March/April 1999

Wiring Harness News

Wiring Harness Producers Respond to New Challenges

By Jennifer Read

There have been major changes in the business of building wire harnesses and cable assemblies in the last five years. Wiring Harness News has undertaken a major research project to uncover the key trends and issues that affect the companies that participate in this market. This is the first of a series of articles which will bring these findings to our readers. In this article we give you an overview of three trends we see emerging from the data: price erosion of certain types of commodity cable assemblies; technology trends as producers compete with other technologies that threaten to replace traditional assemblies; and the rise of OEM outsourcing and its impact on the industry.

Part two of this series, which we will publish in the May/June 1998 issue, will look at the 20 Top Producers of Wiring Harnesses and how these companies have responded to the changing business climate.

According to Fleck Research, the total North American market for cable assemblies is $6 billion. In other words, $6 billion worth of cable assemblies was consumed in North America last year. Of that figure, one-third, or approximately $2 billion, is imported. China and to a lesser degree Indonesia, Malaysia and Thailand have become the cable assembly hotbeds, according to Ken Fleck, president of Fleck Research, Santa Ana, California. Chinese workers work 12-hour days for about $65 a month. This translates into severe price erosion of some commodity cable assemblies, and cuts into profits of North American producers. This price erosion has caused cable-assembly manufacturers' revenue to decline 3.9 percent, according to Fleck.

However, this trend is offset by the increasing tendency of original equipment manufacturers (OEM)s to outsource more and more of their manufacturing operations. The contract manufacturing industry as a whole has experienced explosive growth. And there is plenty of business to go around – it isn't going just to the big guys. Even the second, third and fourth tier companies are growing. Technology Forecasters, a research firm in Alameda, California, estimated that the top five contract electronics manufacturers (CEMs) had sales of $11.5 billion in 1996; but that is less than the $59 billion in revenue reported by the over 1,200 CEM companies. Nearly 1,100 of these companies had less than $20 million in annual sales.

But competing in this new environment is not easy. "We are experiencing extreme pressure from both ends of our business," explained Tom Morris of T.J. Morris Manufacturing in Logansport, Indiana. We get no break in price from our supply base, but our customers expect us to continuously reduce prices. We serve the automotive industry, which is extremely price conscious, and competitive. Maybe if you built harnesses for medical applications – where the volumes are lower – the pressure wouldn't be so bad. But in automotive, it's very intense."

These two parallel trends – price erosion of commodity cable assemblies, but explosive growth in the amount of contract assembly overall, has created a climate where manufacturers are scrambling to react with sound strategies, including the following:

• Growth through acquisitions. Companies carve out a niche and then acquire other companies doing the same thing. Or they make acquisitions to complement their businesses and enter new markets, especially global ones.

• Strategic partnerships with suppliers and customers to integrate their supply chain.

• Develop core competencies and get rid of what's not working.

"Growth through acquisitions has been part of our strategic plan," says Tim Wright of MWC, in Monona, Iowa. "We have been focused on a very small number of markets and customers. This decision was made due to the growth of the electrical systems themselves, and the increased outsourcing activities."

Supply chain management is a critical part of controlling costs. The material cost of a typical cable assembly is higher now than its labor cost. That wasn't always true, but it has affected how components and supplies are sourced and how inventory is managed. Many manufacturers are working with distributors and suppliers to share forecast data and create more efficient and integrated systems.

"This is an area where we have been very aggressive," says MWC's Tim Wright. "The partnership, open book type of relationship has allowed a lot of progress in terms of relationship building and the sharing of resources. This has in some cases shifted responsibilities to the supplier, but this has not been all bad. In many instances, we have been able to negotiate more favorable pricing and terms than the OEMs had been able to themselves. More importantly it has increased the value of long term relationship by allowing the OEM to focus on other important issues within their own organizations."

Jumping on the Bandwidth

Another place cable assemblers have had to keep on their toes is in the design arena. Computer and telecommunications applications have created the need for more bandwidth and higher density cable assemblies. Whenever a new connector is developed, a new cable assembly must be designed to accommodate it. AMP has developed a 0.025-inch centerline density cable assembly, compared with an IDE cable's 0.050-inch centerline density. They worked with some of the drive and computer manufacturers and developed a cable assembly that has the capacity of running at double the speed, and sometimes at four times the current 1-Mbit/s rate. Molex is working on products for the VESA Plug and Display standard, which is aimed at carrying high-bandwidth video signals of up to 2 Ghz through a single host interface.

Cable assemblers are also adding value to their products by overmolding, adding extra shielding, or otherwise improving electrical characteristics. They are expanding into Category 4 and 5 or even Category data cable for high-speed LAN networks.

"In our industry, the key driver is the fast pace of movement toward sealed connector technology and multiplexing," commented Mike Williams, of Unlimited Services in Oconto, Wisconsin.

Other manufacturers are responding to customer expectations in other ways. "Our experience along these lines has been not so heavily related to the high end technology as it has been high volume. From our standpoint, the technology issues related more to the introduction and development of multi-plexing in particular and the lesser threat of fiber optics. There are a number of existing customers and markets going down these paths and the challenge is to keep up on the development or be replaced by a company that has." explains MCS's Tim Wright.

Supply Chain Management Key to Success

Gearing up for higher volume customers means developing strong partnerships with other companies in the supply chain. That means sharing information and forecasts and putting in place a mechanism for relationship-building. Some companies are not equipped to make the kind of commitment required for this new supply chain mentality. It requires considerable soul-searching as companies identify and re-engineer around core competencies and then find other companies with complementary capabilities with which to partner.

"Ninety-two percent of our terminals and 90 percent of our wire is purchased via electronic replenishment methods, focused on a supplier partnership," says Unlimited's Mike Williams. "We believe the future requires harness companies that can support Just in Time customers."

The "build-to-order" movement means that OEM customers are expecting wiring harness makers to reduce their leadtimes to a matter of days. They want them to deliver assemblies to the OEM manufacturing site just in time to be built into a piece of electronic equipment ordered by the OEM's customer just a few days before. And they really don't want to pay for that assembly until they have paying customer for it themselves. That's what they mean when they brag that they have "zero" inventory.

The "build-to-order" type of customer requires a different kind of cable assembly business to service it. As we talk to the top cable assembly producers about this new environment, we hope to offer Wiring Harness News readers new insights into the future of the industry. Watch for next issue's report on the Top 20 Producers.