October 16, 2006
DETROIT – As electronics content in cars and trucks continues to proliferate, California-based electronics supplier Solectron says the opportunity is there for the auto industry to operate more like the high-tech sector.
In a word, that could mean more strategic outsourcing for Tier 1 automotive electronics producers, which Solectron officials say would help suppliers lower cost, put the focus on more value-added activities and speed new systems to market.
Since 2000, 29-year-old Solectron has been pushing a business model it says has worked extremely well in the electronics industry but is just beginning to take hold in automotive. That is, outsourcing to Solectron manufacturing and logistics, even some product design and engineering of electronics components, in order to free up financial and staffing resources at Tier 1 suppliers.
“For years, the (less vertically integrated) high-tech industry has had a different business model from automotive,” Donald L. Runkle, a former General Motors Corp. and Delphi Corp. executive now serving as senior advisor to Solectron, says in an interview at the Convergence 2006 conference and exhibition here.
“It’s worked well in that industry, and now we’re trying to bring that business model here.”
Because automotive electronics suppliers tend to perform most of their electronics development and manufacturing in-house, they are forced to spend more money on capital and stretch their design resources to the limits, Runkle says.
“My experience at Delphi is that you can run out of electronics (engineers) before the customer runs out of ideas,” he says. “I’ve had it happen where we couldn’t take a job because we were out of software engineers.
“And if you’re vertically integrated, you can also run out of capital quickly,” he adds.
By sourcing electronics manufacturing and logistics work with Solectron, Runkle says, large suppliers can benefit on the cost side from more efficient production and Solectron’s ability to better leverage the supply chain, through which it purchases $8 billion annually.
It also gets plant assets off the supplier’s books, improving the balance sheet, and softens the impact of a downturn in the market, he says.
“You don’t need to own the land, the plant, the capital equipment, the inventory,” Runkle says.
Fewer resources would have to be devoted to the engineering and manufacturing basics, he adds, which means the Tier 1 can concentrate on the more value-added design aspects of its electronics systems.
“Suppliers don’t need to be focused on circuit boards,” he says. “They should be developing better entertainment systems, brake systems, etc.”
Solectron, a $10.5 billion company, currently generates about $300 million from automotive, producing electric power steering control modules; car audio and navigation systems; engine control modules; instrument clusters; and telematics devices.
It won’t reveal all of its key customers, but does acknowledge Delphi is one of them.
Solectron says it is talking to a number of auto suppliers – although it won’t confirm Delphi is among those – about taking over certain electronics manufacturing operations, which could include acquiring existing assets.
Under that scenario, Solectron could buy the supplier’s plant, utilizing its existing workforce, says David Moezidis, vice president-automotive, or acquire the plant but work with the supplier to transfer employees to other operations. A third option is to phase out the plant completely and move production to a new or existing Solectron location, he says.
Moezidis describes the asset-transfer option as a “standing offer” Solectron has put to automotive electronics suppliers worldwide.
Delphi President Jeffrey Owens says such a scenario could make sense for his company, confirming Delphi has been approached by a number of third parties with similar proposals in the surface-mount components sector.
But he says there are “no plans” for that at the moment. Delphi’s manufacturing is “very lean and high quality, and we consider that a competitive advantage,” he says.
And although the surface-mount business is capital intensive, “we’ve gotten that down to half of what it was four years ago,” Owens says.
Still, he admits, an asset transfer could make sense. Solectron, which has produced surface mounts and subassemblies for Delphi, is a high-quality manufacturer with much more buying power than Delphi, he says.
“They are a bigger player (on surface mount components),” he says. “So they should be the masters of the universe at some point.”
Solectron declines to project sales for the automotive side of its business, but says the sector definitely is a growth area. Automotive electronics now comprise 25%-30% of the cost of an average automobile, and the market is expected to rise to $26 billion annually by 2010-2012, executives point out.
Solectron has more than 50 operations worldwide, employing 50,000 people in more than 20 countries. It has four major manufacturing plants, in Guadalajara, Mexico; Timisoara, Romania; Bangalore, India; and Suzhou, China.
Solectron says intellectual property rights and branding are retained by its customers and that it has no plans to become a Tier 1 supplier to the OEMs.
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