The “China price” is not what it used to be. Many old-time manufacturing professionals reminisce about the good old days, when a cheap Yuan, cheap and abundant labor, cheap real estate and lax regulatory regimes meant easy money.
You could succeed in China manufacturing by just showing up and making stuff real cheap, then selling at nice margins. The China price was so low, and competition so scarce there was enough profit for both importer and maker to prosper. And with such an obsessive focus on the price, expectations for quality, service, and social accountability were all low.
Today, China still competes well in electronics manufacturing, but not solely on price. The new China value proposition is more sophisticated and embraces mature supply chains, availability of quality upstream processes, modern infrastructure, and a wide range of contract electronics providers offering varying specializations, technical competencies, and capacities. But it’s still possible to get good pricing from EMS providers.
Below, some strategies to help you get reasonable pricing from your EMS providers.
Go local. Go Direct.
Some Chinese EMS providers maintain sales or engineering offices in US cities. To the US customer, this may seem like a best-of-both-worlds proposition — outsourcing to China while dealing locally; no need for late night calls to catch China business hours, phones are answered in English, and face-to-face meetings won’t require international travel. (Request list of EMS/ODM providers anywhere in China or the greater Asia region)
While US or European offices may be a plus, these can also add unnecessary costs, and risk.
This adds cost because the office adds no value to the product but still needs to be funded, and the US-based staff handling your program needs to be paid. It also adds risk because Western-based individuals who have ownership of your account are not the ones performing the work– those folks are in China. (See: China contract negotiations)
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Its also generally a good idea to deal as directly as possible with the people actually doing the work. And chances are the local sales office you deal may, or may not, have a strong relationship with the China-based facility.
In once instance, a China facility several years ago was assembling industrial components for a large, global 100 European electronics OEM. This multi-national OEM dealt with a US-based consultant indirectly, via a local European sales office that associated with a Chinese operations office. This group, in turn, subcontracted the OEM’s business to the US consultant.
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Without the OEM having direct access to their production facilities and engineering team, the OEM’s customer’s problems ballooned out of control, while accountability in China dissipated.
Among some of the critical-to-quality issues was gold plating on one connector. The single source for this connector was a factory located outside China. The source was proposed by the intermediary in Europe, and subsequently accepted as the single designated supplier of this component.
The OEM pushed the intermediary for component cost reductions. The intermediary then pushed their source directly. It wasn’t a problem until the OEM suspected the component supplier had achieved cost reductions by reducing the gold plating and falsifying test reports.
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Suddenly it was time for the OEM to send two engineers to China and deal directly with the facility. In this case “better late than never” did not apply.
The engineers visited the facility claiming falsifying of documents on behalf of the component supplier whereas, if anything was wrong it was between the intermediary and the designated source.
Had the OEM dealt with the factory directly from the early stages, they could have assigned people to competitively source the connector (and other) components so the OEM would at least have a reality check on pricing and, at best, have more qualified sources to improve delivery and quality performance.
In the end, the OEM had to write-off all of the tooling material lots in stock.
The takeaway from this story? When looking for potential providers, include local sales offices in your mix of potentials, but also do three things:
1.) Confirm the sales office on the China-side is the manufacturer and not just a broker or project manager subcontracting to an EMS manufacturer.
2.) Inform the local manufacturing rep know they will be competing on price with stand-alone Chinese EMS providers.
3.) If you do work through an OEM manufacturing or supply chain operations intermediary in your home country, make sure you have direct access to the manufacturer in China from day 1.
Help reduce EMS provider uncertainty
Keep in mind, sometimes Chinese electronics EMS providers can inflate quotations not out of greed or inexperience, but rather to protect their margins by pre-offsetting unforeseen cost increases.
It could be they may fear being blind-sided by MOQ exposure, unstated or misunderstood processing requirements, higher-than-expected defect rates, or surprising cost increases for upstream processes such as fabrication and coating of structural components like sheet metal or plastics injection molding.
Naturally, EMS providers are the operational experts and should have some insights into these concerns early on before quoting, but when transferring programs there’s always a risk something has been miscommunicated, miscalculated or has fallen through the cracks. This is one way all EMS providers may try to hedge their risk during quotation.
There are a few ways you can work to reduce the EMS provider’s uncertainly along with the pre-emptive cost inflation associated with it.
1.) Choose electronics providers with specialization, concentration, or at least significant experience in the type of product you are quoting. These providers will have procured similar components and have mature sourcing procedures and contacts. They will likely also know the costs of fulfilling your quality and technical requirements better than an EMS provider having to guess for first-time work. But beware, those electronics ODMs active in your market may also pose a risk of inappropriate competition.
2.) Consider having key parts of the RFP/RFQ translated into Chinese. There are many translation services in China specializing in technical translations, and can turn-around contracts, manufacturing process instructions or other docs in a hurry via email. At the very least pick out critical pieces of information (CTQ items, test specs, inspection criteria…) for Chinese translation.
3.) Reach out to potential EMS providers to suggest alternative components as appropriate. Allowing them to source within their comfort zone goes a long way to reducing uncertainty and lowering costs.
Ask EMS providers for cost-reductions
Understand that good EMS providers are in a win-win position to offer advice on how to reduce their costs and ultimately your price. Make it clear at the outset which specs are sacred, and on which you can be flexible.
It’s typically up to your EMS provider to source tooling and production for outsourced upstream processes like metal case fabrication, injection molding, die-casting, coating… EMS providers will have their preferred sources (and in many cases be vertically integrated in-house) and know how to manage these segments of your program. Beware, this is an area where some providers assume OEM customers could have little price knowledge, and they can add pad margin.
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So its suggested people take the time to find out the local costs of these components. This can be done by sending RFQs to specialized facilities that fabricate for export. You then have the option of using these other suppliers to make parts that are then shipped to your EMS provider. But know its advantageous having your EMS provider be responsible for all upstream processes, where appropriate.
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Try also to avoid over-specifying exotic materials or over-the-top processes. An extreme example: an LED power supply company specified, for their case, a type of proprietary metal molding process, not available in China, that was very expensive. This process was marketed for ultra-precision fabrication of intricate and super-light aerospace and military components and overly expensive for a metal box housing a power supply. The requirement drove up cost of the power supply beyond hope of manufacturing and ASP competitiveness and competing power supplies were using metal stamping or regular die-casting.
So, before sending out RFQs, look over your BOM and do sanity checks on larger cost items.
Getting responses from your RFPs is the first step to your cost reductions process. You can still ferret out significant savings using the following steps:
1.) Look for cost outliers. With itemized quotes, compare line items from each EMS vendor in one spreadsheet. Locate significant variances based on total amounts quoted for each item and challenge the higher costs. Tell the EMS providers or components supplier this item is significantly higher than the average the competition is quoting, to see if they can work on getting that cost in line. (Low-cost outliers also must be addressed, if not challenged. It’s possible the EMS provider quoted so much lower than the competition because they misunderstood your requirements, or because they made a simple error in calculation, or they want to win the business and are willing to take it in at a loss, hopeful to recoup the loss as volumes increase.
2.) Attack components at the top. These might be precision stamped cases, ICs, or other items. Regardless, it’ s worth putting extra effort into lowering the top three or four high cost/impact items. Maybe your enclosure can use a different coating. Maybe tolerances for some processes are too tight. Maybe your volume requirements can be accommodated using cheaper materials for tooling. Maybe some IC’s can be purchased cheaper in the US or Europe than in China.
If your quote is not well itemized, instruct the EMS provider they needs to quote in-line with the competition, and they should look for opportunities to reduce cost.
If one EMS provider is a clear cost-outlier and simply stands their ground, don’t waste your time. This may not always mean they are not interested in your business. It could mean they are unsure they he can perform profitably, or they may even be quietly planning to outsource to another provider. Know when its time to walk.
Cost reduction efforts end only when your program ends
Continue with cost reductions as your program progresses or ramps-to-volume and use your technical sophistication in your dealings.
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Engineering should focus on component count reduction and on specifying a wider choice of lower-cost component brands. Most of your cost-reduction opportunities going forward from this point will often come from component cost reductions, so this can be your priority.
Likewise, always push EMS providers to reduce direct and indirect labor costs as the production learning curve flattens over time. Real process costs generally lower over time and these reductions should be reflected in your pricing.
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