More, faster, cheaper

The price competition between cellular phone manufacturers forces subcontractors to stretch to their nether limits

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By Heli Suominen
     
      "Remember, I did not say that word", the interviewee reminds me at the end of a long phone call.
      "For reasons of confidentiality, we cannot tell you anything about that", comes the brush-off at the start of a second brief call.
      It is as if we were talking about something sacred. However, the that in this case refers to an entirely worldly corporation, mobile phone giant Nokia.
     
It is not easy to get Nokia's subcontractors to talk about what it is like to provide the world's largest handset manufacturer with products and services.
      Subcontractors are careful and reluctant to disclose information about their business. Good relations to the principal are vitally important. Nokia keeps a close eye on the well-being of its brand and guards its corporate secrets well.
      And with good reason: an efficient network of subcontractors has given Nokia a superior advantage over its competitors. Largely as a result of this, the company has continued to be the largest mobile phone producer around.
      Life in Nokia's network is not easy. Subcontractors face the consequences of the increasingly fierce price competition between the major mobile phone makers. They must provide Nokia with an increasing amount of products, and faster, and more cheaply, too.
     
"Nokia is much, much more price-critical and cost-aware than it was a few years ago", says Savcor CEO Hannu Savisalo. The Mikkeli-based company produces decorative coatings and RF/EDS interference shields for cellular phones.
      According to Savisalo, the deal for selling a certain consignment of products used to be negotiated over for a week. Today, the company has an hour to name a price.
      "The prices are negotiated constantly, and we are always trying to find ways to lower the price of our products. The number and importance of professionals mapping out the prices has markedly increased [in our company]."
      Delivery times have also been shortened, says Isto Hantila, the CEO of cellphone module manufacturers Perlos.
      Five years ago the company shipped handset covers to Nokia or Ericsson in a few weeks. "Today, we have one-tenth of the time we had then. From the time when we know what to deliver, we sometimes have as little as two hours to complete the delivery, sometimes as much as a week."
     
How do subcontractors meet the challenges of less time and lower prices?
      The first essential is to have one's base of operations close to Nokia's. When the cellphone giant established factories in China at the end of the 1990s, the subcontractors followed in their wake.
      Now Nokia is opening a factory in Chennai, India. The subcontractors are tagging along. The electronics manufacturing services company Elcoteq was even faster on its feet: it opened a factory in India before Nokia, in 2004.
      Perlos is opening its Indian factory in 2007. Aspocomp plans to open its factory the same year.
      The schedule for Savcor's manufacturing plant in India is still open. Power supply and charger manufacturer Salcomp is currently conducting market research on business in India. Power source manufacturer Eforek is conducting a "preliminary" study on possible expansion in India.
      Wages, taxes, and social costs are smaller in India than they are in Finland. However, this is not the sole reason for increasing numbers of mobile phones now being assembled in Asia instead of in Finland. The production must also be close to the big markets.
      "The logistics cycle is so frenetically fast that we do not have time to import products or components to India from abroad," says Hantila of Perlos.
     
Subcontractors must be able to alter their production at very short notice. On the one hand, the number of mobile phone models has increased, and on the other hand, the life span of individual models has grown appreciably shorter. There are now ten times as many different models of phones as there were in 2000, explains Hantila.
      "We have some sort of window of visibility a week ahead. We make our production plans for one week at a time. They usually change right away, though. Our strength is that we are capable of doing this."
      The mobile phone giants' forecasts of future sales can change at a moment's notice. If the subcontractor is unlucky, it may wind up with a large pile of components for a handset model that is no longer in production. The models change so quickly that stock inventories have basically been abandoned.
      "We are operating entirely at our own risk. We wish that Nokia could make some commitments now and then", sighs Hannu Savisalo of Savcor.
      Production must be able to handle increased demand as well, since the call for covers, circuits, or phone modules can also rise unexpectedly.
      The result of this can be seen in the nature of job contracts: 40 percent of Perlos's global labour force are on fixed-term contracts or are hired from a temp agency.
      Subcontractors try to achieve flexibility by using more subcontractors of their own. Perlos. For example, outsources painting during production peaks.
     
One way to survive the tough competition is to climb in the manufacturing food chain. At least Perlos has succeeded in this, boasts Hantila. "In 2000 we only moulded plastic covers. Now we are responsible for delivering entire electro-mechanical modules."
      Savcor has a similar history.
      "At the turn of the millennium we provided only one service: we produced anti-interference coatings in Finland. Now we are selling dozens of different combinations of products and services in seven countries", Savisalo notes.
      A subcontractor will struggle and fail if it neglects product development. Plastic components and housings manufacturer Eimo made this mistake by not investing enough in the production of new kinds of covers.
      The company weakened and ended up as part of the Taiwanese hi-tech industrial group Foxconn. The new owner shut down the Eimo plant in Hollola last summer.
     
Nokia remains secretive about the exact nature and size of its network of subcontractors.
      All that is disclosed is that much is expected of the subcontractors: they must be global like Nokia, must be be able to focus on quality, be capable of investing in technology, and be cost-efficient.
      Several subcontractors and analysts reckon that Nokia has drawn closer to its main subcontractors. The company includes its vassals and servants in its production development plans and listens to their suggestions.
      The subcontractors do not like terms like "servant" - or even "subcontractor", for that matter. They emphasise equality by announcing that they are Nokia's associates.
      In any event, the mobile phone giant selects its associates more carefully than ever: there are fewer subcontractors directly connected with Nokia than before.
      The management of subcontractors has been moved to contract manufacturers who assemble cellular phones from components, such as the Finnish Elcoteq, or the American firm Jabil Circuits.
     
Successful subcontractors have grown in the wake of Nokia and the mobile phone branch. However, living at the mercy of one company and one industry is a great risk for them.
      This is why companies are looking for an end to their reliance on Nokia. Elektrobit, a company that designs mobile phones on contract, has been searching for a new foothold in the automotive industry, while Perlos has been looking into medical devices. The CEO of cell phone charger manufacturer Salcomp Mats Eriksson says that the company will continue to focus on chargers, but will try to sell more of them to companies other than Nokia.
      Subcontractors have survived the hurly-burly of competition with varying results. Elektrobit has been successful. It received 4.5 stars [out of five] in an analysis in Helsingin Sanomat a week ago, based on the company's financial statements for 2005.
      Profitability and gearing were both good. The largest of the Finnish subcontractors Elcoteq received three stars. Circuit board supplier Aspocomp, on the other hand, announced last Friday that it had posted a loss of around EUR 11 million before tax, reversing the fortunes of the previous year. Despite its growth aspirations, the company is still so small that was not included in the HS accounts analyses.
     
What about the future? Will the competition continue to toughen?
      It is possible that the price competition will ease up a notch when the market share situation in the developing markets has stabilised.
      Then again, the industry as a whole has become permanently tougher. Mats Eriksson of Salcomp sounds somewhat tired as he contemplates the future. "Where there's life, there is pressure on prices."
     
Helsingin Sanomat / First published in print 19.2.2006
     
In addition to the persons mentioned by name, representatives of numerous enterprises were interviewed for this article, along with the head of research at the Research Institute of the Finnish Economy Jyrki Ali-Yrkkö, analyst Erik Sucksdorff of the FIM investment and brokerage firm, and analyst Hannu Rauhala of Opstock Securities.


Previously in HS International Edition:
  Finnish personnel management, Taiwanese style (21.6.2005)
  Taiwanese-owned Foxconn to close Hollola factory (23.8.2005)
  Nokia´s Pertti Korhonen to head Elektrobit Group (16.2.2006)

Links:
  Perlos
  Salcomp
  Savcor
  Nokia
  Elcoteq
  Elektrobit

HELI SUOMINEN / Helsingin Sanomat
heli.suominen@hs.fi