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Electronics Supply&Manufactjfing F O R O E M A M P E M S M A N A G E R S W I
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MANUFACTURING
As the demand for wireless headsets grows, market leader Plantronics breaks ground in China on a new
manufacturing plant—and a new manufacturing strategy
I BY ARIK HESSELDA
W V 1 stronaut Neil Armstrong spoke the unforgettable words "one\small step for man, one giant leap for mankind" into the company's headset. Across the globe, millions daily use its
k products while driving—in certain places, such as New York, to comply with regulations mandating the use of "hands-free
car phones. / ronics Inc., the world's No. 1 supplier of mo
bile-phone headsets, is not a household name. Yet its products are ubiquitous. The wide adoption of wireless devices over the last decade and new applications in the consumer electronics sector guarantee more people will be using Plantronics' products in the future.
Little wonder that Plantronics is deploying a new manufacturing strategy to support what the company's executives believe is a faster-growing electronics segment, with opportunities for rivals and startups to encroach upon its market share. Naturally, China is a big part of the company's manufacturing future. What's not so common in these clavs when outsourcing is the norm
in-house and to pull subassembly work from contractor
O C T O B E R 2 0 0 5 I ELECTRONICS SUPPLY & MANUFACTURING
M A N U F A C T U R I N G GOING GLOBAL D D D Q D D
"Some of my suppliers in China can live on 10 percent profit margins," said Terry Walters, Plantronics' senior vice president for operations. "You can do some back-of-the-envelope math and figure out that if I can run that operation myself, I can keep the profit they're making off me."
It's not that Plantronics is not making money now. In fact, its revenue and net income have been growing strongly. In the fiscal year ended March 31, the Santa Cruz, Calif., company's net profit increased 57 percent, to $97.5 million from $62.3 million in the prior year. During the same period, revenue climbed to $560 million, up 34 percent from $417 million in fiscal 2004. Since slumping 25 percent in 2002, Plantronics' revenue has been on an upward track and is forecast by analysts to rise to $650 million in 2006.
In addition to the widespread adoption of mobile-phone
devices, actions by governments as well as
safety-conscious drivers to minimize hazardous handset
use behind the wheel are spiking demand for headsets.
What's driving the surge? Only five years ago, the sight of someone talking on a hands-free headset connected to a wireless phone might have caused a few stares, as its owner seemingly spoke to the air. It's no longer a strange sight, in part because of the success of the mobile-phone headset as a product category. In addition to the widespread adoption of mobile-phone devices, actions by governments as well as safety-conscious drivers to minimize hazardous handset use behind the wheel are spiking demand for headsets, according to researchers.
A recent study of U.S. wireless users by Knowledge Networks, a consumer research firm, found that headset suppliers have more room for growth. The research firm found that 22 percent of wireless-phone users employ headsets. That suggests
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• • • • • • GOING GLOBAL MANUFACTURING
a market opportunity of some 40 million headsets in the United States alone, based on the Federal Communications Commission's estimate that there were 181 million wireless subscribers in the U.S. as of yearend 2004.
And that's only part of Plantronics' potential. Increasingly, consumers are using wireless headsets for gaming and voice-over-Internet Protocol (VoIP) telephones. "Once you start getting into the VoIP business, and as that begins to grow, the headset business really becomes interesting," said Tim Bajarin, head of market research firm Creative Strategies. "But right now, die primary market for these devices is cell phones and call centers."
Plantronics has been making communications headsets for decades and steadily perfecting the devices to make them a must-have consumer accessory. Already, Plantronics is the leading brand in the wireless-phone headset sector, ahead of rivals Jabra and GN Netcom—both units of Danish company GN Store Nord— and privately held Belkin Components.
But Plantronics is thinking beyond phonelike applications. The company's goal is to broaden "our reach to include virtually anyone who uses a phone, a computer, a game console or an MP3 player—which is to
say virtually everyone," Plantronics said in a statement. It recently landed a deal to provide headsets to Mi
crosoft Corp. for use with its Halo 2 game on the Xbox console. It has also developed products that combine headphones for listening to music on Apple Computer Inc.'s iPod with a headset for use with a phone. And high-end entertainment-oriented headphones are next. One new product uses Bluetooth to make a set of headphones that can play music from any audio source but can also connect with a cell phone over Bluetooth wire-
"0 nee you start getting into the VoIP
business, and as that begins to
grow, the headset business really
becomes interesting."
TIM BAJARIN, CREATIVE STRATEGIES
less technology. Clearly, there's a lot of unexplored potential in so seemingly simple a device.
New manufacturing strategy For 33 years, Plantronics' strategy has been simple: buy
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MANUFACTURING GOING GLOBAL • • • D D D
materials and partially assembled products in China and elsewhere in the Far East, and ship them to a five-building Plantronics complex situated about 15 minutes from the U.S. border in Tijuana, Mexico. The complex comprises about 250,000 square feet and employs about 3,500 people. There, products are assembled from the subassembled components brought in from China, then packaged and shipped out.
But Plantronics needs more manufacturing capacity. So, over the course of the next year, it will add 200,000 square feet in Suzhou, China, about 60 miles west of Shanghai. In time, Plantronics expects to triple its floor space in Suzhou. According to its most recent annual financial report, the company has rights to more than 660,000 square feet of property at the Suzhou site. It said it expects to spend
Plantronics needs more
manufacturing capacity. So
over the course of the next
year, it will add 200,000 square
feet in Suzhou, China.
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about $15 million on construction in its 2006 fiscal year, for a total project cost of $20 million. The initial head count in Suzhou will reach 800 in its first year of operation.
The new facility makes sense for a few reasons. For one, it will save money on subassembly work currently outsourced to Asian contractors, said Walters, the senior vice president for operations. For another, it will in time give Plantronics the presence it needs to attack the burgeoning market for consumer technology in China.
Today, Walters uses subcontractors in the Far East for materials acquisition and subassembly work. The subcontractors then ship the prod
ucts to Mexico, where Plantronics performs final assembly, testing and packaging.
Walters said that a tipping point occurred recently when more than 50 percent of the company's procurement dollars were going to 12 suppliers in Asia. "It got to the point that the run rate of our procurement budget was such that what we were spending was more than the revenue of two or three of our biggest suppliers combined," he said.
That was when Roger Lin, Plantronics' president of Asia-Pacific operations, was handed the task of expanding the company's presence in Asia. Lin, who had first been assigned to run Asia procurement operations from an office in Taiwan, investigated several potential manufacturing sites around China—all within one to two hours of Shanghai—and even considered locations in India.
"We looked at India briefly because we do some tactical manufacturing there," Walters said. "By that, I mean we sometimes hire a contract manufacturer like Flextronics or Celestica to do some [assembly] for us there, primarily for products in the local market. They do the work in order to provide enough local content that you avoid the import duties."
The problem, Walters said, is that while India has a ready supply of engineering talent, "it doesn't have the robust group of suppliers that China does. China is almost a one-stop shop for the things we need, like microphones and speakers and cables and plugs. We had none of that in India."
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GOING GLOBAL
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MANUFACTURING
ZA ction items • i Plantronics is setting up a manufac
turing system in China to complement existing operations in Mexico. If you are similarly looking at integrating China into your company's future manufacturing plans, consider these questions:
Could your company recapture profit If It elimi
nated subcontractors in China by building its own
manufacturing facilities there? In other words, will a
move to China be a net benefit?
Do you have or can you develop adequate
contacts in China? Do you know how to do busi
ness in the region or know someone who can
walk you through the process? You may want to
start by expanding the responsibilities of an exec
utive already in the region to include spearhead
ing a search for your own manufacturing site in
the country.
Are you prepared to deal with China's peculiar
regulatory systems? Stories of bureaucratic bot
tlenecks in China are not always exaggerated. You
need a plan for dealing with the local authorities
on matters relating to land acquisition, construc
tion, environmental impact and future expansion
of the site.
4 How will existing plants and facilities be
affected by any plans to open new plants in China
or elsewhere around the world? Will they be made
redundant, or will they still be critical to operations?
Look ahead, do contingency planning and incorpo
rate the manufacturing system you have today into
what you want for tomorrow.
Plantronics settled on Suzhou for its availability of engineering talent, its proximity to the Yangtze River, its information technology infrastructure and the relatively stable local government, among other things.
China offers more It's a familiar refrain by executives at Western manufacturing companies, who are finding China an attractive option for recapturing costs. And China is only too willing to make the process of building there smooth, Walters said.
"Generally speaking, we were pleasantly surprised [with the offer from the provincial government]," he said.
D D D D D D
Plantronics dealt with a quasi-government agency whose goal is to get local people employed in factories run by companies like Plantronics, according to Walters.
"The process was relatively painless," he said. "The agency provides a piece of land. They want you to invest in constructing your building so you will employ their people. They quickly zone and build your buildings for a reasonable rate. The building permits and the architectural review are all handled by this one agency, and all parts of the agency are aligned with one goal of employing people. And so everything goes lightning fast."
Plantronics hired Bechtel to handle construction of the Suzhou facilities, which are being built in accordance with specifications of the Green Building Council, Walters said. "We had to do for China the equivalent of an environmental-impact statement [in the U.S.]," he said. "Bechtel supplied us with an architect who was familiar with things like how to site a building best, given the positioning of the sun. For example, there's a large glass wall on the north that does not get exposure to the sun. And the roof is painted white to reduce the heat load and so reduce the need for cooling."
While the facility in China is under construction, materials and subassembled components go by ship to Mexico for final assembly, packing and shipping to retailers and wireless carriers.
It's in Tijuana where Plantronics keeps track of some 2,300 stock-keeping units (SKUs), each specific to the retailer that ultimately will sell it—in part because, as Walters explained, headsets that may look identical are packaged specifically to the retailer's needs and desires. Plantronics sells headsets for cell phones for Radio Shack, Best Buy and Staples. While the products may look the same, they require three separate SKUs.
Staples requires an electronic article surveillance (EAS) tag to prevent shoplifting, and the tag has to be mounted right behind the bar code so it can be deactivated as the checker slides it over the bar code scanner. Radio Shack has Plantronics supply the product in a way that Radio Shack employees can open the clamshell package to let the customer access the product and then put it back on the shelf. Best Buy wants that clamshell sealed and doesn't want to pay for an EAS tag.
The diversity means Plantronics packs and ships orders by hand. "When you consider the variety of packages and different styles and sizes of packaging we use, automating it would be so expensive and time-consuming to develop that by the time it was done, your packing paradigm could change significantly," Walters said. "Replacing the human hand can be really expensive."
Once an order is received, the packing order prints out at the Tijuana facility the following morning. When
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MANUFACTURING GOING GLOBAL D D G D D D
the contents are packed, they're sent by truck across the border to a United Parcel Service facility in Chula Vista, Calif. "We can pick, pack and ship for $2.50 an hour, and that's a lot less than what we would pay in St. Louis or Memphis," Walters observed. "Add to that a materials chain in China with world-beating prices, and I don't think anyone can touch us on efficiency."
And so what happens to the Tijuana facility when the new one in China comes online? Practically nothing, Walters said. In fact, if all goes well, it will expand.
"The long-term effect on Tijuana is not one that you might expect," Walters said. "Even with the China site, we are still a build-to-order, pack-to-order operation. Most of the time things will be bulk-shipped to Mexico in much the same way they are today. I like to think of this as having the best Arik Hesseldahl can be reached at [email protected].
"Sitting in Santa Cruz, I'll never
understand what the
Chinese want. You have to
be in China to understand
what China wants."
TERRY WALTERS, PLANTRONICS
of both worlds. I can buy my materials at world-beating prices. But I still have to have a place that is close to my local market, where I can build to order and house my finished goods."
Over time, Walters expects the Suzhou plant will grow in importance, particularly as Chinese consumers, already heavy cell phone users, begin to want accessories for their ever-more-advanced phones. But these will have to be developed and marketed by people familiar with the needs and desires of the Chinese consumer.
"I'm so American that, sitting in Santa Cmz, I'll never understand what the Chinese want," Walters said. "Our theory is that you have to be in China
to understand what China wants." •
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