A New Start

FT: Steiff teddies head home as outsourcing is too much to bear

Steiff teddies head home as outsourcing is too much to bear

By Gerrit Wiesmann in Frankfurt

Published: July 5 2008 03:00 | Last updated: July 5 2008 03:00

In the 106 years since it was invented, the cuddly teddy bear has become a bellwether of capitalism.

The plush toy was pioneered by Steiff, the German company that claims it made the first bear with moveable arms and legs in 1902.

The mohair and felt invention came just as the citizens of the US were celebrating the humaneness of then president Theodore Roosevelt, who spared a bear on a hunting trip. Steiff was soon able to snag a burgeoning export market.

A hundred years later, the company helped swell the outsourcing wave as it moved about a fifth of production from high-cost Germany to low-cost China. Five years later, it is in the throes of moving it back, having learnt that cost is not everything.

The privately-owned company in southern Germany joins a steady stream of small, specialised western companies that have found the lure of cheap Asian labour outweighed by the added difficulties - many unforeseen - of manufacturing there.

"We have learnt our products are better if we make them ourselves," says Martin Frechen, co-chief executive of the firm in Giengen, Baden-Württemberg.

"The things we wanted to be done were not the things the Chinese were used to doing." He stresses Steiff never had problems with safety standards that some US importers have struggled with. "Things were also fine in terms of quality," he recalls. "But when we looked at whether this was sustainable, big question marks arose."

This was less a symptom of purported Chinese laxity than changing priorities at Steiff. Mr Frechen and co-chief executive Wilfried Blömke-Trox, installed in 2006 and 2007 respectively, decided to bring the brand back to its high-quality roots.

"Steiff had tried to enter the €20-€30 ($31-$47) range - before, some products had sold for €100," Mr Frechen says. "But cheapness meant an end to uniqueness. So we switched from price back to quality" - a Steiff bear now costs €30-€80.

But the high turnover of staff in China made for problems. "It takes eight to 12 months to get a seamstress up to speed," Mr Frechen says. "As sewing is difficult and making microships easier, we worried about keeping enough trained staff."

There were also the disadvantages of distance that Steiff had born stoically up till then. High transport costs and overbooked container ships meant the company had to buy pricey space in advance, sometimes to find out no shipment was ready. Outsourced production is meant to be fully in-sourced again by late 2009 to factories in Germany, Portugal and Tunisia. They employ 800 people. Transport savings and selling more expensive products are expected to cover the rise in the wage bill.

Mr Frechen declines to divulge numbers. But he says repositioning the brand and moving production is helping a bottom line hit when Steiff went down market five years ago.

He clearly feels global trends in manufacturing are a less to blame for Steiff's recent roller-coaster ride than changes in the retail front end. He notes that US department stores once accounted for 30 per cent of toy sales, but today it is just 1 per cent.

"Soft toys in the US are now dominated by the discounters. Wal-Mart, Target and Toys R Us account for over two-thirds of sales," he says. "Retailers and customers think soft toys have to be cheap - it's a trend we're seeing elsewhere as well."

As a result, Mr Frechen says, Chinese toy manufacturers "always think in terms of price and volume." Any one with "complicated" criteria should think about keeping manufacturing in-house. "We say soft toys don't have to be cheap," he says.

"For children, surely only the best is good enough - the best design, the best production, the best safety standards," he continues.

"Soft toys help to comfort children, they're vital for a child's development," he concludes. And maybe for capitalism's, too.

Copyright The Financial Times Limited 2008

FT: Truck maker heeds firemen’s call

Truck maker heeds firemen’s call

              By Hal Weitzman

Published: May 12 2008 19:42 | Last updated: May 12 2008 19:42

Anyone who thinks “fire-engine red” is a standard  colour would be surprised  by the paint laboratory at the back of the Pierce factory in Appleton, Wisconsin. On the wall are 125 metal plates, each painted a slightly different reddish hue.

“If you’re going to spend half a million dollars on a fire truck, you’ve got to be able to choose the exact colour you want,” jokes Jim Michal, vice-president of manufacturing for Oshkosh Corporation, the heavy truck maker that acquired Pierce in 1996.

Many western manufacturers have tried to stay competitive in the face of low-cost overseas competition by closely tailoring products to their customers’ needs. Oshkosh takes this approach to the extreme, customising its trucks according to individual buyers’ needs and collaborating with customers on redesigning its vehicles.

Its experience shows how such a strategy can pay off: in the past decade, Pierce has grown at an average rate of more than 11 per cent a year. With revenues last year of $600m – up from $180m when it was bought by Oshkosh – it is now the leading maker of fire trucks in the US with a market share of about one third in North America.

Tim Solobay, chief of the Canonsburg Volunteer Fire Department in Pennsylvania, agrees that Pierce’s customisation strategy helps attract buyers. “We went with Oshkosh because it’s just easy working with the company – you know it won’t become an engineering nightmare.” Pierce trucks are popular with volunteer teams, of which there are about 34,000 in the US and which account for 80 per cent of the company’s sales.

Mr Solobay is beaming at his new fire truck, parked on the factory floor – a slice of classic Americana with rows of gleaming vehicles bearing the emblems of fire departments from Jacinto City, Texas to Downers Grove, Illinois.

Mr Solobay says this is his third point of contact with the company: first, he and his crew met a local salesman to talk about design features, then, last December, they visited the factory to talk in more detail about customising the vehicle. On this return visit – a four-day trip – they check the results and take delivery.

Mr Michal says Pierce’s strategy of working with customers is two-pronged. First, the company tailors each vehicle, from the artwork on its grille to the water-pumping technology. “The customer has an option list for specifications,” he says. “The result is that no two vehicles are exactly the same.”

While that makes Pierce vehicles (such as the one pictured below) among the most expensive on the market, it also wins fierce brand loyalty among purchasers. Mr Solobay says his fire department is paying about $30,000 more than it would for a vehicle from a rival, but adds that for a fire truck that is only replaced about every 20-25 years there are other considerations, such as dependability and the unique features the company offers. “These are top-quality vehicles,” he says. “We know that because our other fire trucks are from Pierce.”

Oshkosh is so confident that its customers will stick with the Pierce brand that in April – while the US industrial sector appeared to be mired in recession – it increased the price of its vehicles, citing rising steel costs.

Charlie Szews, Oshkosh’s president and chief operating officer, says the tailoring strategy has been honed over decades. “We operate in relationship markets. These products last up to 50 years – there are still Pierce fire trucks from the 1950s that operate in the field. We have to think long-term.”

The second part of Pierce’s strategy involves using contacts with customers to aid redesign and spur innovation. Before undertaking a fundamental redesign of its basic fire truck model two years ago, Pierce surveyed its customers to get ideas for improvements. Then the company invited more than 100 firefighters to visit the factory to give them more detailed feedback. It put them in groups and asked them to design their ideal fire truck from scratch.

The company fed ideas from this exercise into the redesign: it removed a pillar from the windscreen and changed the location of wing mirrors to improve visibility; made door handles bigger so they were easier to use for firefighters wearing gloves; and installed side airbags for extra protection.

Oshkosh also used the opportunity to measure firemen – and found out they were, on average, taller and broader than federal guidelines on cab heights and seat widths had led them to expect. As a result, the company widened the standard seats in their trucks.

During a standard sales process, too, the company has a lot of time to get to know its customers. As with the Canonsburg fire department, customers who buy a fire truck infrequently – such as volunteer departments serving rural areas – typically have three meetings with the company over the course of the six months leading up to a sale. Up to 10,000 visitors a year come through the factory to inspect and collect their vehicles, and Pierce uses the opportunity to collect feedback.

“We line them up with a series of lunches and dinners while they’re here so we can hear their ideas,” says Mr Michal. “At every meal we have a staff member from a different department go out with them to chat informally. Then the employees document what’s been said and send it on to the engineering department or the marketing department.”

Bob Bohn, Oshkosh’s chairman and chief executive, says the ability to listen to customers in such an informal setting is an invaluable part of the production process. “It gives them a chance to really tell us what they like and what they don’t like,” he says.

It is only through taking advice on its products from their users that Pierce has been able to claim a progressively larger slice of the fire truck sector, the company says. “These markets only grow at about 1-3 per cent a year,” says Mr Szews. “We need to think differently in order to increase our market share.”

Vehicles built on front-line experience and first-hand feedback

While Pierce’s relations with its customers go deeper than most, Oshkosh adopts a similar approach across other units. Employees in its military arm, for example, spend months living in the field when US forces are testing prototypes and 20 per cent of the division is devoted to parts and servicing. The company has two facilities in Iraq and one in Kuwait dedicated to repairing and refurbishing military vehicles.

Mike Conger, Oshkosh
vice-president and general manager of operations, says his experience of living for three years near government “proving grounds” where vehicles are tested and delivering vehicles to the field is typical of how the company works with the US military. “I could walk around and talk to the staff sergeant or the chief warrant officer and get direct first-hand feedback about how our vehicles were performing,” he says.

As is standard for US military contractors, members of the Defense Contract Management Agency, a unit of the Pentagon, also work on site with Oshkosh. The company brings the dozen-strong DCMA team in to its operations as much as possible, with federal staff sitting in on twice-daily production meetings as well as inspecting quality and processes. Mr Conger says: “We hear the customer’s expectations right on the shop floor, and our employees hear it first-hand.”

Copyright The Financial Times Limited 2008

             

                 

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FT: Silicon feels the power of the sun

Silicon feels the power of the sun 

By Chris Nuttall

Published: March 24 2008 19:08 | Last updated: March 24 2008 19:08

Applied Materials is winning itself a place in the sun with a high-stakes gamble on expansion into the solar industry.

As the world’s biggest maker of equipment for the semiconductor ind­­ustry, Silicon Valley-based Applied Materials is used to providing tools that help others to be creative. But a $1.9bn (£959m, €1.2bn)factory order, understood to be from a Chinese consortium, impressed analysts this month and showed Applied becoming more directly involved with solar.

The order is more than five times bigger than any order the company has ever received for chip tools and demonstrates that the company’s contribution to the success of the technology could be far bigger than occurred in semiconductors. But to achieve this, Applied is undergoing a transformation of its business that includes acquisitions and offering to fit out production lines.

Mark Pinto, Applied’s chief technology officer and head of its new energy and environmental business, speaks with the enthusiasm of an inventor freed to make his dreams come true. “What is exciting about solar for our employees is that we feel like it’s in our hands, we can play a very big role,” he says.

In his previous career as a scientist in Bell Labs, the research division of phone company AT&T, Mr Pinto was frustrated by a company culture that could not get great ideas into the marketplace. Now he is seeing the impact of combining his research efforts with business development in a fast-growing industry eager to embrace new methods and technology.

With semiconductors, he says, Applied has been dependent on oth­ers to come up with “killer applications”, such as Apple and its iPhone, in order to drive industry innovation and sustain demand for transistors and the equipment that makes them. “Solar provides way less than one-tenth of 1 per cent of the world’s energy needs, so the potential market is huge. The killer app is already there – if you lower the cost of solar, the market is there,” he says.

Applied believes its technology is key to making solar energy cheap­er. Announcing its expansion into solar in September 2006, Mike Splinter, chief executive, promised to cut the cost per watt of generating solar power from $3-$5 to $1. “We plan to change the cost equation for solar power through adaptation of our existing technology and new innovation in order to help make solar a more meaningful contributor to the global energy supply,” he said.

In other words, in changing its own business, it is also changing the economics of a new industry. Ap­plied was in a unique position to do this because of its knowledge of handling silicon – a base material for both semiconductors and solar panels – and because of a separate foray into making equipment for flat-panel display makers.

Applied entered this business in 1991. In semiconductors, Applied’s core expertise is in making equipment that can create depositions – thin layers of insulating material on chip wafers. A similar deposition process is needed for flat-panel displays. Applied Materials and display manufacturers discovered they could be made more cost-effectively the bigger the size of glass from which the screens were cut. Applied’s machines for making the panels have grown so big they can no longer fit even on 747 jumbo jets and are mainly assembled on site. Now variations on this equipment have been adapted for solar panels.

Mr Pinto says the company initally assumed only panels small enough to be carried up ladders and fitted on residential roofs would be needed. But the industry has told it that bigger panels are re­quired for utilities to assemble solar farms and for other commercial installations. He says a kind of Moore’s Law is at work, referring to Gordon Moore of Intel’s 1965 paper that predicted the number of transistors on a chip would double around every 18 months. This was really about costs coming down with miniaturisation. With display and solar panels, the economics are also about cost per area, with the costs falling if the panels can be cut from bigger sheets. Installation is also much cheaper with fewer, larger solar panels.

Applied is focusing on thin-film solar, which exploits the photovoltaic effect of sunlight being absorbed by materials and converted directly into electricity. Silicon only 2-3 millionths of a metre thick is deposited on a glass substrate in the thin-film process. But Applied has also hedged its photovoltaic bet by buying companies that are expert in crystalline silicon, whose cells need more silicon, around 175 millionths of a metre thick. Its acquisitions in the past two years include Italy’s Baccini, which makes test systems for manufacturers of crystalline silicon, bought for $330m, and HCT Shaping Systems, a Swiss company that cost Applied $475m for technology that cuts silicon into pieces thinner than the slimmest salami slice.

Paula Mints, solar analyst with Navigant Consulting, says Applied has done the right thing, since she expects thin-film will grab no more than 50 per cent of the market. “There is always a cost/efficiency trade-off,” she says, alluding to the fact that thin-film is cheaper in needing less silicon, but it is less efficient in converting the sun’s rays to electricity.

In thin-film solar factories, Applied’s deposition equipment ac­counts for 70 per cent of the costs. It has therefore offered to equip com­plete factories for panel-makers, while integrating the other 30 per cent worth of equipment such as conveyor belts, sourced from other suppliers. The full solar production line it offers is another departure for Applied, says Mr Splinter: “We have changed the business model here too – when we started in thin-film solar there was basically no industry, so we started off a complete line. We’ve never done this before.”

Tim Arcuri, Citigroup semiconductor equipment analyst, says the Chinese order shows Applied’s stra­tegy of offering large-scale complete solutions is working. “It has been something of a holy grail to build monster gigawatt factories using these big pieces of glass to achieve a very low cost per watt,” he says.

The first Applied-fitted factories are coming on stream this month, equipment orders are expected to be worth more than $2.5bn by 2010, and Mr Arcuri says he can easily see solar accounting for a quarter of Applied’s revenues by then. But the company faces competition from rivals such as First Solar and Oerlikon Solar and the future path of solar technology has yet to be determined.

“This is a huge gamble for us,” cautions Mr Splinter. “We are betting a lot of shareholders’ money as well as our own research and development that this is going to be big and very successful. So far, so good – it’s the greatest opportunity the company has had in many years, but I think we still have a long way to go.”

The whys and hows of cutting what a watt costs

Applied Materials’ venture into providing manufacturing equipment for the solar panel industry is part of a surge of interest in Silicon Valley in the alternative energy.

Venture capitalists have funded start-ups trying new materials and methods to convert the sun’s rays into electricity, while Cypress Semiconductor span off solar-panel provider SunPower in 2005.

Google has the largest solar panel installation of any US corporate campus and has launched an initiative to explore solar thermal power – concentrating the sun’s heat to produce electricity.

With silicon currently the key material used in both semiconductors and solar panels, the Valley is in a good position to put its expertise to good use.

Mike Splinter, Applied’s chief executive and a Valley veteran, says solar reminds him of the early days of semis.

“People are jockeying for position; there are different technologies and materials and we are feeling our way,” he says.

“As the cost comes down, the solar market should scale much faster as there’s a huge market electricity, whereas then there was no computer market.”

According to Citigroup analyst Tim Arcuri: “There’s going to be a shake-out, with there being four or five different technologies and their different supply chains. But when there’s a scrum like this, I would not bet against the Valley.”

Paula Mints, solar analyst at Navigant Consulting, offers a different perspective: “Silicon Valley is a marketing term.

“I don’t think we have any more sand or processed sand than anywhere else. But we do have an area that draws interesting, capable, brilliant people to it.”

Copyright The Financial Times Limited 2008

FT: Make or break

Make or break

Review by Edwin Heathcote

Published: March 1 2008 00:13 | Last updated: March 1 2008 00:13

The Craftsman
By Richard Sennett
Allen Lane £25, 336 pages
FT bookshop price: £19.99

During the birth of the modern era, one word more than any other soaked into the rhetoric of late Victorian and Edwardian polemic – craft. From John Ruskin and William Morris to Adolf Loos and Walter Gropius, nearly every writer, teacher and critic defined their position in relation to craft as an existential reaction to the anonymity and inhumanity of industrial mechanical reproduction. It became the single defining theme of late 19th- and early 20th-century culture.

The machine, it was said, was destroying pleasure. Marx’s commodity fetishisation had become a vortex of manufacture and marketing, and consumer fashion demanded an ever-quicker turnover of shoddy, machine-made goods. The craftsman languished in his workshop, squeezing the last drops of pleasure of his art from a few final commissions for those few surviving men of wealth and taste.

Even the Viennese architect and theorist Adolf Loos, one of the harshest prophets of modernist reductivism, defended his shoemaker’s right to decorate his brogues (as Loos stripped decoration mercilessly from his own buildings) as a last bastion of humanity against the crushing weight of dumb industry.

But, after the industrial slaughter of the first world war, the machine seemed to have won. Craft was relegated to the realm of art and eccentricity. And there it still languishes, a perceived world of floppy pots and ropey brooches.

Richard Sennett’s previous analyses of contemporary cultural malaises covered everything from the decline of public space to the consequences of inequality for respect as a concept. In The Craftsman he launches an unusual and stimulating exploration of craft as a means of doing a single thing well, to focus on something other than ourselves, and therefore redeem some soulfulness from our barren lives.

At the heart of the book is an idea that work need not be about making money but can be about something more existential and profound. In a charmingly (and often slightly ramblingly) eccentric journey, Sennett takes a look at great craftsmen over the ages, from the workshops of Antonio Stradivari and of Renaissance goldsmiths to the strange set-up and motivations of the National Health Service. He takes us back to the creation of Diderot’s revolutionary Encyclopedie (1751-72) and isolates the egalitarian impulse embodied in listing roi (king) near rotisseur (roaster of meats). Sennett identifies the contrast that Diderot illustrates between the useful and the useless, between craftsmen – whose techniques are so extensively covered – and the dearth of anything produced by the idle rich.

In the same era Sennett takes us around the workshops of Promethean Jacques de Vaucanson, maker of the semi-mythical flute-playing automaton, a proto-robot able to play the instrument through a breathing mechanism. De Vaucanson moved on to a shitting automaton duck (ate food, digested, defecated). This was less successful but caught the eye of Louis XV, who commissioned him to create a robot to weave silk in order to bypass surly silkworkers and improve quality. De Vaucanson made the transition from visionary craftsman to maker of machines. With his loom (a later version could be operated by a donkey) De Vaucanson presaged the age of industrial production, the worker demoted to automaton.

A couple of centuries later Sennett takes us through a detailed comparison between two houses by the architect Adolf Loos and the philosopher Ludwig Wittgenstein. Loos’s house is a crafted dwelling, layered and complex, Wittgenstein’s over-thought and overwrought, designed for abstract perfection not imperfect humanity. One is the work of a practised craftsman, the other of a theorist.

Sennett’s studies are the work of a resolutely public intellectual. The Craftsman, like the best of his books, takes an erudite, eccentric, ethical and enthralling route through culture, in this case the culture of making and production. His conclusions – slightly vague but always encouraging – suggest that craft and its cultural and ethical rewards are available to all of us, from the skills of mothering to plumbing. Contemporary discourse can float between the ineffable concepts of philosophy and the abstractions of maths and cyberspace; Sennett is keen to reconnect thinking with making, to revive the simple pleasure in the everyday object and the useful task. There is something here for all of us, even those just sitting in front of a computer.

Edwin Heathcote is the FT’s architecture critic

FT: Book review: Michelin's very own guide

"Mr Lottman's account of the company's behaviour during the second world war is appropriately judicious; occupation provided no easy options. The company decided to keep its factories open; the alternative might well have been forced labour for its employees. The Michelin factories did enough for the German war effort to warrant a Royal Air Force bombing raid. Against that, several Michelins had distinguished resistance records."

==

Book review: Michelin's very own guide

By Michael Skapinker, FT.com site
Published: Mar 03, 2004

THE MICHELIN MEN
Driving an empire      
By Herbert Lottman            
IB Tauris, $27.95, £19.95

 

In 1985, Financial Times journalists went to Clermont-Ferrand in central France to interview François Michelin, head of the eponymous tyre manufacturer.

 

It was the first interview Mr Michelin had given to any newspaper in six years. There was no question of the journalists entering the factories. The interview took place in a hotel - after the next-door room had been checked for eavesdroppers.

 

When the FT returned last year to talk to the new boss, Edouard Michelin, François's son, the interview was at Michelin's headquarters. These days, the company even allows journalists to peek into the factories.

 

There is a limit, however, to Michelin's new openness. When Herbert Lottman, author of The Michelin Men, asked when Edouard was born, the company declined to say. An "always helpful outside source" provided the answer (August 13 1963), along with the intelligence that Mr Michelin's family called him Dou-Dou.

 

So this is not an authorised history. Michelin refused to help in any way, which has not made the book any less readable.

 

Marcel Dassault, the French aerospace pioneer, called Michelin's tyre business "a provincial speciality". A book about tyre-making would be a provincial speciality too, except that Mr Lottman, a New Yorker who has been a journalist in France for 30 years, has a wide sweep, and there is more to Michelin than tyres: there are its famous guides, its celebrated restaurant ratings, and Bibendum, the Michelin Man, one of the world's best-known corporate mascots.

 

And because Michelin has been there throughout the automobile's history, its story is the 20th century's too.

 

Michelin traces its roots to 1830 and a company that manufactured rubber balls. It was renamed Michelin in 1889, when André and Edouard Michelin (the current chief executive's great-grandfather) were invited to run it after their father married into the founding family.

 

Edouard took care of the manufacturing in Clermont-Ferrand. André, living in Paris, became the company's hugely skilled publicist. By now, Michelin's business was tyres: bicycle tyres and horse-drawn vehicle tyres. André Michelin said in 1895 that he did not see much of a future for automobile tyres.

 

He was wrong, but the company caught up, surpassing Britain's Dunlop and Germany's Continental to become Europe's greatest tyre manufacturer. From the start of the automobile age, Michelin campaigned for more and better motoring. The guides, started in 1900 and, initially free, were part of that. If people were going to travel by car, they needed to know what was worth looking at and where to eat: two stars meant "worth a detour", three stars "worth a journey".

 

Michelin was a paternalistic employer, providing staff with housing, schools and medical care. Its leaders were eager followers of the newest management trends, meeting Frederick Winslow Taylor, the father of "scientific management". The company had an employee suggestion scheme as long ago as the 1920s.

 

Against this, Michelin was fiercely anti-union and took a harsh line against anyone who tried to organise one. Leaving Michelin, or being fired, had serious consequences. Departing employees, even those who were dismissed, had to agree not to work for any company in the same field, whether in France or abroad.

 

The Michelins had an early understanding of the importance of air power in war. During the first world war, their factories produced crude bombers. Mr Lottman's account of the company's behaviour during the second world war is appropriately judicious; occupation provided no easy options. The company decided to keep its factories open; the alternative might well have been forced labour for its employees. The Michelin factories did enough for the German war effort to warrant a Royal Air Force bombing raid. Against that, several Michelins had distinguished resistance records.

 

The company's postwar success was based on its pioneering of the radial tyre. Its continued name recognition owes much to its restaurant stars. Mr Lottman knows a lot about Michelin's stars and he treats us to the full five courses.

 

There is a long section on the positive effects on restaurant standards as well as on the negative consequences: high prices, uniformity of culinary style and often intolerable pressure on restaurateurs who covet three stars or, having won them, are desperate to keep them.

 

There is less on how much the restaurant ratings and the guides contribute to Michelin's central business of selling tyres. However energetic Mr Lottman was in tracking down people who would talk, some of Michelin remains hidden.

 

Readers of this newspaper might have liked more on the company's ownership structure, which gives the family and their intimates extensive control but unlimited liability too. There is also little in the way of final summing up or discussion of the future and the publishers have provided a deplorably inadequate index.

 

Enough carping. This is an absorbing, novelistic read: a story not only of a French company but also of French pride, the country's often mysterious industrial success and, finally, of France itself. Well worth a detour.

FT: Meet the world’s biggest chocolate maker

  Meet the world’s biggest chocolate maker

By Haig Simonian

Published: July 18 2007 19:42 | Last updated: July 18 2007 19:42

The packaging promises pleasure, the contents suggest satisfaction, but how many consumers spare a thought for the raw materials in their favourite chocolate?

Key facts

• Sales (2005/06): SFr4.3bn
• Net profit: SFr183m
• Employees: 8,500

Whether a branded bar from a multinational or a gourmet praline made by a specialist, the chances are the raw material will have come from one source: Barry Callebaut, the world’s biggest chocolate maker.

ADVERTISEMENT

About 8,500 Barry Callebaut employees toil worldwide, buying cocoa beans, converting them into chocolate and selling the results. Depending on the customer, the end product can be anything from cocoa powder in packets, liquid chocolate in tankers or dainty little bars sold to individual chocolatiers.

Together, sales to such clients mean the Zurich-based company should churn out more than 1.2m tonnes of chocolate and related cocoa products this year – with Barry Callebaut involved in a good one-in-four of the chocolates we eat.

The only unifying factor is that next to no one outside the business has ever heard of Barry Callebaut, in spite of a surging share price and the fact that the company has generated revenues of nearly SFr3.3bn ($2.7bn) in the first nine months of the current business year,

“We are by far the world’s biggest chocolate maker, but not so well-known”, admits Patrick De Maeseneire, chief executive. “Most of our customers are wholesalers and prefer to put their names on our product.”

Clients range from confectionery companies, such as Nestlé, Hershey and Cadbury Schweppes, to foods groups like Kraft, Kellogg and Unilever. Although such multinationals dominate sales, the company also caters to thousands of hotels, restaurants and confectionery shops.

Attempts to break away from the business-to-business model and to win more consumer recognition have not always gone to plan.

In March 2002, Barry Callebaut bought Stollwerck, a leading German chocolate company, known for its Sarotti brand.

Instead of enhancing Jacques and Alprose, Barry Callebaut’s two existing consumer brands, the initiative turned sour, with disappointing sales, exacerbated by Germany’s recession, factory closures, job losses and big restructuring provisions.

But Mr De Maeseneire, who joined the company later, defends the decision:. “You shouldn’t say it was a good or bad idea. The market changed.”

He says buying Sarotti deepened the group’s knowledge of the retail market, easing expansion into producing “own label” products for retailers.

Perhaps the biggest lesson from Stollwerck was to reaffirm Barry Callebaut’s focus upon core business.

That awareness was propitious. Many of Barry Callebaut’s biggest customers are reassessing their chocolate needs and show increasing willingness to buy more from outside, whether liquid chocolate or even finished products.

The process reflects changes. Squeezed by rising raw materials prices and ever-stronger retailers, big food groups struggle to contain costs, and turn to outsourcing.

Greater outsourcing can be a sensible response – especially if a specialist such as Barry Callebaut is cheaper and more flexible than in house manufacturing. Such decisions look even more appealing when ageing factories need modernisation or renewal – allowing manufacturers to avoid capital expenditure.

In recent months, Barry Callebaut has signed breakthrough deals with Nestlé, Hershey and Cadbury Schweppes in what Mr De Maeseneire calls an accelerating trend. Hershey, for example, only started outsourcing chocolate supplies two years ago.

In other cases, Barry Callebaut is finding that some established customers want to deepen the relationship further. Nestlé, for example, has not only outsourced more chocolate supplies, but has agreed that Barry Callebaut should take over an entire factory in Dijon, including responsibility for manufacturing the group’s distinctive Lion bar.

“The process has really started. Our customers will concentrate increasingly on marketing, selling and distribution, and less on the rest of the value chain”, Mr De Maeseneire says.

He concedes that rival suppliers, from giants such as Cargill and ADM to smaller local chocolate makers, want to break in. But he is confident Barry Callebaut’s unmatched vertical integration provides an edge.

“Being on the ground in the chocolate producing countries gives us much better quality control. The fact that we then go up the entire value chain can also help us in terms of costs and innovation. And we have unmatched geographic spread.”

Mr De Maeseneire recognises outsourcing has its limits. No big group will source more than 40-50 per cent from an outsider, he concedes. Yet, that leaves room for Barry Callebaut to grow. Just don’t expect to see its name on the packet.

Copyright The Financial Times Limited 2007

FT: The next workshop of the world

The next workshop of the world

By Peter Marsh

Published: July 3 2007 03:00 | Last updated: July 3 2007 03:00

The chief executive of Geekay Polymers, an Indian maker of plastic parts, knew he had a problem. Tiny air bubbles had appeared inside some of K. Kannan'sinjection-moulded components, revealing a fault in the manufacturing process that was already annoying an important Japanese customer and posing a threat to Geekay's expansion plans.

Geekay is one of about 40,000 engineering companies, most of them small, in the southern Indian city of Coimbatore - the site of a novel experiment to try to boost the export capabilities of Indian manufacturers.

Just why Mr Kannan encountered his manufacturing difficulty - and how he resolved it - sheds light on some of the broader challenges facing India as it attempts to emulate the rapid growth of China as a global manufacturing power.

Even after several years of impressive economic expansion, India remains an industry minnow. The country accounted for less than 2 per cent of global manufacturing output last year, as against 13 per cent for China.

Even so, in the four years to 2011, India will be the second fastest growing country in the world after China in terms of manufacturing output, according to Global Insight, a US consultancy. It predicts this output expanding at 7 per cent a year.

James McGill, head of the Asia-Pacific operations of Eaton, a US maker of industrial and automotive parts, says his company sees "a lot of potential" in India,particularly in fields such as "low-volume" manufacturing where design and ability to react quickly to changes in specification are important.

Sajjan Kumar, chief executive of North Carolina-based Sigma Electric, a manufacturer with six plants in India mainly supplying larger businesses in the US and Europe, says: "Because of concerns about such things as China's political direction, a lot of US businesses are worried about adding to their operations in China. They view India as a good alternative."

To exploit this potential, Tata Consultancy Services, an India-based information technology and business consultancy that is part of the Tata group, India's biggest industrial conglomerate, has chosen Coimbatore for an experiment in identifying small to mid-sized Indian engineering producers that could step up their operations to become sizeable exporters.

The job of TCS managers in the project is to "tutor" some of them in ways to make themselves more valuable to potential customers abroad, for instance by improving their technical quality and being more reliable with deliveries.

TCS's project in Coimbatore - a sprawling city 300km south-west of Bangalore - could become the forerunner of a service the consultancy would offer across India. Its plan is to link small Indian businesses with the companies' international clients in fields such as automotive and aerospace manufacturing, particularly in the US and western Europe.

TCS has identified just over 100 companies in Coimbatore - including Geekay - which it thinks could play a role in making parts and complete engineering products on behalf of its clients. It is also working in a similar way with about 90 companies in two other Indian cities, Pune and Bangalore. These 190 businesses could become a core group of potential suppliers for western companies, and which could be added to later as the service expands, so TCS believes.

Geekay is based in a small workshop crammed with injection moulding machines. While most of them sport impressive brand names, almost all were boughtsecond-hand and look slightly the worse for wear, in spite of the attention of Mr Kannan, the company's founder.

With a move into exports (a field in which the company has no experience), Mr Kannan believes he can boost Geekay's revenues significantly, starting with a 20 per cent increase this year on the company's sales in 2006 of $160,000 (£80,000).

Existing customers include Pricol, an Indian maker of vehicle parts, and the Indian manufacturing operations of Sicame, a French electrical goods supplier.

But a potential block to these ambitions is Geekay's lack of technological expertise, a problem manifested by the mystifying air bubbles that started appearing in the components it had been making for the Indian operations of Mitsuba, a Japanese vehicle parts supplier.

"Our parts were being rejected by Mitsuba, and we could not work out what was going wrong," Mr Kannan says. Eventually a simulation exercise on a computer - in a small laboratory set up by TCS in Coimbatore to help companies such as Geekay improve their operations - linked the fault to the way the company's moulding machines were being programmed, as a result of which Mr Kannan was able to fix the problem.

Another company that TCS is helping is Ammarun Foundries, a maker of cast parts for general engineering and vehicles. The business is based on a large site on the outskirts of Coimbatore and has 500 employees, mostly working with equipment that would be considered outdated in other parts of the industrialised world.

N. Visvanathan, Ammarun's chief executive, recognises that if he wants to become a serious exporter he has to improve the reliability of the company's processes and that this can only be done with new investments.

"If we spent $5m on new equipment, I feel we could increase sales to about $20m by the end of the decade, with 40 per cent coming from exports," he says. It is possible TCS could help, perhaps by coming up with ideas for a new business plan or introducing Ammarun to new sources of loans.

TCS hopes that by the end of the year the companies it is working with might be able to win export orders worth a few million dollars, with its part in fixing up thecontracts being rewarded by additional fees from its clients.

Assuming the project works well, TCS could extend it to several hundred India-based suppliers for its foreign clients. The prize: a new source of income for TCS as a "supply chain manager" and the chance to boost growth at its big customers as well as India's network of small suppliers.

Just say no: how a big order can snuff out a small manufacturer

A potential problem for Indian manufacturers wishing to step up exports to the US is that they are too eager to get the business.

They "are reluctant to say no", says Pradip Kamat, chief executive of Indus International, a US-based business that facilitates supply links between the two countries.

"Some [potential partners from India] are not sufficiently assertive in pushing back against what the US companies are asking them to do," Mr Kamat says.

A company might agree to order schedules that it cannot meet.

Partly because of their lack of experience in international business, he says, a lot of Indian companies need guidance on how to frame contracts.

Another potential stumbling block is a shortage of skilled people in engineering.

"A lot of suitable young people in India are choosing to go into information technology and service industry, not manufacturing," says K. Ilango, joint managing director of RSM Autokast, a Coimbatore- based manufacturer.

As for US businesses that are interested in hooking up with a small Indian supplier, one issue is whether the small group might collapse, according to one US executive who has experience of Indian suppliers.

"The finances of a lot of small Indian companies are fairly fragile," he says. "The easiest way to kill some of them off is to give them a large order which they find it difficult to fulfil.

"In the process of tooling up for extra production, they overstretch themselves and can go bust fairly easily."

Copyright The Financial Times Limited 2007

FT: Handset outsourcing

Handset outsourcing

Published: June 19 2007 12:26 | Last updated: June 19 2007 19:48

Nokia is rightly proud of its latest handsets, those “artful fusion(s) of materials and technology”. But at least some of the glory must go to the lesser known Hon Hai, the world’s largest contract electronics maker.

Taiwan, home to the Hon Hai group, has attracted hordes of manufacturers of PCs and electronic gadgets. Cost is naturally a big factor: consultancy Visiongain believes companies can shave 10-20 per cent off materials costs, which comprise the lion’s share of the bill, and a further 5-10 per cent off labour. But there are other advantages, including expertise and speed in getting handsets to market. Making it cheaper to develop a broader range of models means being less vulnerable to flops. And manufacturers’ global reach makes them perfect partners for global players – particularly as the latter sell more into emerging markets.

Handset outsourcing continues to move further up the value chain: into design, component procurement and research and development. That partly reflects margin pressure at the big handset makers, and partly the growing competence of the manufacturers. It also illustrates the trend towards selling into emerging markets, where handsets tend to be cheaper and more readily outsourced. Visiongain estimates that almost half of all handsets will be outsourced by 2010, from 30 per cent now.

There are a few clouds on the horizon, including Taipei’s restrictions on investment in mainland China – Taiwanese manufacturers typically use factories in China to make their numbers stack up. At least there are ways around this, such as setting up subsidiaries in Hong Kong. More worrying for groups such as Nokia is the manufacturers’ push into branded goods in China. Given the latter’s efficiency and scale, they would prove formidable competitors in some of the world’s fastest growing markets. As for investors, it pays to be a geek and take a peek beneath the cover. While Nokia’s share price has risen an impressive 35 per cent in the past 12 months, Hon Hai is up 67 per cent.

Copyright The Financial Times Limited 2007

Forbes: The Soul Of a New Laptop

   

   

Special Report
The Soul Of a New Laptop
Jonathan Fahey 05.07.07

Can a network build a potentially huge new product?

Nicholas Negroponte knew he would need a lot of help. when the former director of the MIT media lab announced in 2005 the idea of making $100 laptops for millions of children in the poorest nations, his support group consisted of a couple of professors in cardigans. The project was ambitious: This machine was not a knockoff of a

Dell

or an

Apple

but a complete rethink, from the motherboard to the escape key.

His solution was to open every aspect of the product's development and design to gearheads around the world who wanted to pitch in. Negroponte eventually negotiated formal agreements with designers and suppliers. But at the start he envisioned a wiki undertaking and set up a sprawling Web site (wiki.laptop.org) with dozens of pages dedicated to the laptop's every detail--its goals and technical specs, downloads of the latest software and problems with the latest prototypes. Wild ideas, practical applications, skin-peeling criticism--it's all part of the process. A loosely connected alliance of staffers, suppliers and volunteers work out the kinks. "There would be no way to launch and ramp in any way other than open and viral," Negroponte says in an e-mail exchange from Taiwan, where he is dealing with manufacturing. "A command-and-control model, the way one runs an army, is not well suited for new ideas."

Negroponte is bound to get much of the credit or blame for the success or failure of this laptop. But, with 1,423 people registered on the wiki, there's really no single author. The $100 laptop, called XO, is the result of broad collaboration, sometimes forced, sometimes serendipitous. The same could be said for many familiar designs, products and processes commonly attributed to a single brilliant mind. The design of an automobile assembly line came from a Henry Ford associate who had visited a Chicago slaughterhouse (and might have been influenced by an assembly line created by Ransom E. Olds a few years earlier). The iconic Jaguar E-Type of 1963 (one of which now sits in the Museum of Modern Art in New York) was largely the result of a designer who applied mathematics he'd learned while creating aerodynamic World War II fighter planes, which themselves came from many different sources.

Design often comes about through a network of ideas--some borrowed, some stolen--that cross-pollinate. That's more easily discerned in, say, medieval cathedrals than in art deco architecture like the Chrysler Building. It took 500 years to cobble together St. Mark's Basilica in Venice, beginning in 1063. Traders and crusaders going East and West brought columns, friezes, statues and mosaics from far-flung places that were incorporated into the church.

Now, let's compress the cathedral-building to a year or two. XO had difficult requirements: It had to sip power, be readable in bright sunlight, be extremely tough and sport a much more powerful antenna in order to pick up and emit signals in isolated areas. In addition, the laptop had to be adapted to one of eight languages and four alphabets. Its overall appearance had to be striking enough that kids would want one. And it had to be cheap.

One laptopmaker refused early on to get involved because, it claimed, success would require "ten or twenty" miracles, according to Mary Lou Jepsen, a former

Intel

executive now serving as the project's chief technical officer. But the miraculous has mostly occurred--thanks to contributions from Hawaii and Haifa, China, California and Chile, Argentina, Brazil, Italy, Taiwan--even from Nepal. "It's breaking all the rules of designing something," says Jepsen. "And it's working better and faster than anything I've ever worked on."

Negroponte's nonprofit group, One Laptop Per Child, has raised $31 million from donors such as

Google

,

News Corp.

,

Red Hat

, Nortel and AMD. The XO is being built by Quanta, the giant Taiwanese laptopmaker, with AMD and Marvell chips and Red Hat--Linux-based open-source--software. The supplier companies plan to make a small profit on the machines. One Laptop will scrounge for grants and other funding to help foreign governments buy and distribute the machines to children. Thousands of late-stage prototypes have been built in preparation for full production starting late this summer. Nine countries have signed on to deliver several million computers.

Many technical challenges have been addressed through unlikely collaboration. Example: access to the Internet in nations without much dial-up or DSL or cable or Wi-Fi. One of the hardware designers, lamenting that the antennas of traditional laptops were buried in the display screen, asked if he could liberate them to increase range. But industrial designers worried that external antennas would be too fragile. At about the same time, Quanta suggested a locking mechanism for the laptop that designers thought was not child-friendly or durable enough. After several iterations, the antennas now stick up like rabbit ears, but they also serve as latches to hold the laptop closed. And they fold down to cover the USB ports and microphone jacks, acting as dust covers. As of the last test, the antennas could survive a 5-foot drop, open. Best, they pick up signals from a half-mile away and then act as routers to bounce signals along, even when the computer is off. The idea is that a single connection in a school could reach an entire community by bouncing from one laptop to the next.

Early in the project the laptop included a hand-crank generator to power the battery. But designers soon found that the size, weight, cost and torque needed to power the machine would be too great. Now the battery is easily removable and can be charged in all sorts of ways, like clipping it into a charger powered by a car battery or solar panel. A Bay Area firm called Potenco came up with a handheld accessory that charges the battery with a pull cord like the one that starts a lawn mower.

The screen was a problem because a typical one costs $120 and uses lots of power. So Jepsen changed the pixel layout, eliminated some costly color filters and changed the electronics so the display could be read even if the computer processor were dormant. Also, she designed the display so that it could be seen in black-and-white or color. It uses one-seventh the power of a traditional screen and costs only $40.

Smaller parts of the computer have come from all over--from so many sources Jepsen & Co. doesn't bother keeping track of who provided what. An engineer in Chile wrote a piece of code that governs a keyboard light. A group in Argentina came up with the calculator application. The user interface is being designed in Milan. Key parts of the operating system are being developed in Brazil. Negroponte says an unknown wiki contributor suggested that the caps lock key be eliminated to save space. And so it was.

Of course, not everyone who pitches in is helpful. To create a custom wireless system, the group had to agree to use proprietary, non-open-source software. That displeased a few, but very vocal, folks in the open-source community. They felt so betrayed by the decision, says Walter Bender, a One Laptop founder, that they vilified the entire project and convinced other software designers not to collaborate with it. But it's been nothing like the horrendous process of designing the structure now being called the Freedom Tower, the edifice that will stand on the site of New York City's former World Trade Center. Tortured by demands from developers, police departments, governments and survivors, the building scarcely resembles the original design by Daniel Libeskind. The current plans have been skewered by critics as the "Fear Tower."

The laptop has taken its share of hits. Bender, who is in charge of software, says that operating in such an open manner has subjected his project to withering criticism because so many people were invited to see early versions nowhere near completion. "We put ideas and machines out in the world long before a company would--we are exposing all of our warts," he says. The computer has a thousand bugs, all detailed for anyone to see online. "There's a risk in showing something that isn't finished," Bender says. "But there's a greater risk in waiting." He expects there to be 500 million laptops in the hands of poor children five years from now--both the XO and other low-cost models under development.

A few miracles haven't yet occurred. They haven't hit the $100 target yet; the machines still cost roughly $150 to produce. And One Laptop Per Child hasn't figured out yet how to get the laptops to all those kids. "We need to think about deployment as creatively as we thought about the hardware and the software," says Jepsen. Ideas are welcome.

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FT: The race for the $100 laptop

The race for the $100 laptop

By Kathrin Hille in Taipei

Published: April 9 2007 03:00 | Last updated: April 9 2007 03:00

When a team of education and technology experts from the Massachusetts Institute of Technology said in 2004 they were going to overcome the digital divide by making a $100 (£51) laptop for the poor children of the world, they were ridiculed.

Technology executives said such an extreme drop in cost would be "impossible". Even those who saw the team as visionaries thought the "one laptop per child" (OLPC) project had no future beyond charity.

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Three years later, OLPC appears to be changing the computer industry, although not in the way its founders imagined. The sector has discovered the marketing power of the poor and has increasingly come to believe that the vast majority of the world's population that does not already possess a computer will be one of the main drivers of future growth.

"Currently the semiconductor population is limited to the 800m people at the top of the pyramid," says Cynthia Chyn, a researcher at the Institute for Information Industry, a Taiwanese government-funded think-tank. "The industry is in search of a PC for the next billion."

Over the past year, global hardware and software companies have announced initiatives aimed at this group. Intel, one of OLPC's fiercest critics, has developed low-cost computers aimed atstudents in third-worldcountries, including the "Classmate" PC and the "Eduwise" laptop.

Its rival AMD has pledged to get half the world's population online by 2015 with a device called the Personal Internet Communicator. Microsoft is supporting the establishment of kiosks in villages in developing countries, where residents would share a computer and just pay for usage.

Analysts see some of these moves as no more than public relations campaigns, defensive attempts to make sure that the respective company's brand or technology has a foot in the door once these countries turn into real markets.

But recently companies have started taking steps that are neither charitynor PR: Dell, the world's number two computer company, launched a desktop computer in China last month that sells for as little as $336, more than 60 per cent below the price tag of its previously cheapest machine.

Quanta Computer, the world's largest contract manufacturer of notebook computers, says next year it will start making laptops that will sell for only $200. It is also making the OLPC, the first shipments of which are due to be made this -summer.

Most of these moves have been made possible because the OLPC project forced a group of companies to develop a laptop with the goal of making it as cheap as possible.

This turned out to be far easier than critics had suggested. Costs were cut by using a cheaper form of liquid crystal display, leaving out the hard disk and running the machine on open-source software rather than Microsoft Windows.

"Not all people need to have as heavily loaded PCs as they have today," says Michael Wang, Quanta's president.

Intel's founder Gordon Moore observed that the number of transistors on an integrated circuit doubles roughly every two years, driving the technology industry to produce ever more powerful devices.

Now, though, computer makers will have to use the most advanced technology to produce "older", simpler specifications, argues Jeremy Wang, Asia-Pacific executive director of the Fabless Semiconductor Association.

Mr Wang of Quanta predicts that many different laptops will appear on the market with price tags between $600 and $200 - the lowest price for a laptop so far. "There will be many different combinations [of software and hardware components] for different segments," he says. Quanta has transformed its OLPC project team into a new business unit. "Their task is to create a market," he says.

Copyright The Financial Times Limited 2007