India as a Destination Source for EMS

( Electronics Manufacturing Services )

presented to

Gathering of Indian EMS Executives New Delhi, India

by

Mark Zetter, President VentureOutsource.com

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EMS Evolution

v  Over the next 10 to 15 years, the electronics HW industry will evolve into two primary business models

• product solutions companies •  product innovation/development •  customer channel relationships

• operations management companies •  product concept/industrialization •  process development, manufacturing, logistics

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Traditional EMS

Product Design ATO > Distr.

ATO > End-users/ Reverse Logistics

Cisco Palm IBM

Nokia

Reptron Arrow Avnet VARs

Component Suppliers

Flextronics Foxconn Solectron Celestica

Sanmina-SCI Jabil Circuit

PCB fab., Encls., Plastics

Fabrication/ Mech Assy

Back-end

Front-end Services

Backward Integration

Intel NEC

Motorola

Customer Direct Service Outlets Internet

Direct Mail

EMS Evolution

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EMS Evolution

v  The technology outsource supply chain model is becoming the dominate model and can never be reversed

v  Supply chain purchasing power has swung in favor of the outsource provider

v  The larger outsource providers excel in the ability to rapidly advance and scale the art of process

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Drivers

v  Outsourcing electronics manufacturing can have real economic benefits even in the absence of product cost savings

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(1) (2) (3) (4) (5) (6) (7) Dollars Percent Materials $76 $76 $76 $73 $72 $70 $70 $68 $8 11%

Labor $4 $4 $1 $1 $1 $1 $1 $1 $3 75% SG&A $6 $3 $3 $3 $3 $3 $2 $2 $4 67% Finance $2 $1 $1 $1 $1 $1 $1 $1 $1 50% Freight $4 $4 $5 $5 $4 $4 $4 $4 $0 0% Overhead $8 $6 $5 $4 $4 $4 $4 $4 $4 50%

EMS Profit $0 $4 $4 $4 $4 $4 $4 $4 -$4 n/a

Total OEM Cost $100 $98 $95 $91 $89 $87 $86 $84 $16 16%

Cumulative Savings --- Est. Costs to OEM by Outsourcing ---

Drivers Internal OEM

Operating Costs

(1) Shared resources = greater capacity utilization (2) Production in less expensive regions (3) Cost-efficient product redesigns

(4) Optimizing logistics (5) Co-locating suppliers (6) Controlling component supply through verticalization (7) Greater purchasing economies of scale

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Drivers

Revenue 325,000$ Revenue 325,000$ COGS 231,000$ COGS 231,000$ Gross Margin 94,000$ Gross Margin 94,000$ R&D 30,800$ R&D 30,800$ S,G&A 38,500$ S,G&A 38,500$ Other Expenses 3,082$ Other Expenses 3,082$ E.B.I.T. 21,618$ E.B.I.T. 21,618$

Inventories 196,000$ Inventories 39,200$ P,P&E Net 622,000$ P,P&E Net 155,500$ AR net of AP (25,000)$ AR net of AP (25,000)$ Net Working Capital 793,000$ Net Working Capital 169,700$

Working CapitalWorking Capital

Statement of Operations Statement of Operations Captive Manufacturing Outsourced Manufacturing

ROWC (21,618 x 4) 11% (21,618 x 4) 51% $ 793,000 $ 169,700 = = ROWC

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v  Domestic market potential

v  Inexpensive indirect labor

v  Large skilled direct labor pool

v  Language base

Indian EMS Strengths

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v  Low electronics HW manufacturing capacity

v  Lack of infrastructure

v  Market responsiveness

Improvement Opportunities

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v  Changing governmental policies

v  Inadequate global marketing of manufacturing technologies

v  Lack of cohesive R&D roadmap with little CapEx

Improvement Opportunities

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Productive Capacity

Tech

nolo

gica

l inf

rast

ruct

ure

India

Japan

USA

Israel

S Korea Taiwan

Malaysia Philippines Mexico

Indonesia Thailand

Singapore

China

High Low

High

Low

Competitiveness Source: IMF World Economic Outlook

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Physical Infrastructure

Man

agem

ent

Taiwan

Israel

India

Philippines Brazil

Mexico

Indonesia

Thailand

USA Japan

Malaysia S Korea

China

Low High

Low

High

Competitiveness Source: IMF World Economic Outlook

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v  Advanced research conceptualization •  regional vs international

v  Component design (front-end services) •  fuel component manufacturing •  build EMS infrastructure

v  New product introduction (NPI) •  design-to-alpha, beta •  embedded systems

Worth a Closer Look

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v  New business development •  branding

v  Attracting/retaining OEM customers •  manufacturing velocity •  perceptions, quality

v  Customer support •  electronics HW reverse logistics

Worth a Closer Look

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v  Universities and EMS/SMT technology centers

v  Make a market (government and NGO)

•  international and regional industry organizations •  strategic partnerships, effective media utilization

v  Regional and national government

v  Private sector (mfg. operations, hi-volume EMS infrastructure) •  facility locations consistent with international logistics •  finance cost buckets, operations metrics/KOIs •  program management (CFT, DRT, S/CAR, transfer protocols) •  operations (DFT, MPI/TPI, GHK, IPA teams, alerts)

What’s Next?

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Accompanying articles Steps to develop and promote Indian EMS

http://ventureoutsource.com/india-ems

Discussion on Indian EMS http://ventureoutsource.com/india-ems-challenges