Three Industry Giants From WKK Gather Around for Discussion
During the recent HKPCA show I had the opportunity to catch up with Hamed El-Abd, Lionel Fullwood, and Gene Weiner. Our discussion covered an array of topics, from politics to new PCB factories and what it takes to stay competitive. Below is the transcription from our conversation.
007: Here with me today is Hamed El-Abd, Lionel Fullwood and Gene Weiner from WKK, welcome guys.
GW: Barry, it’s good to see you again in China, the number one economy in the world as of this quarter.
007: Thank you, and that’s what I’ve read just this morning.
GW: And that is clearly because of numbers, not because of technology. The leading technology here is still coming in from the foreigners, including the Taiwanese, who are classed as foreigner.
007: Gene you’ve been coming to China for many years now, correct?
GW: Since 1983.
007: One of the things that strikes me is the amount of change that has happened in just the last five years in particular. What changes have you seen and what’s your opinion on it?
GW: Well with the change a lot of it is superficial. Much of it is a new younger government tightening up, and much of it is from a stronger economic position globally and a stronger military. The Chinese have put themselves in a position to be a power player, if not the power player in the world. They’re still copying, copying, copying and not paying much attention to specs. Mostly it’s homegrown products for homegrown companies, with the best technology still coming from Europe, the U.S., Japan and Taiwan. From Taiwan I would say it’s the application of the technology improvements done by ITRI, their government sponsored research, as well as their major companies.
007: In comparison to the U.S., where obviously you've spent a lot of time, what do you see happening from your point of view?
GW: The U.S. is struggling to maintain a position with a government that appears confused with economic, domestic, and foreign policies. However, quietly happening in the U.S., and not for volume but for technology, we're seeing some great advances in R&D in chips, packages, chipsets, as well as the quiet building of new automated factories in captive shops not publicly known. Lockheed has three in-house printed circuit shops and the public thinks there's only one. It’s now become an open secret that Intel is building a shop in Chandler. Two weeks ago Lionel and I visited Whelen’s new factory in New Hampshire and it’s the first fully automated new printed circuit shop in North America—and I really mean fully automated. The only things that were not part of the automation line was a separate semi-automatic layup set-up and multilayer pressing line by Burkle, an offline ENIG electroless nicke/gold and a plasma machine. Everything else was inline, automated, with a very modern design. Instead of treating the air and water of the entire building they use semiconductor techniques with tunnels around the equipment, making it easier to maintain the environment, and they didn't have to get one single permit for waste treatment because the plant is almost 100% total recycle of air, fumes, and liquid. Copper is plated out of the spent etchant, the ammonia is recaptured and put back in—it was amazing. And we were watching the first runs of 100 panel lots when we were there, and Lionel is doing some evaluation of some new imaging equipment which we can't give you the details on until perhaps spring.
007: Are they in production now?
GW: They're debugging the systems. They started from zero, they put in a building, and they have 12 engineers and technicians running two shifts a day.
007: They purchased a lot of U.S. fabs as well didn't they?
GW: Yes that was interesting. They have a custom-designed plasma, they have a custom-designed waste treatment system designed by the general manager of the plant, an oldie in our industry, Alex Stepinski of Sanmina and other places in the past. They have some innovative approaches to the handling of the legend ink to the handling of solder masks to protect the layer that goes down before the legend ink. It was highly innovative, their plating was all horizontal, by Atotech (that's western), and the machines were dual routers, single station, high versatility and they paid 10% more than say a 5-6 spindle set up or the equivalent. I said, "Why did you do that?" and they said because the versatility and productivity is greater. I think much like many other things, the days of conventional electroless copper are gone. They're using the latest Isola products. The days of conventional drillsets are gone, although there's always going to be some. The days of imaging using photo tools are waning. It will be a minor part of production except for maybe the Chinese copycats within 10 years.
007: You know I went to visit Dongguan Somacis Graphic (DSG) out in Dongguan recently and I was thinking here's a company that came in not with a Chinese mentality but a business mentality.
GW: A European business mentality—very smart and very successful.
007: They set up a factory and have 470 people and they're pumping out $60 million in sales and plan to double that without adding additional staff. I'm thinking, why can't we do this?
HEA: Nobody wants to spend the money.
GW: Well we can do that. Yesterday Phil Plonski, senior managing partner of Prismark Partners, gave a paper. One of his conclusions is a little beyond that which his other partner gave at the IPC meeting in North Carolina in that we have two opposing forces at work here: The need for volume at a lower cost and the need to develop and insert new technology and support the funding. The OEMs are out of it, many of the ODMs have decided to brand their own product and now we're seeing the Chinese smartphones in Europe and the U.S. In addition to that, the supply chains have concentrated. WKK is a major supply chain supplier. As the industry consolidated they consolidated their supply chains. So for a small independent that has a breakthrough, to break into the trusted supplier for the large guys running millions of parts is very difficult. So we have opposing forces and a new method of marketing the entire thing.
LF: I think you have also got the situation where the local and central governments supporting China is all for the companies. They understand that this is a competitive world; they understand that their market is essentially outside of China at least for the foreseeable future; ergo the whole mechanism is such that you could get a shipment out of China in one day. It appears, and this is my personal opinion, that the U.S. government is adversarial rather than supportive of business developments in the U.S. Even clean business, even automated business, because as you said it doesn't matter where that factory is, you can put it anywhere in the world that's supportive, but China is much more supportive of the concept than we presently have in North America.
007: Interestingly, while I was visiting DSG, Mauro was saying that the government is encouraging not bringing in employees and instead to bring in automation, because the government realizes they have to go this route to stay competitive, at least that's how I interpreted it.
GW: Additionally, they have to do it to gain world standard in quality. If they don't do this they can't compete in quality globally. There’s an interesting thing yesterday when I went to Hall 2, which is just chemicals and materials. I spoke to one company and they said their revenue doubled this past year and their profits declined. I asked why and he said to look at all the copycat, reverse engineer companies here in chemicals and materials. They are all new and they're coming out claiming to have everything. They first thing they say is “My boss used to work for MacDermid” or “My boss used to work for Dow Chemical.” The second thing they say is “I have the cheapest parts.” Nowhere do they talk about service, nowhere do they talk about performance, and nowhere do they talk about consistency. So in a way, many Chinese are succumbing to the conclusion that price is king, not cost, price.
007: That’s interesting.
GW: It's a different look.
007: What do you think about China, Hamed? We talked about China a few years back, and in the last five years has your perception or attitude shifted at all?
HEA: No it hasn't shifted that much really. I think that the Chinese are going to be faced with a lot of very difficult problems. As Gene was just saying, everybody is copying each other and it's creating a situation where you really don't have good quality products because one guy copies another guy who copies another guy. There's no respect of the information, technology and the proprietary technology that you have out there. But given the country as a whole, they're having a lot of problems. First of all their healthcare system is basically not really in place and the government is very seriously concerned about how they're going to deal with that. Gene was mentioning a minute ago about the shift in power and how they're now number one and the U.S. number two. They do believe that they are the real economic power today. They do believe that they're building a military which will be able to show that force that they have, as the United States has done for years.
I have my serious doubts whether they are really there yet or not because they're copying in that area as well. You know they just released a fighter jet which copies the F35 but it will be five or six years before it can really run under combat conditions. There are a lot of things that you have to be concerned with and one of things that I have mentioned over and over is the amount of automation that is coming here. As a matter of fact in order for these big boys to compete they have to accelerate automation. We just had a customer this morning tell us “I want that machine, but I want it automated. If it's not automated I'm not going to get it. I want full automation.” So then you have to ask yourself a question, if they automate as much as they're going to be automated, what are you going to do with all the people? America has 300 million people and they have 1.5 billion. There’s going to be some uncertainty because their population is so large and they're still not at the education level where they can do other things and it will definitely affect their economy. We were talking the other day about Foxconn putting in a hundred thousand robots this year, next year they want to up it to a million robots and the year after that even more. But what are you going to do with all the people? We have to begin to think about that today.
007: Interesting that you mention it because I was looking at the new generation of young people here and it’s so different from just 10 years ago—their attitudes, the status that they're going for with iPhones and such, and especially the amount of cars. Holy-smoley, there used to be one or two cars in a parking lot.
HEA: And they're all good cars!
007: Yeah, they're Audis and BMW and so on.
LF: The problem with the young people here is that they've all been weaned to have an expectation now from material growth, and there's just not going to be that much available and it's going to cause a lot of unrest because of this expectation level. "Hey, why can't we have that? Why can't we have it now?"
GW: Yes, there are several things. First will be the expectation, secondly more and more Asian business managers are saying “We no longer trust the Americans, it's too expensive to do business there. Yes we like to own property there, but I don't know if we want to actually be there.” At the same time we look at the other changes on taxes—we're still increasing taxes and they are not. So even if we built these things in the States, to whom are we going to sell them? We’re importing it but we still have to export it.
HEA: I think that Gene makes a very good point. If the United States government continues to increase taxes on American business, why should we do anything there? You’re a businessmen and they're going to go where the best deals are. Our corporate tax rate today is 39%, it's crazy! We used to joke about the Germans being higher than us and now we're higher than the Germans. It's ridiculous. I'm just hoping that the next administration begins to address these issues, because this administration doesn't get it all, or business will continue to decline and leave the country. The other very important point that Gene and Lionel mentioned earlier is when they visited the new Whelen factory, a fresh new PCB plant and one of the first built in 20 years in the U.S., and it only 12 people running the entire factory. This is where we need to be going to bring back business to America but at the same time, what are you going to do with the people that aren't going to have jobs? Do you think Ferguson was the beginning?
007: That was just a demonstration of what a fine line civility and chaos lives on.
GW: Well that came up in another conversation with some of our Asian friends yesterday too. They said in Hong Kong the civil disobedience leaders voluntarily walked into police stations even though there was no arrest warrant out and said here we are, and then they were sent home and they walked out. In the U.S., following the due process of law with a result according to the due process of law, we have riots and parades all over the country. And I cannot believe they were not organized. They were all happening simultaneous, at the same type of targets carrying banners that were premade and if you look closely at the news videos you will see people in the crowds with microphones and so forth coordinating the whole thing. The Chinese must look at us and say "And you were talking about our little demonstration?" We're worlds apart and they think we're headed towards a Third World country and their fast moving to a first world position.
007: Well, bringing it back to the PCB industry, it's all about automation, automation, automation.
HEA: Absolutely, if you don't have automation and are going into automation it will have an effect on your ability to sell. These people need to make money and the other issue is that in China the increase for salaries of factory workers is mandated by the government. So if you look at the last few years, they've increased 20% a year so they're over a 100% increase in the last five years. If they continue to go there that'll force companies to automate, and they'll have to start having to get rid of these people. The government is also mandating things with regard to social costs, health care and things like that, which people didn't have here before. Now all of these factors are coming in to add cost. It is now cheaper for you to get a senior level engineer in Malaysia, Thailand, and Vietnam than it is one here in China. So how soon before people say, "Hey, maybe we need to move."
LF: It does also require innovation. We can't keep using the same old technology. We have to have, for example, better and more efficient ways of transferring data to the substrates. You have to be able to provide at the substrate level the quality that's needed, because as you drive the geometries down, the incidents of fails and defects goes up. Unless you innovate in that area you're not going to get the yields you need to provide the products at the prices we need.
GW: This leads to the newest generation of opportunity for actual equipment. As we are all now working with the cloud, we now have the fog coming, which is local and regional versions of the cloud where you can extract information locally where you need it, quickly, instantly, and then put it back. And that's going to create another whole industry of electronic arts as well as software.
HEA: There is one other area which people don't even talk about, and it's even complicated for me to talk about it here, but it's the massive amounts of corruption, even within our industry. People want to sweep this under the rug and you can sweep it under the rug all day long, but only the other day we were sitting here talking to one of the very top companies in all of China. They were saying how they know what's going on even within their own company and they just look the other way. Of course we know that the Chinese government is addressing it, but the government is addressing it at the government level and they haven't even started to do this at the business level, and it is a very serious problem. They have just put under house arrest or in jail 50,000 government employees—that's a huge number and that's just scratching the surface. You can imagine how much that number would be in business. As a public company, it's not in our DNA to even think about things like that but when you deal with it on a daily basis we are forced to walk away from orders after orders after orders. The way people are getting those businesses is because of that. This is different than the West. China is going to have to learn a very hard lesson sooner or later.
GW: Wouldn't it be nice if in America we followed the rule of law that we talk about and put under house arrest 50,000 government employees that are corrupt? (Laughs.)
007: The thing that is interesting though is the rate at which technology is changing and how we're going to start applying circuits. 3D in my mind is something that is really going change everything.
GW: Well that takes away a lot of the circuit board though. About 3-4% of the surface of a circuit board has already converted to packaging for the past year of what would have been circuit boards. We will continue to see that, but when we talk about 3D though—rather than stacked vias, which are coming but it's too costly yet, especially silicon through vias—the costs are still prohibitive for now and a percentage of that will be integrated into chipset. But the total volume of parts will go up and there will be more smaller parts. It was a fact that last year the surface area of substantive laminate consumed went down. This will be a trend. The net effect was that my guess is in the next five years globally we'll see an increase of printed circuit board production of between 4-7%. With the leaders being packaging and automotive. We see a great deal of movement towards sensors that detect motion nearby and direction of the nearby motion. These are going into automotive things, smart tablets, cell phones, etc. So that business is going to continue to explode. If I would put my money on it right now the way things are in the world, I'd say military boards are going up, though they'll be more secretly done and they'll be in the whole country. Medical boards will continue to increase, it's not a big number, but it'll be in the domestic things in Europe and the U.S. In China, even though the doctors are hustlers here, they don't want to touch anything unless it's FDA approved, and that's United States. Although some of the boards are made here in China, they’re not from as sophisticated of plants.
007: Well guys, it's been great chatting with you. I always enjoy our conversations.