Just how low can you go?

It is certainly interesting times. In a one-week period the following occurred all within a 250-mile radius of my company.

• A small fabricator shuts his plant to focus on brokering because they can’t make a profit selling low volume at “unrealistic market pricing.”
• Another small fabricator sells out, shuttering his plant, and moving the book of business across the country/world because they too can no longer make a profit selling low volume at “unrealistic market pricing.”
• Two low to mid volume EMS companies go out of business shuttering their facilities because they can’t make a profit selling at “unrealistic market pricing.”
• Received “invitations” to participate in three on-line auctions of fabricators – large and small – that went out of business and shuttered their plants.
• Made a series of sales calls to large and small companies – OEM’s – who complained about the poor service and inconsistent quality they are getting from “offshore” suppliers. They continued, “If you can meet or beat their price, we would like to talk.”
  

Interesting times all right and I wish I could say that these events were surprising, but they’re not. I often think that the electronics industry is its own worst enemy. Too many in the industry, from all across the globe, seem to think that they are participating in that dance called the Limbo instead of managing “for profit” businesses. And there is a world of difference. When you dance the Limbo you are rewarded for going as low as you can go under the ever lowing bar. In managing a for profit business, reward comes in the form of long term profitability, balance sheet strength and increased shareholder value. This can only be achieved by increasing profitability being sure that you are raising the profit bar for all through true supplier partnerships.

During the first fifty years of our industry’s existence we have from time to time accomplished many great things contributing to the successful development of increasingly complex and ever more miniaturized electronic technology. But consistently we have accomplished only one thing and that is to insure that all other segments of the electronics industry prospers at our expense via unrealistically low pricing that in effect follows a strategy of giving away the store.

Historically it has been the companies that have had the most aggressive pricing – those who have led the charge to lower the bar for everyone - who have been the first companies to fail when the inevitable down cycle occurs. Whether large or small, public or private, the downward price leader has never succeeded long term. And yet, time and again, electronics companies seem to continue pursuing the same strategy, doing the same thing and, surprise, surprise, achieving the same results: marginal if any profitability at best, and liquidation more often than in other industries.

I know fabricators understand the complexity of producing printed circuit boards. Designers all understand the expertise required to insure a usable product. So why do so many continually attempt to defy the laws of economics and basics of business – realistic pricing?

One reason may be that we designers and fabricators do not do an effective job explaining what real value goes into designing and fabricating a printed circuit board. We may talk about skill and value, but we don’t explicitly explain – in terms customers understand -- what it takes to get their job done right and on time. I know that every time I have ever given a plant tour, at one point or another at least one person will say “I never realized how much went into making a simple circuit board … ” It’s that “how much went into” that we all need to be adequately compensated for. And whether you have a new, state of the art high volume facility in China or an older low volume specialty facility in the U.S., everyone has a lot of “how much went into” – a lot more than they are charging for.

Then again, maybe we all should give our sales presentations at a gas station with a copy of The Wall Street Journal in hand. As we pump gas that costs two to three times what it did four years ago into our vehicles we can read the commodities pricing for copper, tin, silver, gold, etc – all of which are twice to four times what they were a few years ago and ask the rhetorical question “when would your company begin considering recouping the huge increase in material costs ... ”

The fact is that, unless reasonable, realistic and sustainable pricing is embraced throughout our industry, the mergers, bankruptcies and closures will continue at all levels of the supply chain and throughout the world. Large global companies and new Asian companies are just as susceptible and, frankly, have more to loose by continuing unrealistic pricing for market share vs. pricing like a “for profit” business. When the small “niche” players can’t make it and the profitability squeeze begins to take its toll on the EMS industry then you know that pricing rationale is missing, our industry is completely out of control and even the big guys are at risk.

So, yes, interesting times. As our industry enters its second fifty years I hope that we can finally get away from the dead-mans trap of unrealistic pricing and begin to have the courage, commitment and solidarity to establish pricing that reflects the true value our companies provide. If the industry is going to be around in fifty years we all must begin running our companies like profitable businesses – not like a child’s dance. It’s time to move towards realistic pricing that reflects true product value and restores long term profitability. PCD&M

Peter Bigelow is president and CEO of IMI (imipcb.com). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..