There’s a reason Apple is willing to take years of heat over the working conditions inside the Chinese plants building all those iPhones, iPads, and Macs. China is cheaper.
The Dells and the HPs and the Ciscos find it cheaper too. Long ago, they moved away from building servers and networking gear in the U.S., outsourcing almost everything to manufacturers in Asia. After a while, even the giants of the web went to Taiwan and China. Google and Facebook cut the Dells and the HPs out of the equation, going straight to Asian firms who could help them design a new breed of server suited to running a massive online operation — and, yes, build them for less.
But when Silicon Valley startup SeaMicro decided to build a server that would bring the Google ethos to everyone else on the web, it didn’t go to Asia. It didn’t even go to Mexico. It went seven minutes down the road.
SeaMicro’s servers — which save power and space by cramming hundreds of tiny processors into a single chassis — are built by a small Santa Clara, California, manufacturer called NBS. For SeaMicro, doing it here is cheaper than doing it there. The startup isn’t building as many machines as Dell or HP or Google, and that changes the economics of the operation. But in manufacturing its servers stateside, SeaMicro also has more control.
“If you’re building in Asia, you’re Apple. You’re building millions and millions of things. You can’t turn on a dime. But if we want to make a change, we’re on the manufacturing floor immediately”
“The more quickly we can respond to problems — or changes we want to insert into the manufacturing process — the better,” says John Turk, the company’s vice president of operations and a former operations man at Cisco. “If you’re building in Asia, you’re Apple. You’re building millions and millions of things. You can’t turn on a dime…. But if we want to make a change, we’re on the manufacturing floor immediately.”
SeaMicro’s servers are unusual. But its manufacturing strategy is not. As Apple fights off countless complaints over the behavior of Foxconn, its Chinese manufacturing partner, the assumption is that electronics manufacturing only happens in Asia — and a majority of it does. But smaller manufacturers like NBS litter Silicon Valley — not to mention the rest of the U.S. — and over the past two years, according to research outfit Charlie Barnhart & Associates, a large number of American outfits have pulled their manufacturing operations out of Asia and back to Mexico or even the U.S.
“Apple is not going to dump Foxconn and build a plant to build iPads in Fremont,” says Jennifer Read, an analyst with Barnhart & Associates who does nothing but track trends across the world of electronics manufacturing. “But in other end markets — industrial, medical, aerospace — the projects have lower volumes and…[involve] more components. In these latter type of projects, we are seeing a return to ‘regionalization,’ [where products] are being built closer to their end markets. So for the North American end market, they are going to Mexico, or sometimes the U.S. or Canada.”
Yes, labor is cheaper in China. But wages are on the rise. And even when labor is cheap, it’s only a small part of the equation. So much of the electronics manufacturing process is automated — thanks to inexpensive “pick-and-place machines” that grab chips from tape reels and install them on circuit boards (see video below). And if you move overseas, you’re faced with added shipping costs, not to mention the cost of sending your engineers across the world.
But it isn’t just about cost. As John Turk says, it’s about control.
SeaMicro’s research and development budget is $50 million. That’s more than a tenth of the budget at a massive IT company like Dell, and it’s all pumped into servers. Turk and his boss, SeaMicro CEO Andrew Feldman, argue that the company is innovating in a way that no server maker has innovated in the past 30 years.
Google and Facebook and upstart server outfit Calxeda may have something to say about that. But the point is well taken. The idea is not just to build an entirely new breed of server, but to evolve that server much quicker than the competition. SeaMicro is a hardware startup. But in a way, Turks says, it can behave like a software startup.
“It’s all about how quickly you can deliver new innovations,” Turk says. “And that’s about more than just how quickly you can design. It’s also about how quickly you can actually implement that design in your supply chain, shorting the amount of time it takes to get it to your customers.”
SeaMicros’s offices — including its engineering operation — are in Sunnyvale, California. If you drive down East Arques Avenue, take a left, and then take another left, you’ll cross over into Santa Clara, and you’ll find NBS — including its 10,000-square-foot manufacturing plant. The drive is all of two miles, and, yes, seven minutes.
But SeaMicro’s choice isn’t just about proximity. NBS is a relatively small operation, and before becoming a full-fledged contract manufacturer, NBS was a prototype shop. Because it spent years building one-off prototypes, Turk says, the company has a knack for quickly eliminating flaws in the manufacturing process. In other words, it’s not the sort of massive manufacturer that typically serves the like of Dell and HP.
The end result is that NBS is almost an adjunct of SeaMicro. On any given day, SeaMicro engineers can readily show up a NBS to inspect the machines coming off the line. If they decide they need to make an improvement to the server boards coming down the NBS assembly line, they can do so without delay. And if a customer wants a change made — if they want more storage in their systems, say, or less — SeaMicro can make that change just as quickly. “We call it lean engineering,” Turk says. “You don’t build anything unless engineers can immediately make a tweak and then get it out to the customer.”
Return from Foreign Lands
That may seem like a novel approach. And maybe it is for servers shipped to the big names of the internet. But in other ways, it’s not. Mike Buetow, the editor in chief of trade pub Circuits Assembly Magazine, says there are at least 250 electronics manufacturers within about 40 miles of San Jose, California, and most of them look a lot like NBS.
For years, so many “original equipment manufacturers,” or OEMs — even smaller ones like SeaMicro — have been moving their projects overseas simply because they felt they had to. But many are now coming to their senses. According to Miscoll, over the past two years, 31 percent of the “medium-sized” manufacturing projects that once moved to Asia have now moved them back to North America. Countless other firms are still moving in the other direction, hoping to benefit from cheap labor, but the balance is shifting.
“Much of the drive to China was fostered by Wall Street, who were pushing companies to get lower costs quarter to quarter, and a herd mentality developed.”
“Some degree of rationality has returned to the thought process,” say Eric Miscoll. “Much of the drive to China was fostered by Wall Street, who were pushing companies to get lower costs quarter to quarter, and a herd mentality developed. This usually emanated from [top executives] that based their assessment on hype rather than fact. As the luster has come off the China solution, more OEMs are willing to rethink their supply solution.”
At the same time, the economics are changing. That cheap labor isn’t as cheap as it once was. At the moment, Miscoll says, the average wage in China is rising between 1 and 1.5 percent each month. He predicts that between the end of 2011 and the end of 2012, the cost of building a printed circuit board in China will increase at least 8 percent, and if Chinese currency gains strength, he says, the increase could be much higher.
Jennifer Read calls the Apples and the HPs and the Ciscos “the Goliath Fringe.” They’re in Asia for the long haul, and they account of such a large portion of the market. But they’re not the norm. It makes sense for them to be in Asia not only because of the volume of machines they’re dealing with but because so many of the machines’ components originate in Asia. But for smaller outfits, there are more important considerations, including the ability to move fast. In these cases, it makes more sense to be just down the road.
