Back in the late ‘70s, some partners and I started a board company with about $50,000. That was only a few years after the 8-bit microprocessor was born. All we had to do was buy some parts, get some double-sided/plated-through boards designed (on a plexiglass light table, with black tape), have the printed circuit boards made, then hand solder the DIP sockets in, insert the chips, do a little code to test it, and ship it to the customer. Those days are long gone, and the cost of being in the board business is soaring.
Board vendors face a plethora of increasing costs today. Just look at the cost of the components (semiconductors, capacitors, connectors, resistors, and so on). The costs of specialty metals (zinc, copper, lead, tin, and others) have doubled or quadrupled in the past 18 months. Silver and gold have risen dramatically over the same period. Metal prices affect the cost of every single component we put on a board. Additionally, every component we use has an energy or petroleum cost component. Shipping costs alone have risen dramatically with the price of oil.
Additionally, we are stumbling through the fog of meeting the Restriction of the use of certain Hazardous Substances (RoHS) requirements cast upon us by the EU. The cost of RoHS-compliant components is higher, because specialty metals are used and the whole RoHS process is more expensive. Some VITA members have told me that they are getting tin/lead and RoHS-compliant components mixed together on the same reel. Their rework costs are soaring when they have to find and remove the noncompliant components from completed boards.
Even if you stay with tin/lead and ignore RoHS (for the MIL/COTS marketplace), you are still seeing component costs rise because of metal prices. To add insult to injury, we have to deal with the Berry Amendment, which says that for DoD acquisitions, you must prove that the specialty metals used in your products are smelted in the United States, or in one of the approved countries on their list. This affects everything from the copper in the PCB, to the screws, to the PEM nuts used in the chassis. It is impossible to prove where the metal was smelted in all the components we use.
But, component cost increases are small in comparison to the new legislated costs of doing business today. Public companies are enduring the massive costs associated with Sarbanes-Oxley compliance and reporting. That has added many millions of dollars in cost for public board companies. Because some CFOs and CEOs got interested in creative accounting techniques, public board companies have to pay part of the bill. On this front, privately held companies have a cost advantage: They don’t have to comply with Sarbanes-Oxley. Perhaps that is why we have seen Freescale and Philips Semiconductor (now NPX) purchased by private equity firms. It is just too expensive to be a public company these days. I think we will see more public companies in the larger scope of the tech industry go private in the next few years, or sell out to larger public companies.
Benefits and administrative costs are also flooding board companies, and retirement contributions are getting heavy. Medical insurance costs for employees have been climbing as fast as component costs, if not faster. FICA (social security) taxes, paid by employers, go up every time the Feds increase the taxable wage amounts. Sales taxes on locally purchased goods and services continue to rise, no matter where you are located.
Another example of added administrative costs is the effect of International Traffic in Arms Regulations (ITARs) issued by the U.S. Department of State. If you manufacture products for the MIL/COTS market, you must comply. Furthermore, managing technical documents associated with MIL programs adds significant administrative and tracking/control costs. There are no direct fees associated with ITAR requirements, but if you violate them, you could pay fines and go to prison.
Just when you think this story can’t possibly get worse, it does. We have Waste Electrical and Electronic Equipment (WEEE) regulations coming at us, from Europe again, that hold the original manufacturer responsible for disposing of those products at the end of their useful life. The customers will ship the products back to you, and you have to figure out how to dispose of them, at your expense as a manufacturer. The retailer, the user, and the distributor all get a free ride on this set of laws, it seems.
Then we have EuP (Energy using Products) laws on the horizon. These are governmental laws requiring products to use less energy and require specific labeling. Not only do you have to sweat through designing your boards to work with multi-gigahertz chips and connections, you must make them use less energy somehow, or you run afoul of the arbitrary energy-use numbers and cannot put an Energy Star label on your product. Are “energy overuse” taxes far behind? People in the U.K. who drive SUVs already pay huge energy use penalty taxes on those vehicles annually. And, they pay congestion taxes to drive them into London, to travel to their offices, or to visit with a customer.
While all this is driving our costs up sharply, the market for our products is very competitive. With all these component, administrative, and legislated costs added to each manufacturer’s overhead, running a board company is a real challenge today. But the markets for our board products are still strong, and most of the board companies are doing an excellent job of managing these increases. That says something about the resilience of the companies in this business.
I’m sure this list of imposed regulations and additional costs forced on embedded board manufacturers is incomplete. If I have missed anything, please e-mail me and let me know.
For more information, contact Ray at [email protected].