Manufacturing 101 for the modern HW entrepreneurs

Yesterday evening the Hardware Club held the 2nd official meetup at Usine.io.

I was among the three speakers who shared their views about manufacturing. Incidentally, the three speakers represented three different angles: that of a modern hardware entrepreneur that's been there and done that, that of a rare French contract manufacturer operating in Hongkong/Shenzhen/Dongguan and that of the humbly yours, a techie engineer for 12+ years well connected in the Taiwan/China supply chain.

Contract manufacturing for the startups is one of the bigger challenges, if not the biggest, in the scaling phase of the startups.

While a high percentage of the consumers on this planet has been in awe of the visionary product road map laid out by Apple since the late Steve Jobs launched the world-changing iPod in 2001, few have paid attention to the contribution of supply chain management at Apple which until Steve’s death was run by the current CEO Tim Cooke, then the COO of Apple.

It’s an understatement to say that Apple has been the best in supply chain management in the past 5 to 6 years. In fact, Apple had become so good in supply chain management that it has become an inseparable part of its strategic competitivity throughout its rise to dominance with ground-breaking products like iPhone 4, iPad, MacBook Air and now Apple Watch.

There’s a very good reason why Tim Cooke was anointed by Steve to succeed him as the CEO.

However, before modern hardware startups can dream about achieving theApplish mastery in supply chain management, they usually have trouble even in simply getting the manufacturing of their Kickstarter batch done.

Most innovative hardware entrepreneurs that have successfully captured the imagination and emotion, and therefore perceived values, of their first customers grew up in the more developed countries which have long gotten out of manufacturing. The move of these countries toward lifestyle-oriented economies and therefore more consumption of products with higher perceived values coincides exactly with the exodus of manufacturing. As such, most modern hardware entrepreneurs have little idea about how to bring a design into mass production.

Even if in their previous career with Orange or Alcatel they’ve traveled to Taiwan or China to work with the ODM firms to produce their branded products, once they’re out of the big corporates and reborn as startups, they found that their previous friends at Foxconn or Quanta stopped replying to their emails. Even if the talk did continue, the dreaded term “volume” was almost always mentioned right at the beginning.

Alternatively, diving into the sea of thousands of medium-size and small manufacturers littered in the Pearl River Delta (Shenzhen, Dongguan and Huizhou) region is accompanied by lots of risk and information asymmetry that could never be resolved perfectly by contracts or intermediaries.

As much as the relationship between the startups and its VC investors, the relationship between the startups and the contract manufacturers remains one that relies on communication and mutual trust, rather than the Western business protocols bound by contracts or tacit agreements.

And just by speaking the same language — be it Mandarin or Cantonese — does not solve the problem. Otherwise there should have been few business lawsuits between the Taiwanese tech firms and the Chinese manufacturers. Instead, such lawsuits are a common theme in the court of Shenzhen City.

Note that this is not due to bad behaviors from one side. Far from it. One has to understand that for the medium-size and small factories, they also suffer from information asymmetry when meeting a startup. They are more used to accepting orders of standardized products (such as WiFi routers and IP cameras) from Chinese and Taiwanese firms, or simply function as the satellite factories for giants EMS firms such as Foxconn or Quanta. To work with a modern-generation hardware startup, whose potential even the big guys fail to grasp, is a much bigger risk to their tiny business than it is to the startup that wants to work with them.

Some of the hardware entrepreneurs heroically pulled off the unthinkable and successfully found trustworthy and capable manufacturers and produced the products after some painful months, such as our fellow speaker yesterday evening and good friend Steve of Smokio. Most have instead relied on professional services.

It is, however, my personal belief that whichever means the modern hardware entrepreneur chooses to start the manufacturing journey, he or she has to learn the game sooner than later, for the following reasons:

  • Manufacturing should not be separated from design. In fact, DFM (Design for Manufacturability) is the key to a good design. And by shunning away from learning the manufacturing process and working with the contract manufacturers, a hardware startup will repeatedly commit DFM mistakes during the design phase which would at best cause delay in the projects and at worst lead to a back-to-the-drawing-board.
  • Crowdfunding batches, whether funded by Kickstarter or Indiegogo, are the perfect time to learn the manufacturing game. The backers are 100X more tolerant regarding delay in delivery (anywhere from 3 to 6 months compared to 12 hours with Amazon customers). They also implicitly gave up on the (nasty) right for product returns (RMAs). This means that the startups have more room for manoeuvre both in time and quality assurance to learn about manufacturing. Those experiences will prove invaluable to the startups in a later stage, shall they turn a niche product-market fit into a medium or even a massive one. And those subsequent products will be designed with manufacturing in mind, making everything much easier to handle.

Some entrepreneurs that are familiar with the lean startup methodology might question that in an age where outsourcing part of the startup operation is a smart and lean way to grow in an early stage, why should hardware entrepreneurs labor to learn the most unsavory part of their business when they should be focusing on “innovation”?

The key difference here is: lean startups can iterate very quickly by issuing updates in their web-based or mobile-based services, while the hardware entrepreneurs do not have this luxury.

When you deliver a physical product into the hands of your customers, it has to be as final as possible or else the bad reaction could overwhelm you as in the case of the (in-)famous Ring, if not kill you entirely. And given that manufacturing contributes to the most part of the first and second impression of a hardware customer, there’s simply very little room for a startup to operate without taking full responsibility from the very beginning.

I repeat and I insist: whichever means the modern hardware entrepreneur chooses to start the manufacturing journey, he or she has to learn the game sooner than later.

To help you achieve that, we at the Hardware Club have built a vibrant community of selected hardware startups based on a spirit of mutual trust and openness. We do not invite two or more competing startups into the community. Everyone that we invite and that agress to join will find themselves surrounded by the trustful friendly community atmosphere where they could share tips regarding manufacturing, marketing and any useful info. Due to this spirit of mutual trust and openness, entrepreneurs could voluntarily share their manufacturing networks with each other, reinforcing the network effect of this community.

We are already seeing exciting things happening inside the community where brillliant startups introduce others to their manufacturers. We fully expect this community effect to grow faster and faster, all under the same positive, open environment.

In parallel, we’ve been building trusted partnerships with different sizes of contract manufacturers:

  • ELEPHANTS: the world-renown gigantic EMS firms with more than $10B annual revenues, such as FOXCONN, QUANTA, PEGATRON, FLEXTRONICS, WISTRON, JABIL and INVENTEC.
  • LIONS: large EMS firms with annual revenues of $500M to $3B. They basically have the same capability and quality of services as the ELEPHANTS. The lower revenues are more of a choice.
  • LEOPARDS: selected expert contract manufacturers in Shenzhen and Dongguan with $15M to $50M annual revenues. These are usually founded by former factory heads in the ELEPHANTS and the LIONS. They're difficult to find but once a relationship is built, they are super agile and super fast in reacting to the startups' needs.

The manufacturing friends of the Hardware Club are bound by the same trust that’s essential to this growing community, ensuring that our community members have access to the widest and the most pertinent manufacturing resources.

Therefore, if you are a hardware entrepreneur and you agree with our community philosophy, you’re welcome to apply at team (at) hardwareclub (dot) co. We look forward to catching up with you!

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