Why buying from the lowest-cost provider is a downward spiral for OEMs.

In the wake of the economic recession, global innovation efforts have stalled; the profitable ventures are those that offer the lowest cost or price, like Wal-Mart and The Dollar Store. It poses a different economic set of conditions for manufacturers to face.  

We are seeing the beginning stages of a turnaround. But insofar as electronics innovation is concerned, the best we’ve seen in 2010 is Apple’s rehashed tablet concept, an idea that dates at least to the late ’90s.

Kudos to Apple for convincing the masses that the company has cornered the market on designing an integrated, functional, appealing platform. To some, whatever falls from Apple is über-good; while that might be the majority’s perception, “that don’t necessarily make it so.” A little research reveals such nuggets as the “Top 10 Apple Flops,” which doesn’t include the decision to not design in a fan on the Apple III PC, or the recent “antenna-gate” issue on the iPhone. As it turns out, Steve Jobs is no different from any other CEO; he makes mistakes. (Square Trade research recently showed a 26% failure rate of iPhones in the first two years of use.)

And not just in design. Another issue that recently surfaced calls into question the decision-making skills of not only Mr. Jobs, but a number of major high-tech industry players, all driven by the lowest-cost business model. To appreciate the context, let’s review the economic conditions we all face.

It’s not just The Dollar Store and its retail cousins that get the volume; this happens in the B2B world as well. Take Foxconn Technology Group. The world’s largest EMS company runs what some media have likened to an indentured labor camp. Its workers, perhaps caving to the pressure, are committing suicide at rates never seen at electronics manufacturer campuses.

Who among us believes Apple, Microsoft, H-P, Dell, Amazon and others that source from Foxconn did not know the local wage rates? Having been one of those who in my past helped manage such relationships, I can assure readers that they did. Not to know would be nothing short of corporate malfeasance. To chalk it up, as many do, to the saying, “This is China,” doesn’t begin to wipe their hands of complicity.

Indeed, this is the same issue that snared Nike when the hugely profitable apparel maker was caught employing kids to sew soccer balls and sneakers. This is a clear failure of senior management for not ensuring internal corporate sustainability rules were being addressed.

There is no middle ground on ethics and human decency. American companies need to do a better job. Jobs’ attempt to marginalize the issue by stating that the suicide rate in the Foxconn factory was lower than in the rest of China shows an utter lack of awareness, let alone compassion, for what corporate responsibility really means.

Therefore, I am questioning the integrity of every single company doing business with Foxconn. Is the best you can come up with to go with the low-cost leader? And is this what passes for your ability to innovate (not to mention integrity)?

I could also point out that Chinese EMS companies like Foxconn are not managed for sustainable quality, let alone innovation. Why? In a commoditized business, the time comes for game-changing moves (aka jumping the S-Curve). (The S-Curve, as it pertains to innovation management, illustrates the introduction, growth and maturation of innovations, as well as the technological cycles that most industries experience.) Sadly, examples of this among US OEMs are few. And US EMS companies are just as guilty as their customers for not challenging the migration east, knowing full well that some Chinese business practices involve bribery, knockoffs and other shady dealings. 

When I consider all this, it jumps out that President Obama’s call for American industry to innovate has clearly fallen on ears part deaf and part incompetent. In my experience, denial often is used as a form of protecting the status quo – here, sourcing to a low-cost producer whose approaches are nefarious in their impact – and it makes us part of the problem, not the solution. Systematic innovation methods show that there are better ways of doing things.

Let’s look at how this could be done innovatively without sacrificing technology, entire industries and jobs in the US. Consider major industrial failures in recent US history: steel, autos, textiles and TV manufacturing. What, if anything, did they do to reinvent themselves? In the case of steel, it was only after the majority of steel mills closed, and thousands of lost jobs, foreclosures and bankruptcies later, did steel companies come back. New factories are almost fully automated, and in some cases, building advanced technology products (specialty hybrids), and these successors are not nearly the size of their former forges, but their workers are more technologically savvy. In the case of TV manufacturing, the technology has changed to LCD, LED and plasma from cathode ray tubes, but what each advanced technology has in common is they are being built by foreign MNCs, meaning the revenues go elsewhere. New technologies inevitably replaced old ones, yet a lack of investment in developing these technologies meant US OEMs were elbowed out. Textiles manufacturing experienced a different transition: It made sense to move processing closer to the fields of Asia, yet US textile manufacturing did not die; it morphed into specialty materials, like carbon fiber, Gore-Tex, and the like (at least until it becomes automated and someone figures out that it is cheaper to ship the process to another nation to produce the technology). The auto industry denied its rivalry with Japan and Germany for decades and is only now beginning to produce higher technology products that compare with their foreign rivals. Likewise, unions had to face facts that they have drained the company coffers without helping to advance the technology, efficiency and effectiveness of manufacturing. They hopefully have at long last realized that if they don’t participate appropriately, they too will be out of jobs.

Reviewing the public debacle that was the iPhone rollout, it could have been avoided had there been sufficient rapid prototyping of the design local to the design organization, followed by rigorous testing of product performance to ensure reliability and performance standards were met before going public. A US-based design team using overseas manufacturing as a new product development facility is part of the root cause. The level of communication and understanding between a US design team and its overseas manufacturing team typically is very poor to mediocre at best; language and cultural barriers exist, and as a result, effective communication breaks down, particularly in technical matters. I have witnessed on multiple occasions the US team, out of frustration, telling the manufacturing site to “just do what we tell you to do.” 

In systematic innovation terms, there are solutions to this tradeoff between productivity and communication breakdowns between engineering teams. One principle is to use an intermediary. In my days at Intel, I was the manufacturing engineer for server products and acted as the bridge between the NPI and high-volume manufacturing facilities, as well as the design team. Depending on whom I was talking to, I was an advocate to the design team for manufacturing’s needs for more robust design solutions that did not cause the need for additional headcount or rework, yet when dealing with the NPI factory, I would use data from my DfM tools in the virtual design space to break DfM rules and test the validity of the manufacturing envelope. In the process, we rewrote the edge of the manufacturing envelope – essentially redefining the edge of manufacturing envelope – but it was with knowledge of what DfM rules we were going to break, and the result was to create new design considerations and options for both manufacturing and design. This occurred with tight collaboration between myself, the design team, and the NPI facility so that I could get the critical feedback and inputs from frontline workers showing me how something worked (or didn’t). This is, in fact, called rapid prototyping, where we evaluate the risks before we transfer to the high-volume production facilities, where the risks are managed real time and hypotheses are tested inside the envelope we are going to build in. In the relationship with the high-volume team, I used new product transfer checklists that had to be checked off by the receiving production team to make sure no surprises occurred for them and they could ramp production quickly and efficiently.

The answers to the woes of the US economy and the electronics industry are there: greater manufacturing automation; development of advanced materials and manufacturing processes; development of a more technically advanced workforce trained to break contradictions, compromises and sacrifices with innovation principles and systematic innovation methods, and that communicates effectively with one another when facing day-to-day problems; use of rapid prototyping in virtual environments followed by real-time vetting by design and manufacturing. 

The true economic engine of any enterprise, and by extension a nation’s health and wealth, is its people. Application and use of systematic innovation methods is best at the lowest level of a company, where contradiction, compromise, sacrifice and tradeoff in design and processes occur can be crushed. One can have the best capital equipment, buildings and advanced manufacturing processes, but it is the frontline workers, including their engineering collaborators, who are the producers, and the means and methods they employ are what make a product or service that actually produces wealth and profitability.

To fail to see this current economic period as a matter of American jobs on the line (or to do so, yet fail to confront it) is a moral and ethical failure – and economic denial. Have we lost our strength of character to do something different when the situation dictates a more effective approach?

Richard Platt is principal and owner of The Strategy + Innovation Group (sig-hq.com) and was Intel’s global innovation program manager and its senior instructor for systematic innovation methods; This email address is being protected from spambots. You need JavaScript enabled to view it..

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