From the end of 80’s important international companies operating in electronics looked for partnership to outsource the manufacturing activities. The intent of multinational companies operating in the telecom, automotive, IT business, was to leave the manufacturing activities to focus on their own core business. This strategic approach to business allowed international OEM firms to enter in the European market through commercial agreements and the acquisition of production sites. Their business model was to supply entire business unit products acquiring the manufacturing divisions. The target for the OEM was represented by multinational companies with leading technological products, and what it was happening met this expectation. The single technology design of family products allows the international OEMs to dedicate entire lines to a single customer emphasizing the specialization of their assets (human capital, and equipment). In addition, their competitive advantage were the high capital reserves to buy production sites and to cover costs of ramp-up manufacturing activities.
The other face of the electronics market was represented by medium-sized OEM companies operating on boards with low technological components but with technological or strategic applications as transportation, building and industrial automation (synthesized as “power” products), instrumentation and special market niches. This doesn’t require any sophisticated technological knowhow but flexible people to manage different products, many customers and many suppliers.
For these reasons the international OEM and the regional one were not in competition because they acted in two different markets. In addition, regional OEM found barriers to market entry due to manufacturing capability and capitalization limit. On the other hand the global OEM had no interest to enter in a low margin market.
As mentioned, the approach to the market is different. Large OEMs work through corporate agreements and the regional OEMs work with a dense network of business contacts and lobbing activities developed day by day in a long period of growth. The different strategic market approach stimulated the former to a global approach to new market frontiers and the latter to the continuous process innovation as consequence of customer requirements. The first grow through the optimization of organization process, by building international professional teams, global IT services, supply chain optimizations and the second one focusing on process and marketing innovation.
But the rise and fall of manufacturing electronics industry in Europe is basically due to cost and margins.
In the time when Far East started to be competitive in terms of cost, in west Europe, just few global OEMs tried to reformulate the offer to customer looking for new market.
The high tech product has a high component cost. Usually, the cost of direct labor and white collars weights on 5% circa of total cost. Human resources policy for global OEM is based on two main aspects: high specialization and compensation above the regional average salary to avoid high turnover. This is one important entry barrier to market of regional OEM. For the nature of the “power” products, the material does not affect more than 65% of the final cost of the product and in this way the labor cost has a relevant weight. So, what previously was a strategic choice in HR management, now becomes a market barrier for the global OEMs.
Another important aspect prevented and still prevents the entry in the “power” and instrumentation products market: the specialization. It becomes a disadvantage in Europe, for the nature of its sustainable business, because it limits the flexibility and cross functional knowledge. Extreme specialization makes sense in a well-oiled machine (as a production line “high volume low mix), not for niches. And it is also a basic rule of lean production, to know how to do well different things to govern the processes.
Therefore, large OEMs failed, or more realistically, had no interest in changing the well tested organizational structure – basically it meant reduce people dedicated to a product – or in controlling the drift of benefits and salary remaining in this way, out of the game of “power” and niche products.
The big OEMs are leaving Italy and west Europe following the mass production organization model in Far East and at the same time, they are providing to the Italian market organizational know-how that was really missing from our regional OEMs. The latter, in fact, despite the considerable effort developed to find technical and process solutions on its own products, often need to acquire know-how in functions organization and in supply chain. The global OEMs are an excellence source of secondary process organization and service. In “power” & niche market, the second most important driver (first one remains price) is professional credibility, which they developed with their international customer, the “management standing” is one other skill left in inheritance to the regional company culture.
This represents a case in which Italy has the opportunity to get know-how from international companies to increase their business. Often Italians lament a Know-how migration from Italy to abroad when our industry excellences are acquired by international group, in this case, the opposite is happening.