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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

^ • • • 1

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 arik@arik.org.

"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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