintain customers - small volumes, fast turnaround, specialist technology, and service. Many have been successful but of course many have gone out of business.SERVICE is still a weapon available to all UK producers. Going back to our survey, the most common reason for changing supplier was SERVICE and POOR PERFORMANCE. Something tells me that despite the problems of the sector, there is an opportunity out there to be grasped, especially when TOTAL COST and SERVICE become bigger issues. What ever the tactics adopted, there have been many successes, but to a large extent this has only slowed the migration of sourcing to Asia. If many of the existing producers are going to prosper, they will certainly have to raise their game again and shift further towards the service elements. This means proactively raising all elements of the supply-chain. As PRICE declines as a sourcing driver, Buyers will raise the barriers on service elements such as lead-time, inventory and flexibility. Expect TOTAL COST to drive service elements in the same way as we have seen with quality. There is also another competitive threat to consider. Service is becoming so critical for OEM’s importing assemblies and finished goods into Europe that specialist service providers are entering the supply markets. These companies may not necessarily be bare board experts, but as more sub-assemblies are sourced off-shore, there is room in the market for service providers to add bare boards to their list. For those of you who are immediately thinking that this doesn’t apply to boards. Think again. Boards may not meet a traditional criteria of being a commodity product from a technical perspective, but they absolutely meet the criteria of a commodity product from a commercial perspective. So I don’t believe there is any good reason why boards have to be supplied by a PCB producers or a specialist PCB company. Think about this. You source in Asia. You provide your supplier with a forecast. You appoint a specialist 3rd party service provider to manage your off-shore sourced material. You still have a direct relationship with your supplier. Your supplier ships your product into a HUB. Its owned by your supplier.You the end customer PULLS material when you want it, and only for the quantity you need. The material arrives on your production line the next day. You pay your supplier based on the volume. Why does a PCB supplier have to do this ?The main point here is that there are specialist service providers out there who have a job to do in servicing the board assembly, and product assembly markets. There are many other products that are sourced in Asia and supplied into the European market. These products, particularly high value, critical and needed early in the manufacturing process are always going to have short supply lead times. Why does this not apply to boards ? More competition could be on the way. I hope that in reading this you have gained some insight into the problems faced by the PCB sector, and more importantly some of the challenges that face those of you who must service the PCB user. In summary:PRICES have fallen dramaticallyThe levels of price erosion have slowed, but PRICE pressure is here to stay until demand and supply are again in balance.Competitive pressures out there are not going to go away. European manufacturers have themselves to compete with Asia, LEAN manufacturing will be the basis on which product competitiveness is improved in this marketBuyers will eventually be forced to think more about TOTAL COST than just PRICE. This could be an advantage for UK and European PCB producers. Lead-times, Flexibility and helping customers achieve minimal inventories are areas in which domestic producers can WIN. Excelling at this could go a long way to counteract PRICE as the main driver in sourcing terms.My one caveat: the best, leanest, most flexible, high quality bare board supplier base is no good without customers: that means a strong and healthy manufacturing sector. Having a strong and very capable PCB sector is one of the reasons manufacturing will itself remain strong.