The Road Abroad – Strategic Alliance or Greenfield Facility? Print E-mail
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Written by Paul Plante   
Friday, 29 February 2008 19:00

One eliminates the learning curve, but also impairs visibility and communication.

EMS providers use a range of business models to satisfy customer needs. To support the need for access to lower-cost labor regions, Western EMS providers have primarily two choices: build their own facility or develop a strategic alliance with an existing manufacturer in the region. Both have advantages and disadvantages.

This author is in the position of having viewed both models from a management perspective. While I was CEO of Reptron Manufacturing Services, RMS chose the strategic alliance path. RMS was later acquired by Kimball Electronics Group (KEG), which chose to open a greenfield operation in Nanjing, China. Here we look at some distinct advantages and disadvantages to each model.

The Case for Strategic Alliance

In the RMS example, the driver for a China-based manufacturing option was a desire to maintain relationships and provide a solution for customers that felt a portion of their production needed to move to China. RMS was a U.S. manufacturer without sufficient customer demand or resources to establish a wholly owned global footprint. RMS shared the concerns of many domestic manufacturers that if key customers established their own manufacturing relationships with China-based competitors – even on a small scale for margin-sensitive product – they risked the loss of additional business moving offshore. A strategic alliance permitted margin-sensitive product to move offshore without creating a competitive tug-of-war for the total basket of business.

Establishing an offshore greenfield facility came with a learning curve. The strategic alliance model eliminated that learning curve. Production personnel were already recruited and trained, and supplier relationships already established. Underutilized capacity concerns, common when greenfield operations start production, are eliminated because the domestic partner pays only for the resources they use.

However, the model is not without disadvantages. EMS providers are typically accountable for the performance of the alliance partner, even though the production resources are not completely under their control. Both the EMS provider and its partner’s need for profitability often result in a markup on top of a markup in pricing. There are oversight costs for EMS provider audit teams, and typically the EMS firm carries the bulk of the program management responsibility. Systems incompatibility can impede documentation transfer, and time zone and language differences can impair communication. Real or perceived issues with supply chain integrity also can occur, as purchasing activities are no longer the sole responsibility of the EMS provider. Reduced visibility of inventory levels at the offshore partner or in transit is a consequence of this type of arrangement.

Another potential disadvantage is the alliance partner’s motivation to modify core business models to accommodate high-mix/low-volume production. Strategic alliance partners in low-cost regions often have business models that favor high-volume production and minimal schedule flexibility. Domestic EMS providers tout schedule flexibility as a key advantage over low-cost regions. They may be reluctant to drive changes in the offshore model, as this increase in schedule flexibility could result in moving more business to the alliance partner and squeezing profit margins for the domestic firm. These internal business model conflicts can turn a strategic alliance into a reluctant arranged marriage where both partners acknowledge the relationship but prefer to focus on other interests.

While some customers may embrace the model, others may have concerns about supply chain integrity, schedule flexibility, quality or total cost. Maintaining intellectual property integrity also becomes a bigger challenge in an alliance relationship, as the domestic EMS provider has less control of the entire process.

RMS considered these issues carefully in selecting a strategic partner. A project team composed of representatives from supply chain management, manufacturing operations and quality drove the selection process. During a two-year period, the team made six trips to China for potential partner site audits. They found different strengths and weaknesses at different companies within China. In some cases, potential prospects lacked good financials (or at least verifiable financials), and in other cases, key quality certifications were not in place. The team narrowed the options to a group of three potential alliance partners.

The chosen partner had board-level, mechanical assembly and total box-build capabilities. Another advantage was its U.S. headquarters was in Chicago, which facilitated communication during U.S. business hours. The selected partner was smaller than RMS, was certified to ISO 9001:2000 and used industry-recognized workmanship standards. A good working relationship was established with the company owner. The strategic partner actually installed a board-level assembly process that mirrored the processes found in RMS facilities so seamless transitions were possible. Non-compete agreements were established to protect each company’s respective customer base.

While the relationship achieved its primary purpose of providing an option for RMS customers needing to migrate some production to China, it did not represent a good long-term globalization strategy. RMS had a primary goal of growing its domestic sites, which reduced focus on the strategic alliance. The resulting lack of consistent projects for the alliance partner and overall profitability constraints associated with these projects hampered the alliance’s success.

The Case for Greenfield

KEG followed a different model in expanding global reach. Unlike RMS, KEG had the customer demand and financial resources needed to successfully expand globally. As part of a large multinational company, it also had established experience in expanding to new regions.

When the company added a greenfield facility in Nanjing, it was faced with the challenge of filling capacity in a new location. However, it also had the advantages of a robust methodology used to facilitate rapid transfer of standardized processes, standardized equipment and a common IT platform. This helped support personnel training activities and quality certification processes. The result: a facility completely aligned with the overall company business model and the ability to migrate projects from other KEG facilities, as well as winning additional business from existing and new customers. Most important, projects moving to China were strategically aligned with the company’s long-term business vision.

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Customer reaction to outsourcing to a wholly owned Asian facility has also proved somewhat different. RMS customers that had once been concerned about using a strategic alliance relationship have embraced the KEG model.

For example, a manufacturer of public safety products chose to move lower-volume, higher-mix mature product to the new facility. It had previously shown disinterest in this type of move because of the project’s demand variation complexity. The alliance model simply didn’t permit RMS to control production resources and provide the level of visibility required. The KEG model provides better visibility and close U.S.-China program management team coordination. Today, the project is jointly manufactured in KEG’s Nanjing and Tampa, FL, operations, and the associated project teams communicate seamlessly with the customer.

In another example, an RMS medical customer was experiencing cost pressure on some of its mature product. Its reluctance to outsource under the strategic alliance primarily was related to concerns about IP protection and unauthorized parts substitution. While still concerned about China manufacturing in general, under the KEG model, the customer was comfortable transferring some production to KEG’s wholly owned facility in Thailand. Two assemblies were transferred to the Thailand operation. Today, Thailand builds these assemblies to a generic configuration, while final configuration and test are performed in Tampa. The customer has achieved its cost-reduction goal within a framework that also addressed perceived risk factors.

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More than one road exists abroad. Both the strategic alliance and greenfield facility models have advantages and disadvantages. The best path is determined by a combination of the EMS provider’s business model, internal resources for growth and customer requirements. Carefully consider the pros and cons of each choice before embarking on the journey.

From a customer perspective, high-volume customers probably benefit most from EMS providers with a wholly owned global footprint, but for companies with high-service needs or smaller pieces of business, the choice isn’t as clear. Companies with an occasional need may benefit most from a strategic alliance.

Paul Plante is vice president, medical industry solutions, Kimball Electronics Group (kegroup.com); This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Last Updated on Monday, 03 March 2008 06:11
 

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