Recent Trends in Technology-Driven Companies -Part 3-

By Hajime Yamada (GLOCOM)

In electric equipment-related business, a movement toward Electronics Manufacturing Service (EMS) has begun.

EMS is a consignment manufacturing service of other brands' electronic equipment. Since the late 1990s, Solectron Corporation in the U.S. has been undertaking manufacturing products of IBM Corporation, NCR Corporation, Mitsubishi Electric Corporation and Sony Corporation among others, after it purchased plants, inclusive of employees, from these corporations. Such makers specializing in contract manufacturing have been growing rapidly.

Enterprises undertaking EMS may reduce manufacturing costs by mass-production when they receive orders from more than one corporation. Sometimes, these EMS makers not only manufacture products as subcontractors but also undertake product planning or designing. Existing makers who entrust work to EMS providers have an advantage in that they can heavily invest their funds in Research and Development (R&D) of new products that put value on speed, while they farm out orders for manufacturing products at a low price.

In Japan, KYODEN Corporation and Kaga Electronics Co., Ltd. among others are spreading and succeeding at the EMS business.

For example, sales of KYODEN as of March, 2001 were 85.4 billion yen, an increase of 31% compared with the previous term. The income before taxes was 3.9 billion yen, a 40% rise. Sales of Kaga Electronics in the same term were 106.2 billion yen, an increase of 37% compared with the previous term. The income before taxes of Kaga Electronics was 6.6 billion yen, an increase of 88%. Such an increase during depression of trade in Japan is quite exceptional. Both companies are affected by the IT recession in the latter half of fiscal 2001, and business is declining. However, as of September 2001, Kaga Electronics maintained a tendency to rise in both sales and income before taxes compared with the previous year.

KYODEN is a corporation specializing in manufacture of printed-circuit boards (PC boards) used for such equipment as personal computers. The company started business with trial productions of PC boards, and has developed a flexible production system with accumulated know-how. It is also beginning cooperation with other companies in Asia, such as ones in Singapore. The president of KYODEN was reported to have said, "We hope to keep only product planning and designing departments of EMS in Japan, and do manufacturing in Asian countries." This shows that the company is trying to be thorough in trimming costs.

Kaga Electronics also deals with PC board manufacturing as EMS. The company receives contracts for producing PC boards from Chinese home electric appliance makers, for example, and tries hard to cooperate with other companies in Asia.

Putting electronic equipment on market requires a long process such as R&D, product design, preparation of production lines, manufacturing, quality control, and sales. Major companies often have advantages in R&D or in gaining market information, for example. On the other hand, there are companies such as KYODEN and Kaga Electronics that are good at producing PC boards. The EMS business materialized only after each company concentrated on its strong field, and cooperated with each other to market products.

To run an EMS business is also equivalent to detaching plants and making them independent manufacturing bases. Some major corporations go into reorganization. For example, NEC Corporation converted its subsidiary telecommunication equipment manufacturing companies in Miyagi and Yamanashi prefectures into EMSs; and some of Sony plants have started to receive manufacturing orders from other brands.

Contrary to these trends, Matsushita Electric Industrial Co., Ltd. has a different approach. The new concept Matsushita Electric came out with is "ultra manufacturer."

An ultra manufacturer invests a majority of its operating funds in software, services and intellectual properties. It does not cut off manufacturing departments as other companies do. Rather, Matsushita Electric has prospects in developing business by multiplier effects of manufacturing and other operations including software business, while keeping manufacturing departments within its firm.

Considering the ultra manufacturer concept, Matsushita Electric also expressed interest in adopting a customer-centered policy. In other words, company management aims at reforming its operation by application of IT technology, as well as shifting to a customers-first-policy by delegating more authority to sales people who deal with customers, and by steering R&D to more customer-emphasized direction.

Those critics who insist on introduction of selection and concentration concepts into management and support independence of manufacturing operation as EMS constantly criticize Matsushita Electric's way of reform, complaining that it lacks thoroughness. However, others believe that in Japan, where a drastic change of a corporation is very difficult, keeping manufacturing departments within the enterprise would better match socially.

In this series, I have repeatedly reported trends of modularization and division of labor within corporations. Whether or not Matsushita Electric, which has gone in another direction, will succeed is quite noteworthy.