Electronics Supply & Manufacturing: Going Global

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As the demand for wireless headsets grows, market leader Plantronics breaks ground in China on a new manufacturing plant—and a new manufacturing strategy

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BY ARIK HESSELDA

stronaut Neil Armstrong spoke the un-

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1 forgettable 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 mobile-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

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"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, u p 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.

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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.

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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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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 wirelessphone 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 w h o uses a phone, a computer, a game console or an MP3 player—which is to

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say virtually everyone," Plantronics said in a statement. It recently landed a deal to provide headsets to Microsoft 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-

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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 p o tential in so seemingly simple a device. New manufacturing strategy For 33 years, Plantronics' strategy has been simple: buy

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about $15 million on construction in materials and partially assembled its 2006 fiscal year, for a total project products in China and elsewhere in cost of $20 million. The initial head the Far East, and ship them to a fivecount in Suzhou will reach 800 in its building Plantronics complex situatfirst year of operation. ed about 15 minutes from the U.S. The new facility makes sense for border in Tijuana, Mexico. The coma few reasons. For one, it will save plex comprises about 250,000 square money on subassembly work curfeet and employs about 3,500 people. rently outsourced to Asian contracThere, products are assembled from tors, said Walters, the senior vice the subassembled components president for operations. For another, brought in from China, then packit will in time give Plantronics the aged and shipped out. Plantronics needs more presence it needs to attack the burBut Plantronics needs more geoning market for consumer techmanufacturing capacity. So, over the manufacturing capacity. So nology in China. course of the next year, it will add over the course of the next 200,000 square feet in Suzhou, ChiToday, Walters uses subcontracyear, it will add 200,000 square na, about 60 miles west of Shanghai. tors in the Far East for materials acfeet in Suzhou, China. In time, Plantronics expects to triple quisition and subassembly work. The its floor space in Suzhou. Accordsubcontractors then ship the proding to its most recent annual financial report, the com- ucts to Mexico, where Plantronics performs final aspany has rights to more than 660,000 square feet of sembly, testing and packaging. property at the Suzhou site. It said it expects to spend Walters said that a tipping point occurred recently w h e n 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 w h e n Roger Lin, Plantronics' president of Asia-Pacific operations, was h a n d e d the task of expanding the company's presence in Asia. Lin, w h o 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 Fastest Delivery on 038999s in the Industry 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 Phone: 800-444-6056 avoid the import duties." Fax-. 631-563-6015 The problem, Walters said, is that while InPhone: 800-595-1115 dia has a ready supply of engineering talent, "it Fax: 407-327-8070 doesn't have the robust group of suppliers that ELECTRONICS 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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i Plantronics is setting up a manufacturing 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 eliminated 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 business in the region or know someone who can walk you through the process? You may want to start by expanding the responsibilities of an executive already in the region to include spearheading a search for your own manufacturing site in the country. Are you prepared to deal with China's peculiar regulatory systems? Stories of bureaucratic bottlenecks in China are not always exaggerated. You need a plan for dealing with the local authorities on matters relating to land acquisition, construction, environmental impact and future expansion of the site.

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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 incorporate 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.

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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 O C T O B E R 2 0 0 5 | ELECTRONICS SUPPLY & MANUFACTURING

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the contents are packed, they're sent of both worlds. I can buy my materiby truck across the border to a Unitals at world-beating prices. But I still ed Parcel Service facility in Chula have to have a place that is close to Vista, Calif. "We can pick, pack and my local market, where I can build ship for $2.50 an hour, and that's a to order and house my finished lot less than what we would pay in goods." St. Louis or Memphis," Walters obOver time, Walters expects the served. "Add to that a materials chain Suzhou plant will grow in imporin China with world-beating prices, tance, particularly as Chinese conand I don't think anyone can touch sumers, already heavy cell phone us on efficiency." users, begin to want accessories for And so what happens to the Titheir ever-more-advanced phones. "Sitting in Santa Cruz, I'll never juana facility when the new one in But these will have to be developed understand what the China comes online? Practically and marketed by people familiar nothing, Walters said. In fact, if all with the needs and desires of the Chinese want. You have to goes well, it will expand. Chinese consumer. be in China to understand "The long-term effect on Tijua"I'm so American that, sitting in what China wants." na is not one that you might exSanta Cmz, I'll never understand what TERRY WALTERS, PLANTRONICS the Chinese want," Walters said. "Our pect," Walters said. "Even with the China site, we are still a build-totheory is that you have to be in China order, pack-to-order operation. Most of the time things to understand what China wants." • 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].

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