Escatec: Survivor Strategies for the Western Manufacturer

So you think electronics manufacturing is dead or on life support in the West? Wake up. In North America and Western Europe, many electronic companies of varying sizes are taking remarkable steps to set themselves apart. They're holding their own against the "Made in China" phenomenon that has overrun the industry during the last 15 years, and they're helping to erase the notion that the West is not competitive. There's hope in the future of Western manufacturing.

Let me tell you about one such company.

This summer, I visited Escatec AG in Heerbrugg, Switzerland. Nestled in the heart of the Rhine Valley, across from Lake Constance and only miles from the German and Austrian borders, Escatec Switzerland is focused on advanced electronics production, specialized designs, high-value and low-volume equipment, as well as cradle-to-grave electronics manufacturing and supply chain services.

Despite its small size -- about $200 million in annual sales -- Escatec is demonstrating, with some modest success, why electronics production can be possible in high-cost locations in Western Europe and North America.

The products and services demonstrated to me during a day-long visit clearly show why it's premature to sing a dirge to Western manufacturing. Among Escatec's offerings is high-end survey and telecom equipment that costs up to tens of thousands of dollars, and is so highly sophisticated or requires such high-level security encryption that manufacturing it anywhere outside of the West is simply not an option for the equipment vendors and the end customers.

Then there are the products that require such high-level precision engineering and are difficult enough to produce outside of Switzerland -- reputedly the home of nano-engineering -- or other Western locations that the idea of outsourcing them to Asia is a non-starter for OEM vendors and equipment end-users. Many of these products are sensitive equipment used by governments, armed services, highly specialized industrial outfits, and security obsessed firms (such as those in the financial services industry).

Chinese companies and contract manufacturers based in Asia-Pacific may offer lower costs for such equipment, but as long as national boundaries exist and security remains a top priority for governments and enterprises, the production of equipment like this will remain firmly in the West and at firms that can guarantee security, authenticity, precision, and accuracy to the 100th percentile range.

"Some production will never leave the West," said Daniel Pfeifer, global R&D manager at Escatec during a tour of the company's facility. "What we do in Switzerland is make higher value, high-mix and low-volume products that are critical to the customer's operations. There are some products that we make here that the customer won't let us ship even to the United States, not to mention other parts of the world."

Escatec's business proposition is unique, and the fine details reveal the future of Western manufacturing. The company is owned by a Swiss entrepreneur but has operations in both Europe and Asia as well as partnerships in North America. It offers design, project management, prototyping, testing, and regulatory approval for equipment used for critical applications by companies and governments across the world. While the volumes are typically small (sometimes numbering only as much as a few hundred to 5,000) the price is high and the margins deliciously substantial.

Customers typically don't hesitate to pay top price for such equipment because the value to their enterprise is exponentially proportioned to the manufacturing cost. Plus, the certainty of accuracy, security, and authenticity of the products make the value proposition of Escatec and other design and contract manufacturing firms like it across Europe and the US overwhelmingly compelling.

For example, Escatec makes about nine variants of a single survey tool that sells for about 5,000 Swiss francs (that's about $5,346). Many of these tools could be thrown into a pool of water, buried under several feet of snow, or even run over by a truck and still operate much as they did right after passing production quality check.

"We have a unique value proposition," said Gerhard Klauser, general manager at Escatec, in an interview with me. "We offer design, manufacturing, and supply chain services. In many cases, the customer only needs to show up here with an idea and not even a sketch. We'll take it from there."

Manufacturing, of course, is under immense pressure in the West. Labor costs are assumed to be too high because Western engineers reportedly get a much larger compensation than their counterparts in Asia. Plus -- the argument goes -- Western workers have been coddled for so long by employers, governments, and restrictive labor laws that they've essentially become less competitive than their Southeast Asian counterparts.

Please don't believe the hype. There may be some truth to the concept of the "overpaid" Western engineer, but the specialized ones companies need are as scarce as moon rocks; you know where they are, but it costs a lot to get them.

You'll be surprised to hear that companies like Escatec are in constant recruitment mode, actively seeking and often unable to find enough engineering employees to meet their highly-specialized needs. GM Klauser and head of engineering Pfeifer told me the company is seeking engineers to fill slots that have been vacant for upward of six months. The company's strategic location astride three different Western countries, and not too far from Eastern Europe, means it can attract engineers from Italy and as far away as Greece, Poland, and Russia.

Which engineers are most difficult to find? I asked Klauser. Mechanical, PCB, and analog professionals, he said. "What's not so difficult to find are embedded software engineers," he added. "Even these aren't available for easy pick up, though."

"You need to have skilled people here in Europe to meet peculiar needs of the customer," Pfeifer said. "That’s not about to change even if everyone else moves to Asia. Manufacturing has shifted to Asia but it hasn't been eliminated here."

The road hasn't been easy for Escatec, and it hasn't been less torturous for many of the Western manufacturers that still maintain operations in Western Europe and North America. To survive, Escatec has broadened its services and introduced a wide range of offerings, basically taking even the most complicated cases -- as long as the customer is willing to pay for the services. The company operates a strict, lean manufacturing environment; even the receptionist has undergone lean training.

During the last year alone, Escatec has spent hundreds of thousands of dollars on new equipment to reduce manufacturing workflow and increase efficiencies. Even in R&D, it operates a double-barrel strategy where it leverages high-level engineering expertise in Europe for high-margin products, and engineering resources in Malaysia for low-level, multiple touch design and production.

"We do prototyping in Europe when it makes sense and do mass production in Asia when it makes sense," Klauser said. "The Malaysia operation comes in when we don't need constant customer interaction and when we can use the opportunity to reduce production cost."

In a follow-up report, I will discuss how Escatec can take customers' ideas -- just some thoughts about what they would like to make -- and turn these into superb products.

The process of turning an idea into a viable product may be fascinating to design engineers and supply chain professionals, but for customers, the product itself is the real story. I held a production sample of the watch briefly and quickly returned it. The price? About 5,000 Swiss francs. The entire process from concept to design, component procurement, and manufacturing all took place in Switzerland. Score one for the Western manufacturer.