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CATEGORY Business

New Round of Hardware Innovation and Transformation of OEM Giants

ParisTech Review / Editors / 2014-11-28

The financial crisis, rising labor costs and fierce competition have been hurting the profit margin of foundry businesses. Widespread 3D printing technology has also brought changes to the manufacturing industry. To cope with challenges, manufacturers are exploring all strategic directions, including rethinking their business model completely.

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Globalization has brought us a more coherent world trading system. As it reshapes the distribution of global manufacturing, developed countries are giving birth to more innovations and designs, while work at the cost-sensitive middle- and bottom-ends of the supply chain has been shifted to less-developed Asian and African countries. Companies specializing in Electronics Manufacturing Services (EMS) have seized this chance to rise. Companies like Flextronics, Hon Hai and HTC have become household names thanks to the booming electronics industry. They linked renowned enterprises such as Microsoft, IBM and Apple up with huge factories operated by tens of thousands of cheap laborers.

In fact, brand owners no longer manufacture or even design their products anymore. This significant change not only applies to cell phones, computers, and other consumer electronics and network devices, but it also affects sectors including the medical, auto, energy and aerospace industries. A number of powerful manufacturers are capable enough to provide end-to-end services to by covering design, engineering, logistics and delivery as a whole.

Nevertheless, the financial crisis, rising labor costs and fierce competition have been hurting the profit margin of foundry businesses. Widespread 3D printing technology has also brought changes to the manufacturing industry. To cope with challenges brought by this trend, manufacturers tactfully relocated to places where labor is cheap. They choose to erect more factories to fully utilize the scale effect. Companies like Foxconn invest heavily in robots, with which they hope to replace human labor someday.

Two years ago, Flextronics announced it was in the process of restructuring its business model, from EMS to total Supply Chain Solutions Provider that delivers design, engineering, manufacturing and logistics services to a range of industries and end-markets. With China being its most invested in region, Flextronics recently announced that it has entered into a strategic partnership with The National University of Singapore (Suzhou) Research Institute (NUSRI) to establish a hardware incubator called Flextronics-NUSRI Lab IX Hub , adding one more investment project to the 3 established factories in Suzhou. The Head of Flextronics Lab IX and NUSRI talked to SJTU PARISTECH REVIEW about the innovative strategies, remodeling businesses and the latest trends in hardware manufacturing.

SJTU ParisTech Review: What made Flextronics and NUSRI create such an incubator?

Lior Susan:Internet and mobile Internet make geographic distance less visible by enabling connections between your phone, car and even medical devices. The prevalence of the Internet drives up global demand for hardware. Nevertheless, unlike the well-invested, resourceful and knowledge-equipped software business, the hardware industry is far from reaching a milestone. A new product needs more investment from its concept to prototype, and all the way up to mass production. The mission of the project is right to support hardware startups, helping them rapidly cross the chasm from prototype to production.

Lior Susan, Head of Flextronics LAB IX

Lior Susan, Head of Flextronics LAB IX

We have investment in Chinese, Israeli, European and some Silicon Valley companies. What we found interesting was that Chinese companies have more leverage and resources in manufacturing. China, as the “world factory,” is looking to be introduced and integrated into a global eco-system with access to design, venture capital, markets and customers overseas. It’s not hard for us to find “Silicon Valley spirit” in Chinese entrepreneurs, who are also lacking resources. Lab IX is able to step in to provide and share information between Chinese and Israeli entrepreneurs, for example.

As a major end-to-end supply chain solutions provider, Flextronics is known for its rich resources and experience in the entire industrial chain including hardware design, manufacturing, delivery and logistics. Startups can enjoy more industrial resources and relationships in addition to capital from Flextronics.

Running against the backdrop of mounting labor costs, stronger competition and downsizing of foundry gross profit, can you tell me a bit about the steps Flextronics took after it announced its plan for restructuring?

Lior Susan:Sure. As an end-to-end total supply chain solutions company, we have a very similar core business to other OEM companies. However, our services have spread to almost the entire supply chain with a global outreach in over 30 different countries.

What I really want to highlight here is our innovative three-tier Flextronics Platform. Tier one is the visible physical structure, which covers our global facilities, people, assembly lines, materials and parts of the manufacturing process. This tier can be found in almost every peer company. The second tier is about end-to-end services that include innovation, engineering, logistics and supply chain, We provide these services for a wide range of industries and end-markets, including data networking, telecom, enterprise computing and storage, industrial, capital equipment, appliances, automation, medical, automotive, aerospace and defense, energy, mobile, computing and other electronic product categories. We exercise what we’ve learned from designing and manufacturing electronics to help startups, and likewise, we apply groundbreaking innovations and technologies from start-ups to existing products. The third tier focuses on real-time information sharing where we can help our clients improve the efficiency of supply chain management, and speed up their decision making process.

When did Flextronics put in place this strategy?

Lior Susan:The strategy was brought up by our CEO Mike McNamara two years ago, when the global macro-situation and economy were undergoing profound changes. Lab IX complied with this three-tier structure to encourage more innovations.

For a company like Flextronics, are you going to conduct R&D more through internal facilities or collaborate more with external intelligent institutions like NUSRI for more technology transfers in the future?

Lior Susan:I believe Flextronics will be walking on both legs. But unlike big institutions or companies, elites from smaller companies will be more innovative, mobile and result-oriented. We can form a network like an octopus to hunt for small but powerful teams worldwide. We will jump in to help them with mass production and building supply chains once they have good designs.

You also mentioned the great potential for China’s market and industrial environment to attract capital. Start-up hubs and incubators are flourishing in China. So what distinctive added value is Lab IX ready to bring to startups?

Lior Susan:For instance, lots of startups are not quite sure of what to do about procurement or inventory. Flextronics, with rich experience in this aspect, is ready to advise on how to optimize the capital allocation and maintain a reasonable level of inventory, with the example being purchasing different parts from Nanjing and Taiwan before assembling at our Flextronics Zhuhai Industrial Park.

For dealing with suppliers and clients, startups may not be able to carry out talks with big enterprises such as Microsoft or Cisco on an equal footing. Flextronics acts to bridge the gap in cases like this, as these corporations are already our customers.

Another advantage we have is related  to hardware. Let’s take cell phones as an example. For a cell phone to start from a prototype until the moment when it’s ready for mass production, it differs a lot in craft, procedure and modeling if the phone is produced on a scale of 1,000 compared to a scale of 100,000, or even a million. Usually the first batch of products won’t run into problems, whereas companies tend to reach a bottleneck when scaling up production. Unlike software, it is impossible for us to infinitely copy and spread hardware as we do with computer programs.

HUI Kwok Leong, Associate Director of NUSRI

HUI Kwok Leong, Associate Director of NUSRI

HUI Kwok Leong : Flextronics plays a key role in helping startups tap into the market by providing experience in supply chain management, mass production and market integration. NUSRI, on the other hand, can fill in the technological gaps for lots of startups. Aside from Beijing and Shanghai, Suzhou also has quite a number of incubators, but with only limited amount of technologies and market resources.

When talking about hardware technology, what is your take on the popular open source hardware and 3D printing technology? Do you think they will take a toll on traditional manufacturing?

Lior Susan:3D printing lowered the threshold for hardware startups to join the league and encouraged more entrepreneurs to invest in this business. It might have taken 500,000 dollars to produce a prototype via the old way, but only 50 dollars through 3D printing.

But for the entire manufacturing industry, 3D printing will not leave a heavy mark on mass production. A variety of sectors including aerospace, defense and medical devices can have certain parts of their products made by adopting this technology within no time. It is a positive step for the companies to take to reallocate their capital and reconsider their inventories. But the original purpose of introducing 3D printers was not to replace mass production. This is the intrinsic nature of the 3D printer that we can’t overlook.

So if we go deeper into the fundamental way of thinking, with a higher demand for customization, is it still necessary for mass production to be around?

Lior Susan:You are right about the growing trend of customization or configuration. However, the relatively high cost of customized products will guide consumers to stay with standardized goods churned out through mass production. Customization does make sense though when it comes to unique, high value products such as big medical equipment.

HUI Kwok Leong: I have a few things to add if I may. Products nowadays can bear a very complicated structure. The number of parts needed for manufacturing is also on the rise, sometimes even reaching a million parts. 3D printing can only effortlessly produce a couple of these parts, but it’s impossible for the printer to take over the entire production and assembly process. Mass production is the ultimate way if manufacturers are sensitive about cost. We can still turn on our 3D printers when making parts that are not of core importance. I believe the future of the business model will combine merits from both mass production and 3D printing.

Aside from Internet and micromation, would you like to look ahead to the coming 2 decades for what revolutionary innovation might come forward?

Lior Susan:In general, I believe there are 3 sectors that will expect groundbreaking innovations. The first is transportation. With the advent of new means of transportation, we will hopefully spend less time on commuting. For instance, it may only take me 10 minutes to travel from Suzhou to Shanghai. The second is robots. Intelligent robots will play an increasingly important role in production and consumption, among other important sectors. The third will be 3D printing. I believe we will have more well-developed medical printing technologies, helping patients with printed tissues and organs of a human body.

HUI Kwok Leong: Lots of progress in 3D printing is made in materials. Fine ceramic is a key material widely used in aircraft engines, satellites and defense industries. The public is not very aware of this material, which also brings great challenges. That’s why lots of companies and R&D centers are working hard on combining 3D technologies with ceramic materials to bring more breakthroughs to the industry.

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