Major EMS providers are turning to emerging passive component vendors in China, Korea, and Taiwan to source their needs in the Far East, putting added pressure on well-established players in the United States and Japan.
The compulsion to partner with local suppliers is simple --lower prices and better proximity. Both North American and Japanese suppliers argue, however, that their global presence and strength in services and technology can effectively compete with the local Asian suppliers, some of which are beginning to enter the U.S. market as well.
According to analysts, Celestica, Flextronics, SCI, and Solectron have recently made agreements to procure capacitors, resistors, and other passive components from suppliers in China, Korea, and Taiwan. EMS suppliers declined to state their supply partners, but they conceded that low parts pricing and geography factored into vendor selection.
"We look at the total value a supplier offers in terms of base pricing, logistics, quality, and flexibility," said Andrew Gort, executive vice president of global supply chain management at Celestica Inc., Toronto. Gort added that 10% of the company's revenue is derived from the Far East, where the company has facilities in China, Japan, Malaysia, Singapore, and Thailand.
"We've used Asian, particularly Korean, suppliers of passives as well as printed-circuit boards and displays for a long time," Gort said. "We look for global suppliers that can support us anywhere we operate."
Flextronics International Ltd. of Singapore is also working with local Asian suppliers, according to a company spokesperson, who cited improved lead times, lower logistics cost, and better component pricing as reasons. The company is expanding its plants in southern China, Malaysia, and Shanghai, the spokesperson said.
"It's only natural that as EMS companies build more plants and infrastructure in the Far East, they utilize the suppliers there to broaden their supply base," said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York.
"EMS companies feel they can more easily negotiate with the Far East suppliers because they have easier access to those suppliers' top executives," said Andrew Rassweiler, an analyst at iSuppli Corp., El Segundo, Calif.
While pricing differences between passives from Asia and North America have narrowed recently due to market pressures, Rassweiler said that resistors from China, for instance, are often at least 20% less than those from U.S. companies.
Rassweiler added that both South Korea's SEMCO and Taiwan-based Yageo play a key role as supply partners for EMS providers. Neither company could be reached for comment.
Both companies have huge production capacity, particularly in multilayer ceramic chip capacitors (MLCCs) where they rank among the top five producers, combining for an estimated 23% of total capacity in 2001, according to iSuppli.
SEMCO, which receives 18% of its revenue from passives, has reportedly brokered several large supply agreements with SCI Systems Inc. and Solectron, and is reportedly looking to ink an agreement with Jabil Circuit Inc.
Yageo reportedly has a major investment in a chip resistor plant in Suzhou, China, to support EMS providers SCI and Flextronics, and is building a plant there to manufacture MLCCs.
At the same time, Yageo has established a U.S. subsidiary, Yageo America, in Addison, Texas, to sell the company's capacitors, resistors, and inductors.
Rassweiler added that some China-based suppliers, most notably resistor vendor Feng Hua, are also trying to enter the U.S. market through local sales organizations.
Competing on service, not price
As major EMS companies increasingly partner with Asian passive component manufacturers that are also trying to increase their presence in regions like North America, suppliers that do not have a global presence-particularly smaller U.S. companies-could be threatened, warned Ted Kundtz, an analyst at Needham & Co., New York.
Already, many smaller passives vendors, unable to compete head-to-head with the larger suppliers' production volumes and low prices, have steered away from highly commoditized parts such as MLCCs. They're concentrating on more niche products, such as metallized film capacitors for automotive and industrial applications.
Meanwhile, established North American manufacturers are trying to compete with their foreign counterparts by maintaining a global presence and emphasizing their broad product lines.
"EMS suppliers need companies that are global," said Craig Hunter, strategic marketing manager at AVX Corp., Myrtle Beach, S.C. "AVX has plants in China, Indonesia, and Japan through our Kyocera subsidiary, as well as warehouses in many Far East countries."
Other domestic manufacturers, such as Vishay Intertechnology Inc. of Malvern, Pa., and Kemet Electronics Corp., Greenville, S.C., use third-party logistics providers to supply passives in Asia.
"We have distributors in the Far East, including China, and have a major warehouse in Singapore," said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay.
Smith added that Vishay, which garners about 25% of its sales in the Far East, believes that its broad portfolio of active and passive parts positions the company well to serve EMS providers and OEMs by providing a single component source.
Kemet is able to supply passives anywhere globally within 72 hours with the help of global inventory hubs, according to Sandy Beck, vice president of marketing.
"I think the market is somewhat territorial, though companies that have competitive advantages will do well anywhere," Beck said. "But if a company has a bias toward a local supplier, that's something that happens everywhere."
Established Japanese suppliers like Murata and Rohm say they don't have the lowest prices to compete with other Far East suppliers, but do have other advantages.
Murata Electronics North America Inc., Smyrna, Ga., is trying to get a leg up on the emerging Far East companies by emphasizing advanced technology, according to John Denslinger, senior vice president of sales.
"We traditionally don't try to be the price leader, but we offer value," he said. "We have programs to miniaturize MLCCs to 0201 package sizes, which not many other suppliers have."
Denslinger added that the capacitors were being designed into a cell phone being manufactured in China.
Having customer service programs in place like vendor-managed inventory is also important, according to Ken Sykes, senior vice president at the Eastern sales division of Rohm Electronics USA, San Diego.
"Companies like Yageo bring in very aggressive pricing, but they're a relatively new player and need to establish credibility," Sykes said.
But to capture global market share, many of these Far East suppliers-including Japanese companies that have been relatively absent in the United States-are setting up marketing and sales operations here to do exactly that.
At the beginning of the year, Sumida America was formed from Sumida Electric (USA) Co. Ltd. and Remtech Corp. to serve as a domestic marketing arm for Sumida Corp., a Tokyo manufacturer of standard inductors, transformers, filters, and networking products.
"Our revenues, projected at roughly $80 million this year, are up 25% from last year so far," said Harsh Koppula, president of Sumida America, Rolling Meadows, Ill.
Koppula added that parent company Sumida partners with Solectron Corp. at one of the EMS provider's plants in Japan, which manufactures desktop PCs for IBM Corp.