The Internet is delivering most of its promises, but the use of online reverse auctions could drive products into a commodity status with the potential for all but eliminating product R&D, devaluing and destroying service, and likely bringing the electronics industry to its knees.
Ah, the power and promise of the Internet: the power of instant access to almost unlimited information; the power of right-now communications; and the promise of hyper-efficient supply chains.
With the Internet, prices are transparent. Shoppers have the power to buy and sell products quickly and efficiently -- shopping for the very best deal.
The Internet today is delivering most of its promises, but one of those promises may savage the electronics supply chain. The Internet, and more specifically the reverse auction on the Internet, promises to drive products into a commodity status with the potential for all but eliminating product research and development, devaluing and destroying service, and likely bringing the electronics industry to its knees.
Here's how it happens. Reverse auctions, as the name implies, are a mirror image of auctions. Instead of selling, though, companies access the Internet to announce to the world that they want to buy products or services. Implicit in this process, at least in the electronics industry, is that the product you want, whether it's solder or PCBs, is a commodity.
In its strict definition, a commodity grows in the ground or walks on the ground. It's fungible. There is no product differentiation. But certainly, PCBs and solder paste are not commodities.
The IPC Solder Products Value Council, in its lead free testing program, validated that solder paste from six global solder manufacturers did perform differently. Now, those differences in printing characteristics, voiding, wetting and slump were not dramatic -- and not necessarily better or worse -- but they were different. The tests refute, of course, the notion that solder is a commodity. PCBs, as the foundation for electronics, are a custom designed product and as a result, also are not a commodity.
It doesn't really matter though because these two products, as well as other products in the electronics industry, are at the end of the sharp stick of reverse auctions. "Step right-up folks," the reverse auctioneer seems to cry over the Internet, "and let's see how low you can go." Now, most solder manufacturers and interconnect manufacturing services companies (PCB manufacturers) demure from participating in the reverse auction process. But that's not the point.
PCB and solder manufacturers' customers on occasion use the ridiculous prices quoted during the reverse auction to drive prices down. The process would warm the heart of Adam Smith, the father of the free market, but Mr. Smith never had to rely on a complex supply chain.
Manufacturers for solder, PCBs and a whole host of other products begin to lower prices as the benchmark price of the reverse auctions take effect. As prices by the manufacturers come down, something's got to give. Eventually, suppliers cut staff and decrease or eliminate customer service and research and development.
Staff reductions and customer support are casualties to this hyper-charged competitive environment and so is research and development. It's understandable that companies drive prices down as a matter of survival. However, as the electronics industry resumes its growth, will the supply chain be able to adequately invest in product and process technology? The electronics industry forged its growth on research and development advances, but this might not be the case for long in this punishing environment.
Today, research and development costs, like a hot potato, continue to be passed down the supply chain from OEMs, to EMS companies, to industry suppliers. Everyone believes in the critical importance of research and development, but no one segment in the electronics interconnection industry is now truly able to significantly invest in it. With no investment in R&D, the industry slowly grinds to a halt.
Reverse auctions are a symptom of a larger illness of unreasonable pricing throughout the supply chain. What then does the future hold for industry suppliers?
Customers, who conduct reverse auctions will be less than delighted with the product they receive. They will learn, to their surprise, that this product is different than they expected. Will the manufacturer also provide customer support? Probably not at the reverse auction price. In other words, over time, "the market" will demonstrate the downside of commoditization of the electronics industry supply chain.
Try a little experiment. The next time you need a new roof for your house, hold a reverse auction. Then, choose the very lowest bidder with the bids transparent to all the roofing companies. No, you can't interview the contractors, you have to choose the lowest price. You probably won't do it, will you? There's too much at stake.
Well, why should the roof for your house be any different than the material that holds the parts to the PCB and provides the interconnectivity or the PCB itself -- the foundation for the electronics assembly?
Ultimately, reverse auctions promise to devastate the electronics industry supply chain. That's not a promise that is good for the industry or its participants, whether manufacturers, suppliers, or consumers. That's not a promise the industry should keep.
Tony Hilvers is vice president of industry programs at IPC, a U.S.-based trade association and leading source of industry standards, training, market research and public policy advocacy for all facets of the electronic interconnect industry. With more than 20 years of industry experience, Hilvers is responsible for IPC industry segments, including the printed circuit board (PCB) and Electronics Manufacturing Services Management Councils, the PCB Suppliers Council, the Surface Mount Equipment Manufacturers Council, and the California Circuits Association. He also oversees IPC's Market Research and Government Relations departments. Contact him at TonyHilvers@ipc.org.