Reigniting Taiwan s High-Tech Growth Engine. Made in (by) Taiwan

Transcription

1 Reigniting Taiwan s High-Tech Growth Engine Taiwan s troubled high-tech hardware sector is falling prey to the false prophets of excessive automation. The solution lies not in more robots, but in fixing the underlying inefficiencies. 1

2 With the decline of the classic PC and the emergence of new competitors in mainland China, Taiwan s high-tech hardware sector has lost appeal for customers, investors, and employees. Concern peaked in June 2014 when Barclays predicted that Taiwan original device manufacturers (ODMs) are unlikely to remain competitive. A.T. Kearney takes a markedly different view. We see the Taiwanese high-tech industry, specifically its ODMs, positioned for success. In this article, the first in a series to commemorate the opening of our Taipei office, we look back at the roots of the industry in the region, discuss the problem with excessive automation, and outline ways to slash costs without breaking the bank. With stronger industrial engineering practices and smart automation, we believe Taiwan s ODMs can become true global leaders. A Look Back Let s start by looking back 20 years. The mostly U.S.-based PC original equipment manufacturers (OEMs) were bursting at the seams and looking for ways to boost capacity in order to satisfy the appetite of rapidly growing commercial and consumer markets. Accumulating assets in one s own factories was not something American investors and analysts were doing, so outsourcing was the natural move. Taiwan was in the sweet spot combining entrepreneurial spirit, engineering skills (acquired from decades of making simpler devices like pocket calculators), access to the mainland Chinese labor market, and English language skills. Huge factories were springing up in coastal cities in China and they were welcome. And it got even better as these cities and provinces were generously funding industrial parks. In practice this meant that the companies got the land and the buildings for free, and received subsidies for equipment and for the products produced in these factories. The proximity of ports made shipping goods back to America or Europe easy. And it worked. Production volumes ramped up quickly, supply chains were reliable, and product quality was good enough. In a heartbeat, virtually all American OEMs had outsourced nearly all their manufacturing to Taiwanese ODMs. This, in turn, made PCs affordable to everyday consumers, fed millions of families in mainland China, and made the ODMs the flagships of the Taiwanese economy. While we laud the immense achievements of this time, we also have to note that a couple of vital skills got lost in all the excitement. America had been the pioneer in mass-producing goods, with W. Edwards Deming, an engineer, statistician, and professor, probably the most influential herald of industrial engineering the world has seen. Made in America mostly for Americans made the application of industrial engineering principles crucial for staying competitive. But in the big waves of outsourcing to China with labor rates at a tiny fraction of American wages (around $0.5 per hour in 2000), these principles did not seem to matter that much. Hardly any of the factories in China reached productivity levels anywhere close to those in America. Inefficiencies were dealt with by putting more operators on an assembly line. The result was what can be observed in most ODM factories in China: long assembly lines with dozens of operators each performing a miniscule task. The tasks were dull and boring and the operators didn t like them. So they left as soon as they found a slightly better job elsewhere. Many factories in China coped with an attrition rate of more than 100 percent per year. Compare this to single-digit rates in the United States and in Europe. With most operators working at the low end of the learning curve since they were new in the job, running an efficient factory was very, very difficult. 1

3 Fast Forward to 2015 Today, coastal regions in China have become rich and finding workers is painful. Many factories have relocated to Western China, where the labor market still looks good but the move pushes them thousands of miles from the coast. It still makes sense to be there to serve the booming Chinese market, but logistically America and Europe are complicated and expensive. These factory relocations have not helped industrial engineering practices. Indeed, experts are stunned when they walk through the factories. Wherever they look, there are line-balancing issues, redundant tasks, and non-value-adding handling. In short, at any given point in time, about half of the operators are idle. With hourly wages now in the range of $4, these inefficiencies matter a lot. Unfortunately for them, a couple of Taiwanese ODMs are relying on false prophets to lead them out of this problematic situation. Chief among these is excessive automation. Media reports suggest that some CEOs talk about deploying 100,000 to 10 million industrial robots. Very often this means replacing one operator with one robot. This is a dangerous game that may sink some of the most important flagships of Taiwanese industry. The programming and maintenance of these robots is hugely expensive and results in extremely inflexible processes. SMT lines and the milling of unibody chassis for ipads are examples of smart automation. Excessive automation can mask poor industrial engineering practices. Don t get us wrong; we are not dogmatically opposed to automation. Automation makes a lot of sense when applied to tasks that are highly repetitive, require levels of precision that we humans cannot achieve, or are too exhausting or dangerous to perform. Surface-mount technology (SMT) lines and the milling of unibody chassis for ipads are perfect examples of smart automation. We re opposed to excessive automation, the kind that can mask the poor industrial engineering practices that have become the norm at Taiwanese ODMs. In product design, for example, these practices are very much focused on designing reliable products with affordable components. But too often, these products are hard to make. We have seen desktop PCs that require 80 rivets and screws and need to be flipped and turned multiple times during assembly. Strong Practices, Smart Automation It is our conviction that industrial engineering practices must be strengthened and streamlined before considering automation. This can be done with little to no investment. In our experience, an average ODM factory in China can cut head count in half with a few simple measures. Once these practices are cleaned up, then the focus can turn to automation and designing reliable products with affordable components. For example, with state-of-the-art design for 2

4 manufacturing, manually inserted rivets and screws are replaced by automatic point welding fixtures and flipping and turning is replaced by unidirectional stacking of components that can be done with a simple robot. With smart automation, enabled by design-for-manufacturing, we have helped companies bring down production head counts to just 25 percent of original levels. Imagine what slashing 75 percent of manufacturing head count will do for Taiwanese ODMs. Increased profitability is the most obvious impact, while the strategically more important impact is independence from the Chinese labor market. Now, efficient factories with smart automation can be established close to markets, allowing production in America for America, in Europe for Europe, and in India for India. With this, supply chains are shortened and inventories reduced. Taiwanese ODMs that embrace these two principles will not only offer their customers entirely new service levels, but also help themselves become true global players. Authors Christian Schuh, partner christian.schuh@atkearney.com Alenka Triplat, partner alenka.triplat@atkearney.com Harald Jordan, consultant harald.jordan@atkearney.com Angela Chang, consultant angela.chang@atkearney.com Damon Broder, consultant damon.broder@atkearney.com 3

5 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit Americas Atlanta Bogotá Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Taipei Tokyo Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please insight@atkearney.com. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. 2015, A.T. Kearney, Inc. All rights reserved.