What is Celestica doing

Landis + Gyr boss: "The competition in electronics is very, very intense"

Landis + Gyr boss: "The competition in electronics is very, very intense"

All of Europe wants intelligent electricity meters. What looks like winning the lottery to manufacturers is actually a risky business.

After almost two years on the stock exchange, Landis + Gyr's shares are finally striving to return to light. The titles were issued for 78 francs in July 2017. It was only four weeks ago that the papers managed to return above the 70-franc mark. The price trend actually does not match the strong demand for intelligent electricity meters, which Landis + Gyr has given Landis + Gyr to an increase in orders of a whopping 57 percent to 2.1 billion dollars over the past three years. An EU directive passed ten years ago wants 80 percent of European households to be equipped with smart electricity meters by 2020. The utilities hope for considerable savings in the recording of energy consumption in households. And these should become more economical if they can read the monetary value of their daily electricity and gas consumption in real time. But what looks like huge business to manufacturers is in truth a constant race against costs. "The international competition in electronics is very, very intense," says Landis + Gyr boss Richard Mora.

“We have two to three strong competitors in every market”.

In the past financial year, the more than 120-year-old company based in Zug has made great strides. The 1.6 percent increase in sales to $ 1.8 billion resulted in a marked improvement in profitability. A massive drop in warranty expenses combined with significantly lower overhead costs tripled operating income and increased net income from $ 46 million to over $ 122 million. In July, shareholders can look forward to a substantial dividend increase.

Outsourcing becomes part of the strategy

In order to move forward, however, the company must continue to hone its costs. The company raises an average of less than $ 20 per meter and "every year the price drops by an average of one to two percent," says Mora. The outsourcing of production thus becomes an integral part of the strategy. The execution of a major order from “British Gas” won in 2013 for the delivery of 10 million intelligent electricity meters was completely transferred to the Canadian electronics component manufacturer Celestica in 2018. The devices are to be manufactured in Romania or Mexico. As a result, up to 300 jobs are lost in England.

The project is a first step towards the “asset-free strategy”, as Mora describes the transformation of the company from a manufacturer to a pure product developer. The contract with British Gas is particularly suitable for full outsourcing, he says. "It's about high quantities with few variants". Celestica, which emerged from a spin-off from IBM in 1994, specializes in volume production with 28,000 employees in low-wage countries around the world. Its customers include almost all original manufacturers in the global electronics industry, including companies from medical technology and the automotive industry.

Tough fight and mini-margin competition

There is an uphill battle for minimal profit margins in the electronics industry. Original manufacturers can achieve significantly higher margins in final sales than their suppliers - thanks to their reputation and market position. According to an estimate by the EU Commission from 2012, original manufacturers outsource 80 percent of their production to the five largest suppliers. These include three of Landis + Gyr's core suppliers: Foxconn, Jabil Circuit and Celestica. The Taiwanese company Foxconn is by far the world's largest supplier of electronic components with annual sales of $ 167 billion. Its operating profit margin was just 2.6 percent in 2018. Much smaller providers such as Celestica ($ 6.6 billion in sales) and Jabil Circuit ($ 23 billion) come in at 3.8 percent and 6.1 percent, respectively. In contrast, the best-known original manufacturers such as Apple achieve operating margins of around 30 percent. Landis + Gyr was also able to achieve a margin of over 14 percent in 2018. The direct labor costs in component manufacturing are only a fraction of the total manufacturing costs. But they represent a large part of the prime costs that can be directly influenced by the supplier.

This has consequences: the suppliers to the global electronics industry keep writing negative headlines with extremely low wages and miserable working conditions in large production centers such as China, Malaysia or Mexico. In the process, circles close to the union observe that the sheep get darker the further away they are from the original manufacturers. Much has changed at Foxconn since the company badly damaged Apple's reputation in 2010 with a high suicide rate among workers. The business logic remains the same. Social responsibility in the supply chain is only pushed from top to bottom. Small companies like Landis + Gyr can hardly change that. If you don't play the game, you're quickly out of the competition when it comes to competition. Behind this lies the dilemma of the corporate responsibility initiative, which can only develop its effect if it is supported by the largest countries and companies.

Celestica is part of a group of ten "critical supplier companies," says Mora. This also includes other volume manufacturers such as the American Jabil Circuit or the Taiwanese Foxconn with more than a million employees. A short while ago the closest group of suppliers consisted of around 100 companies. “The recent bottlenecks in the supply of components have prompted us to limit this,” explains the CEO. The supply bottlenecks for printed circuit boards that have occurred in the past two years have shown him the limits of the global division of labor. In many places delivery quantities were rationed and, in the case of Landis + Gyr, there were significant, revenue-relevant delays in the delivery of electricity meters.

And Landis + Gyr's supply chain goes far beyond the narrowest circle. “Just a few years ago we had a few thousand suppliers around the world. Now there are fewer than 1000, ”says Mora, knowing about the high risks of the division of labor. In the past few years, the American had to experience for himself that even small errors in this system can quickly have horrific cost consequences. A few years ago a supplier changed the process for manufacturing special capacitors without consulting customers. The component subsequently proved to be no longer reliable and led to malfunctions in the electricity meters. In this case alone, Landis + Gyr has had to provide warranties worth $ 67 million over the past three years, and the story is not over yet. Nevertheless, Mora assures: “Our supply chain management is well developed. Our suppliers have been in business for many years. "