Following your OEM customers: What's in it for you?

The name of the game is follow the leader, and in this case the leader is business equipment maker Hewlett-Packard (H-P). The followers are four custom injection molders. First it was to the Northwest. Next it was to southeast Asia. Now, it's to Guadalajara, Jalisco, Mexico.

Guadalajara has been dubbed the Silicon Valley of Mexico. Located about 200 miles northwest of Mexico City, Guadalajara has long had a reputation as a major manufacturing center. Several large electronics, telecommunications, computer, and business equipment OEMs are there and more have announced plans to go there.

The custom molders are the Scottsdale, AZ-based Tech Group; Puget Plastics Corp. of Tualatin, OR; TriQuest Precision Plastics headquartered in Vancouver, WA; and SPM/Dynacast headquartered in Anaheim, CA.

How OEMs Attract Molders

H-P operates plants worldwide, but the ones in Vancouver, WA and Corvalis, OR-sites of the company's huge printer manufacturing operations-have been a magnet for molders. H-P uses an enormous number of plastic parts and has a stable of custom molders to supply those parts. Additionally, H-P is considered one of the best OEMs with which to do business. Is it any wonder that molders chose to follow it to the Northwest? Puget and TriQuest were already in the area. Tech Group built a greenfield plant several years ago to be near H-P. SPM/Dynacast purchased an existing company in the area with plans that H-P would be as much as 40 percent of that plant's business.

That plan never materialized, according to Andre LeBlanc, chief operating officer for SPM/Dynacast. H-P then made the decision that the work being done in the Northwest would go to H-P's Guadalajara operations. "So off we go to Guadalajara," says LeBlanc, speaking collectively. However, SPM/Dynacast didn't go there solely for H-P. There are other OEMs in Guadalajara in addition to H-P, such the Philips/Lucent joint venture, Philips Consumer Communications, and IBM. The others agree that there's more down there than just H-P.

On the Move

That's a good thing, because the most recent move in this high-stakes game of chess is H-P's decision to take the work slated for Guadalajara and move it to Singapore. This decision has affected all of the molders to some extent. It also affected one moldmaker who lost a $1 million tool package to an offshore mold shop.

"This is symptomatic of the volatility of the OEM/supplier relationship that exists in today's fast-paced, competitive market," says LeBlanc.

Puget Corp.'s vice president and general manager Jerry Schmidt says that company does a lot of work for the H-P group (VCD) that makes the high-volume, lower-priced printers for the general consumer market. "We made a decision to go to Guadalajara based on the overall market in the area," Schmidt says. "Albeit, the decision was spring-boarded on the expectation that we would get H-P work." Schmidt explains that it was another H-P printer group (VPR)-lower-volume, higher-performance business printers-that decided to go to Singapore. "We had ultimate expectations of getting some of that work, too, but we'll be doing work for the VCD group, so we're not impacted by the decision to take the work to Singapore."

Fred Smith, regional manager of business development for SPM/Dynacast, says he sees this trend of moving work around the globe in search of lower costs accelerating. "If a company goes from California to Monterrey, Mexico, then to Malaysia, then to China, then where next?" he asks. "The timelines between these shifts are compressing from five to six years to three to four years to a year or less. When you make a heavy capital investment, that's tough to deal with."

In spite of recent decisions, H-P is firmly committed to Guadalajara since going there with a plant in 1982. Brad Whitworth, international communications and public affairs manager for H-P in Palo Alto, CA, explains that H-P's printer products have some of the highest volume of any of its product lines. "We can't produce these volumes alone, which is why you find a lot of molders helping H-P accomplish its mission," says Whitworth.

H-P's policy is to encourage local procurement, to help build the local community, and to ensure the supply lines are short-to be next-door neighbors with suppliers who understand the company's needs, Whitworth explains. "Guadalajara is important to reaching our Latin American markets, which are the fastest growing today."

Whitworth says H-P wants its products assembled as close as possible to the market where they're destined. Since the Latin American markets are growing so rapidly, getting products to dealers as quickly as possible is crucial to sales. "We can't put products on ships," says Whitworth. "We are continuing to manufacture in all regions of the globe, but the growth isn't in the U.S. The real growth for H-P's products is outside the U.S., both in terms of sales and manufacturing."

The Commitment Issue

H-P is always up front with regard to its position with suppliers. The company looks for suppliers that are committed, as H-P is, to serving the end customer. But commitments to suppliers are somewhat more ambiguous. "When we make a commitment to a community, it's part of our corporate objective to be there long term," says Whitworth. "We look for suppliers that are committed to the community, not just necessarily to us."

Consequently, H-P doesn't want suppliers to make any large, capital investment based solely on its business. "We're a major player but we're not the only one there, and I hope people aren't making business decisions based just on H-P. I hope that people arein this for the long haul, for good, strategic reasons and not out just to make a quick killing." Yet most molders locating new plants, whether inside or outside the U.S. borders, do so on the basis of one customer. Using that one customer as a baseline, they then tap into other opportunities that arise in an area.

Schmidt of Puget agrees. "We don't believe it's wise to have a long-term strategy based on a single customer. But short term you can use one customer to spring-board your business in an area."

SPM/Dynacast has done this several times with Northern Telecom, and done it quite successfully through contractual agreements, notes LeBlanc. Today SPM/Dynacast has eight times as much business with Northern Telecom as it had four years ago. At the company's Calgary and Wales facilities, Northern Telecom is 90 percent of SPM/Dynacast's business.

However, LeBlanc cautions that "trying to diversify away from a giant is difficult." He advises molders who put up a plant for one initial customer that they "must work immediately to diversify away from that customer or you become immediately known as a captive shop. It's then hard to convince anyone else they'll get equal attention."

According to Whitworth, H-P likes to do business with suppliers over the long term and not change suppliers if at all possible. "We like to see them become successful," he says. "Our preference is to work long term with suppliers." However, because the nature of high-tech business is one in which things change so quickly, H-P shies away from contracts. "We don't make the promise, but we do behave as if things will be long term," he says.

But it's really the molders that take the biggest risk when they choose to follow a customer without contractual assurances. Brent Stumbaugh, CEO of TriQuest, isn't yet convinced on Guadalajara. "It remains to be seen whether we'll all be successful there,"he says, a tone of caution in his voice. "It's not a done deal by any means; it's still somewhat of a grand experiment."

He notes that H-P is a customer, but not the only customer the company has in the area. TriQuest went to the area a year ago and purchased a contract manufacturer. Warns Stumbaugh: "Anyone who goes there betting on one customer is taking a high-risk gamble. My concern is what happens if these big OEMs decide to leave this area to go somewhere else," he adds. "Suddenly you've got machines everywhere and no work."

Schmidt concurs. "Be nimble on your feet," he advises. "Don't get so entrenched in geography that you can't pick up and move. Realize that following OEMs around the globe has pitfalls."