While perception and expectation have a significant impact on pricing (see: The Cost (Not Price) of Being Global) there are structural reasons why global pricing remains elusive. One of them is the way business is conducted. Even in the most global organizations, profit and loss are still measured on a regional basis. In order to be meaningful, apples need to be compared with apples, and oranges need to be compared with oranges. It makes sense — except in the global supply chain.
Electronics components flow freely around the world — that’s the point of being global. However, this freedom is one of the very reasons achieving a global price is difficult. For the electronics supply chain, it’s all about where an order is booked versus where an order is fulfilled and how channel salespeople are compensated. A distributor in the US convinces a US-based designer to use Part A in an end-product. For its effort, the distributor is compensated based on Part A’s sales. The BOM on the product is quoted in the US, and Part A is priced at $1. That $1 also builds in the supplier’s profit margin.
The product’s OEM uses a Singapore-based EMS to manufacture the product. The distributor, which has a sales office and warehouse near Singapore, can fulfill the EMS order. However, Part A sells for 75 cents in the Far East. Suddenly, the distributor’s compensation goes down because the compensation was originally based on $1, not 75 cents. The supplier’s profit margin may erode to account for the difference between $1 and 75 cents. And should the sale be recorded in Singapore, or in the US?
In the days when products were manufactured and sourced locally, this wasn’t a problem. But the very nature of the global supply chain adds such complexities. There are costs associated with shipping products around the world, currency exchange differentials, and various payment terms. On the surface, a global electronics industry should level the price playing field — the ability to manufacture anywhere and everywhere should even out the various costs of doing business. Dig a little deeper, though, and the realities of regional differences become apparent. Every partner in the supply chain faces that dilemma: supplier, distributor, and customer. Each has its own business interests at stake.
These are just a few of the other factors (besides perception) that have an impact on component pricing. In upcoming blogs, we’ll discuss a few more.