PCB Manufacturing Reshoring, Automation, and Sustainability with Alun Morgan

We're joined today by the Technology Ambassador at Ventec and President of the European Institute for the PCB Community (EIPC), Alun Morgan. He and host Zach Peterson have a broad, thoughtful conversation centered on PCB manufacturing. They chat about emerging manufacturing markets, the potential for supplier buyouts, reshoring, automation, and much more. This is a fascinating conversation for anyone looking to get a current view on the international manufacturing market, as well as valuable insights into where it might be headed.

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Show Highlights:

• Intro
• Current Manufacturing Trends in Europe
• Growth in Packaging
• Producing at Scale
• Up and Coming International Manufacturing Markets
• Big Manufacturers Getting Bigger?
• Return to Buying Out Suppliers?
• Variable Costs, PCB Manufacturing, & Reshoring
• Pricing Pressures & Automation
• Automation: Prices, Reliability, & Sustainability
• Wrap-Uponal manufacturing market, as well as valuable insights into where it might be headed.

Links and Resources:

• Watch more of Alun Morgan:
  • Materials Science 101 with EIPC Chairman Alun Morgan
  • Alun Morgan on the History of FR-4
  • Alun Morgan On PCB Base Materials
  • Alun Morgan On Glass Fibre Production
• Connect with Alun Morgan on LinkedIn
• Visit Octopart.com, The electronic part search engine

Transcript:

Alun Morgan:

I think the thing we have to get our heads around is if people are going to insist on having, let's say, a more local supply chain, a more robust supply chain, more supply security, there's a price to pay for that.

Zach Peterson:

Hello everyone, and welcome to the Altium OnTrack Podcast, I'm your host, Zach Peterson. Today, we're talking with Alun Morgan, Technology Ambassador from Ventec, and President of EIPC. You may remember him from his keynote at AltiumLive, he also delivered a keynote at EIPC this year, and I'm very happy to talk to him about some of the manufacturing trends happening around the world. Alun, thank you so much for joining us. So as I mentioned, you've been a keynote speaker at AltiumLive, you also delivered a keynote at EIPC this year. I thought it would be great to talk to you about some of the manufacturing trends that have been going on in the industry. Maybe before we do that, if you could just briefly introduce yourself, and then what it is you do at Ventec, and what you do with EIPC.

Alun Morgan:

Yeah, sure. So I'm the Technology Ambassador for Ventec, I have been for nearly five years now. I spent my entire life in substrates, PCB-based materials, and I've really enjoyed working with Ventec. It means I get to keep pace with a pretty active manufacturer with a very broad portfolio. The good thing about Ventec is they have products in many, many sectors, and I love the variety of working with them in different sectors. So I support their technology, I work with their staff, I work externally as well, giving information to third parties, like EIPC and conferences, and also OEMs and board makers. So that's my role with Ventec. And EIPC, I've been the president now for, I think, nearly 12 years. It's coming up to that. And again, the EIPC exists to support the PCB community in Europe. So we're very focused on PCB, and personally, I am as well. I mean, it's been my... Basically entire career. So EIPC does have a broader reach, we do talk to OEMs, of course, and to designers.

The other thing that's very important for us is the design community in Europe, so I work closely with them, and again, through other organizations in Europe as well. And I think that's how I got the link through to AltiumLive, which again, I really enjoyed talking to a big audience of very diverse industries, and a really, really great event. So I thank you for the invitation to join that, and also the invitation join you today, Zach. Really appreciate it.

Zach Peterson:

Yeah, absolutely. One of the reasons I wanted to talk to you was because as I mentioned earlier, a couple of times, obviously, the manufacturing trends are very important for those of us in the industry, but I always like to try and get the European perspective. I'm in the US, Altium's headquarters are in the US, a lot of our guests are from the US, so we don't often get an opportunity to get the European perspective on these trends. So what are some of the trends that you are observing in manufacturing, and where's the biggest growth area right now?

Alun Morgan:

Yeah, so it's been a hard year, I guess. I mean, that's where we should start from. I mean, we've come out of COVID now, and everyone was hoping that 2023 would show some real growth. Of course, in terms of real GDP growth, it hasn't, but we are looking at PCB growth two to 3% this year altogether. So it's not been a disaster, but I guess people are lining up for next year to try and improve things. We're all suffering with... In new Europe, especially the after effects of the continuing effects of the war in Ukraine, that came as a big blow to us in Europe. We had hope last year to really begin a good recovery from COVID, and suddenly, this disaster fell upon us, which has had big implications for raw materials, for energy costs, and many other things. So that's the backdrop that we are sitting in. Manufacturers have carried on, of course, manufacturing. They've come out of COVID, now back into full-scale manufacturing largely, and we're expecting around two to 3% growth in PCB fabrication this year.

It does bring European PCB manufacturing back to round about the $2 billion mark again. So we dropped down to 1.5, $1.6 billion during the COVID years, or perhaps 1.6, 1.7, and we backed to nearly $2 billion again now, so that's what we're seeing. Of course, one of the big issues that inflation brings is the difficulty for investment. Investment is required in PCB manufacturing and in the materials to supply that. And this never seems to end. The digitalization of our business has caused big investments to be required, and when you've got interest rates running at seven, 8%, inflation running at 10, 11%, it's pretty difficult. There are some signs now of that slowing to some degree, but certainly, I mean the big growth area, it would seem, is in packaging right now. We are seeing overall PCB growth forecast to grow, let's say, five or 6% in the next few years. But packaging, it's double-digit, we're looking at 10 to 12%, so that's pretty important. And of course in Europe, we do have one major player, there's only one in the top, I guess, the top five in the world, and that's AT&S.

[NEW_PARAGRAPH]AT&S is, of course, a very successful and very big worldwide company, worldwide reach, and they really have been leading the way in new packaging technologies, substrate technologies in Europe, and I guess in Asia, to some degree as well, where they have, of course, all the manufacturing. So I guess if I was to summarize where Europe is, it has one very big player in the market, but doesn't have very many other players involved in advanced packaging. Packaging is typically an Asian story, it's not very much a European story. And if we're going to participate in the growth of that market, we need to do something and make more investments into our, let's say, home domestic producers, and that... I know AT&S is investing, and investing in a big way. We were there a couple of years ago, just before COVID, for a conference and we saw the plant in Leoben in Austria. It was very impressive. But obviously, they are very much in that sector, and there aren't many others in Europe participating at the same degree that they do.

So I think that's going to be a story in the packaging side, but also on the PCB side. We are certainly seeing that HDI is growing, especially, say, the finer pitch UHDMI. And again, capacity in Europe is limited for that. We have some manufacturers, the thinking of the equipment required, take laser drilling machines for example, I guess in Europe, we have a few dozen of these machines. How many of them are capable of sub-75 microns? I'm not really sure, but let's say a few dozen. I think similar in the US, by the way, not very different. China alone, the last time I knew, had over 1,000 machines. So we certainly know that China has a very big investment in that kind of technology. I think what's interesting now, when you look at HDI in particular, especially ultra HDI, a lot of these markets for HDI I've been around consumer products, and I'm including mobile phones in that kind of sector, by the way. So that's been a very big driver for that kind of technology.

I think what we have seen now, from a technology point of view, is we've seen that moving away from consumer into more, let's say, other applications. And I can include in that automotive certainly, and I can include space as well. Space is now using HDI, they never did, but now they do. They've gone through the cores, they've gone through all the reliability testing, and now HDI is becoming far more mainstream away from consumer. And that again, I think, is a big move for us in Europe. Europe has never been a big... Or hasn't been in recent years, a big consumer-producer, certainly a big consumer market, but not a big consumer-producer, and that has very much gone into the Asian manufacturing area. So I think HDI is becoming, let's say, more mainstream away from consumer now. And I think that will require another look and perhaps more investment in Europe. But again, that's not going to happen overnight. And let's be honest, if you wanted to buy 1,000 laser drilling machines, you probably couldn't buy them right now.

But I think it will shift the emphasis to some degree, and perhaps hopefully the reliance on the more, let's say... I'd say simpler in some ways, the two layer and multi-layer technology in Europe, which is predominant, is being replaced gradually. And there's more HDI coming along, and I think we will see this grow and grow in Europe. So that's what I'm expecting to see in the next few years, and I'm certainly hoping that we'll get more share of the packaging business as that moves forward as well, because double-digit growth sounds very nice, whereas for overall PCB, it's single digit. So that's the way I'm seeing things right now.

Zach Peterson:

So in terms of the growth for packaging, I mean, double-digit growth, no one's going to turn that down assuming they can get the capital to invest in it, but with packaging, there's really an overlap in terms of capability for UHDI. I mean, I know that the exact steps for the different products aren't exactly the same, however, it seems that if you're investing in one, you're really investing in the other.

Alun Morgan:

Yeah, I mean, the packaging market is basically dominated by flip chip BGA. I mean, that's the biggest sector, but there's an awful lot of other areas in there. When you talk of technology, you get a massive map when you look at this. I mean certainly, flip chip BGA is the major part of it, but there's other things coming on as well. There's the Antenna in Package, the system-in-package coming along as well, quite strongly. And I've seen very high growth figures for some of those other technologies and they will, I'm sure, take a bigger part of this as time moves forward. The question really is the technology requires investment, it requires equipment that's capable of doing this whole range of technologies, and I don't see a great deal of that in Europe right now. Some companies have it, of course, in a limited way, and I mentioned AT&S already, but when we get to more volume manufacturing and more flexible manufacturing, that's going to be a challenge. And one thing I suppose that typifies PCB manufacturing as against EMS, that part of the market, is PCB manufacturing has many more steps.

We're talking hundreds of steps, and we're talking about a very variable process. So if we are talking about advanced packaging, we're not talking about one production line, we're talking about a production line that can do lots of different technologies, and different parts of production. Looking at EMS, typically, you have quite obviously sophisticated machines, but the technology is pretty much nailed down for those lines. The variability, or the number of different processes, is fewer. So PCB, by it's very nature, requires a manufacturer to have all the tools in his toolbox, and all the possible routings and methods for manufacturing the board. So I think once that gets into the PCB shop, it will of course be used for different technologies, but the investment needs to be the right one that gives you the flexibility. We don't tend in PCB to nail it down to that degree, because we don't know what designs are coming. The days of the integrated manufacturer, OEM manufacturer are gone. So now, the board shops are really jobbing shops, and they're driven by what the customers want. And that changes, and it changes not overnight, but it does change.

If you look back the last 10, 20, 30 years, there's been a massive change in the kind of equipment required. I think digitalization has been one of the biggest things that I've seen, certainly in my career, and the investment costs now just gets higher, and higher, and higher. In Europe, we've seen consolidation in manufacturers as well. We're down to about 175 PCB makers now, board makers, that figure was over 500 going back in the early-2000s. So the ones that really, I think, have dropped off, the ones who couldn't afford the investment or couldn't get the finance to make the investments in their business. Of course, there's big consolidation, so the market hasn't dropped by the same percentage terms as the manufacturers, but those that survive have to be reasonably bigger players and have access to capital, and that's something that in Europe we don't have the ease of. I mean, some companies in Asia do. You certainly see a longer expectation for return on investment in Asia than we have typically in Europe, and that's a mindset that we have.

I mean, I heard a talk some years ago from a guy from... I think it was Alibaba Finance, I think, and he was saying that he doesn't see any lack of innovation, a lack of will in Europe, he sees great things. What he saw was a lack of access to capital markets. I think that is something that maybe we have to push on government a bit more, and I think we're seeing a little bit of that now. We've seen the European Chips Act now, as you have in the US as well, and that really is calling on government to help support our technology industries. And of course, chip making is another story, another league, again. The investments we're talking there are many billions of dollars, and of course, private companies can do this, but again, they may not choose to in a market such as ours. So I think there's certainly been a subtle change in mindset there, and I think we are seeing now governments at least being willing to invest finance, and we are hearing multiple billions of dollars being allocated.

There's tens of billions, in fact, in Europe to chip manufacturing to increase the share of worldwide production of silicon in Europe. And I think we may see, or we may hopefully see, some more willingness to invest in the PCB side, the packaging side as well, because the chips without the rest of it doesn't really make a lot of sense. So we are discussing that with anybody who'll listen right now in the EU and other European governments. I'm hoping that might be a part of the story, because I think whatever else we do, we've got to accept investment is a critical part of keeping pace to technology, and more and more critical now than it ever was.

Zach Peterson:

Yeah, I would agree. You brought up something interesting here, which was... Well, two points really. First was difficulty accessing capital, which makes sense, but it sounds to me like even if you could access the capital, it's difficult to even access the production assets that you need to be able to produce at scale in these areas, and therefore create a return for your investors. So it sounds like they really both go together.

Alun Morgan:

Yeah, and that is an issue. There are, of course, manufacturers in Europe of equipment who actually have been very successful in overseas markets. So they have focused a lot on the overseas markets, and done very well, especially equipping China, which has grown phenomenally in the last 20 years in PCB manufacturing, so a lot of companies have done that. Specialized equipment, like laser drilling machines. There aren't many manufacturers in the world for that kind of equipment, so to get hold of that equipment is pretty difficult. So if you want to... Say I want to buy 100 laser drilling machines, I don't know how long the queue would be, it would be pretty long, I suspect. I certainly know for the equipment to manufacture, say PCB material, say a copper foil for example. Again, lead times are many years to get hold of the drums to produce that. So I think it's never too late. I mean, obviously, wherever you start from is where you are. You can't start from anywhere apart from where you currently are, but we have to accept it's not going to happen overnight.

So I think it's a question of moving the needle and actually just getting a sense of direction of travel. And if we accept we're going to invest more in the business, then fine, let's start doing it, let's have that mindset now. But we're certainly not going to find a 20, 30, 50% increase in PCB manufacturing capability in Europe in the next six months or a year. I mean, that's not going to happen. But if we do put our mind to this and we have the resources, then I think over a period of time, same with the silicon as well, by the way. Silicon plants don't get built overnight, they, again, take some years to come into play, but at least if you have that in mind, it gives an optimism and gives a sense of direction. I think that's really what we're looking for here. We were able to stabilize in Europe after the 2000 dot-com crash, we stabilized our manufacturing from around 2010 onwards at around $2 billion, more or less, in Europe.

Even with some consolidation of manufacturers, COVID knocked us down a bit again, but we came back to that level more or less now. The real threat though, right now for us, is the energy costs, and there is a risk of this, or the mindset being, "Well, we're going to just drop down, and down, and down again, against competition from Asia." But actually, if we have the right mindset, I'm certainly hoping that we can hold that line, and then actually grow that line, because the market is growing. PCB worldwide is growing at around 6%, that's the kind of CAGR figures we're looking at. So the projections I saw recently, well, let's say we're around $80-something billion now, maybe $84 billion at the market. The projections are will be around 128, $130 billion by 2030 worldwide. So the worldwide market is growing, and has been growing. What I think we're asking for is that the European manufacturing sector should at least have that growth as well. So rather than staying still, which would be of course dropping in percentage terms, let's try to grow from that.

We can only have around, I guess, 2.4, 2.5% of the world PCB manufacturing in Europe. Holding it there would be, of course, the first line, but actually to grow that from 2.5, perhaps to 3, 3.5, 4 again will be wonderful. But that will require significant investment, and will require some years. So I think that's the kind of mindset we have to have for this. And it's easy to become a bit despondent, a bit negative around the manufacturing of what's happened, but things are moving now. China is dominant, in terms of PCB manufacturing, it took that position some years ago now. But certainly, looking at the way that that map is configured, there are many PCB manufacturers in China owned by Taiwanese companies, for example, and there are political risks around China. It's unfortunate to say around Taiwan as well, to some degree. It's, of course, not subject to the same political controls as China, but there are tensions, and all of us are aware of that as potential risk. And most of us have woken up to the fact that when we do get supply chain issues in the market, it can be devastating.

We saw it through COVID, we couldn't get materials out of Asia. We saw it with the ship that went sideways in the Suez Canal and block supplies for some days. So these supply chain risks are pretty real now. There's been a massive migration, in the last 20 years, of the supply base for electronics. So the consumer base is still very strong in Europe, we are great consumers. I think the EU27 is either number one market in the world or number two to the US, so we are both the biggest markets for these products. And the manufacturing base, of course, was here 25 years ago, more or less in pace with our demand, so the supply and demand side were pretty much balanced. The demand has carried on growing, but the supply side has really migrated across to China primarily. And there is a move now to move some of this manufacturing, of course, out of China and away from Taiwan, to some degree as well, primarily China. And the figures I've seen show there's a migration in the range of perhaps 30% of PCB manufacturing away from China, and into Southeast Asia.

So I'm not talking about bringing it back to Europe or the US right now, but certainly moving this out of that region. And we're looking at places like Thailand, like Vietnam, Malaysia, Indonesia, and the Philippines. So there is a potential to move that business, or to migrate some of the business away from focusing on China, to give a bit more resilience for the supply chain. So that's already occurring. So it's not a big step to imagine that some of that could migrate back into Europe and North America as well. It's already on the move, so why not consider that too? So I think things are moving in terms of the map, the manufacturing map, for electronics, and PCB in particular. And I think it'll be a good time for us to really, really consider doing that as well, and moving some business back into Europe.

Zach Peterson:

So you mentioned expansion into Southeast Asia, right? Thailand, Vietnam, but two other areas where we've been hearing about outside of Southeast Asia are Mexico, or Latin America more broadly, and India. Where else have you heard of companies expanding their capacity outside of China, Taiwan, Southeast Asia, but not necessarily into Europe or the US, which are essentially the end consumer markets?

Alun Morgan:

I mean, what has been talked about is India quite a bit. I mean, India has around... I think it imports around $2 billion, I think, of PCBs per year, something like that. And India has been touted for growth and domestic manufacturing for some years now. I think the big problem that India faces, or what I've certainly heard, is infrastructure. So there is still a lack of infrastructure in the country to really absorb that, but I think there's a desire there. Absolutely, there is a big electronics base there, there's design there of course as well. And of course, demand is increasing. So I think that's something that I think we should see on the table, I'll have to be honest and say I haven't heard that in the recent discussions, and I'm hearing very much Thailand has been the number one destination. Vietnam already has something, and looking at Indonesia and Malaysia as the primary market. So I think India should be on that list, and I think it probably will be on that list, but not right now. That's something that will probably come a bit more into the future.

I think commentators I've seen said, "Yeah, it's a potential, but actually not in this current round." I think Mexico, of course, has been a long-term partner for North America offshore but not too far away, which is also beneficial. I don't know too much about Mexico or the business there, but I know there are automotive producers, and their supply chain who do operate in Mexico. And that does seem to make sense, because you are very close to a final market. I guess the problem for us in Europe is the nearest will be India, but India's still far away. It's still big distances to Europe from Asia in general, so we don't have the benefit of something like Mexico on our doorstep. The nearest big producer to us is much further away than Mexico is for North America in fact.

Zach Peterson:

Now in terms of the investment, one thing I'm wondering, and this comes from the fact that typically, more advanced manufacturing capabilities require higher levels of investment. This seems to me that the trend is going to create a situation where the big manufacturers get bigger. So in order to support UHDI packaging, they need a lot of capital investment. It's just less risky to invest that with a larger company versus a mom-and-pop company, and then they're much more likely to be able to access the scale of customers that are going to then create positive return on that investment. Would you agree with that? And do you think that's what we're going to see? Something where we're going to have more consolidation, more acquisitions, or just some of the bigger players continue to get larger?

Alun Morgan:

Yeah, it's been going on for many years now. I don't think there's any surprise that we're seeing that, certainly in the PCB sector, PCB companies, if you look back many years, we're typically a lot smaller than supply base and their customer base, there are big OEMs they were feeding and they're being supplied by big manufacturers. So the PCB guys are being squeezed from all sides, and you've seen that with the consolidation that we've seen in the business, there are some now very big PCB manufacturers, guys in billion dollar scale, many billion dollar scale, which makes a bit more sense. So I can't imagine we're not going to see that continuing. There are some very large manufacturers and acquisitions are still continuing, companies are still acquiring smaller competitors and building up. So yes, I think that's going to carry on, and I think it's necessary as well. The PCB manufacturers have to have some strength, and when they have a bigger scale, of course, they have easier access to capital markets. There's no doubt about that.

So I think yeah, I see that happening. The mom-and-pop shops are great and they have a place, there are some specializations still. Let's not forget, there are very specialized markets in our business. I look at things like very specialized antennas, medical devices, a few companies that really, really specialize into those kinds of areas. And we have them in Europe. We have a big cluster, in fact in Switzerland, of medical makers and guys who are very much involved in the low-loss antenna business, very specialized producers. And those guys are going to continue and they're going to survive. They have very, very well-defined markets, very defined specializations, and that makes a lot of sense. But the broader PCB guys who have the, say, big range of products and big range of markets they supply, I think are bound to continue to consolidate and get bigger. I think that makes absolute sense. So yeah, I probably see it that way. I see the large ones on the one hand and I see the very specialized, very perhaps even relatively small companies.

We're talking, perhaps in some cases, just a few millions of dollars or a few tens of millions of dollars of turnover, but very successful, very high margins, and very well-defined markets. And I think that's, well, probably what differentiates the kind of players into the future. I guess the ones that will get lost are the small general purpose players, the guys who haven't got the scale, and haven't got specializations either. And probably I would say, looking at the whole market, you see that across the whole supply chain as well. Thinking to Ventec, for example, as a materials producer. Ventec is not the biggest materials producer by a long measure, but Ventec has many, many specializations, so many areas where it really has a high focus, like the IMS and the, say, polyamide business, and now low loss. So some specializations, there are other manufacturers that produce big volume with massive benefits of scale for the large volume, big serious production, and I think there's obviously a place for that as well. But the ones who try to do both things, they're probably the ones who suffer the most.

So either be a big volume producer, very, very capable in volume, or be somebody who's very specialized and target markets where there are lots of value to be added, let's say, in these smaller, more specialized markets. But I say smaller, even niche can be pretty big these days. Polyamide will be a good example of that, where the niche is many tens of millions of dollars, very nice business, nowhere near the size, of course, of standard FR4, but of course very, very specialized and potentially bringing higher margins for a specialized manufacturer with a high variety of different copper claddings, different thicknesses. So massive range of complexity, and of course for that, people understand they have to pay a premium, whereas of course when you're buying standard products, premiums are more difficult to discuss. So I think there's definitely a segregation in the market for that, and I see it through the entire supply chain. Again, OEM specialized, of course they have their specialties. Board shops tend to be general purpose and the suppliers tend to be general purpose.

But I think in the board side, and the supply side now, we are seeing some specializations now that target particular sectors that really fit their business model and fit their company. So yeah, I think that's how I will see it going forward. There's certainly more consolidations, there's no doubt that will continue on the volume side of things.

Zach Peterson:

So in order to overcome some of possibly the pricing pressures and then access specialized capabilities, do you think we'll ever see a return to captive operations? Or maybe not fully captive operations, but where a company buys out their supplier, and owns the supplier, and they can cut out the overhead? And then also, they can run it like a typical fabrication or contract manufacturing business, where they give others in the industry access to those capabilities. Is that a model that we might ever see?

Alun Morgan:

Yeah, it is a great question because things tend to go this way, don't they? Big is beautiful, then small is beautiful, and round it goes. I mean, when I joined the business, many years ago now, they were mainly captive shops. So the OEM had its own manufacturing, so in assembly, the whole thing was in one place. And I have got one example, there is a company, the company in Estonia, actually doing something similar now. It's an OEM, they have their own assembly, but then now they're building a board shop. So actually, I know one example where that's happening, and they're doing that because they want control of the whole process. And I can see that. Obviously, it goes a bit against the business model that we've been employing the last 30 years, or 40 years now. But actually, yeah, I could see that and I can see that that does make some sense, especially when a manufacturing OEM has a very well-defined technology that they're active in. So they happen to be a two general purpose.

Of course, you can make a plant very nice if you can make it dedicated and specialized around a particular kind of process, particular kind of technology. It's when you get general purpose that the costs tend to rise. And I see no reason why someone who does that couldn't make their plant available on the outside market as well to others. I mean, that would make sense. I don't know what happened with the one I'm discussing or talking about right now. But yeah, I think it's a viable prospect for some companies to think in that direction now. Whereas, I guess, you'd be laughed at 10, 20 years ago saying that, but actually today, yeah, I think that will probably make sense again.

Zach Peterson:

Yeah, I think it makes more sense today as companies start to need more access to that specialization. And so when you brought up specialization, I thought, "Okay, we could probably see some kind of return to that on a limited scale." I don't think you're going to see every OEM just suddenly buy up a PCB shop so that they can produce their own stuff. I think at some point, the costs and the headache of trying to run that operation outweighs the benefit of just reducing the overhead. But it would be interesting to see if that comes back to some extent, and we see that form of onshoring, rather than just the general purpose kind of shop onshoring to US and Europe.

Alun Morgan:

Yeah, and we have to think about the model for that as well. I mean, the main reason why people have wanted to take away the piece of manufacturing and the assembly away from their OEM operations is to reduce the fixed costs, to make the cost variable, and that makes a lot of sense. When you build your own plant, again, you carry the full cost, whether you're busy or not busy, so that's the thing. And if you imagine the investment costs, as we've already said, for a general purpose PCB maker going forward, very, very high indeed. But if you can nail the technology down, if you can make a dedicated line for your kind of stuff, I can see that as being a potential. So if we are talking about onshoring, which I guess we are to some degree or reshoring, I don't believe we're going to really build back the same way it was. I mean, that's not going to happen. We're not going to go back to the 1980s or 1990s.

But the bit that we do do that with, I think it makes a lot of sense to give it some critical thought, say, "How should we do this? If we're going to bring this back, I'll bring something back or bring part of the supply chain back, what should it be and how should it look?" And I think it should look probably quite different to the way it looked 30, 40 years ago. And that makes a lot of sense, whereby an OEM might decide to do that and actually, rather than encourage his suppliers to invest in more capability, to invest in some of his own perhaps, for dedicated parts of the line. Now, many guys will see this as an anathema. They won't think this really fits their model anymore, but actually when you consider supply chain risks, you've seen the disruption we've seen in the last few years and there has been substantial disruption. People have not been able to get raw materials at all in some cases, having no raw materials is a disaster, your lines stop completely.

So I think if doing that brings some more resilience, that makes a lot of sense, and I can imagine it now, yeah. I know one example, only one, but a fairly big one by the way, but only one example. And there could be more in the future, you would think in that kind of critical way. So yeah, I think we're going to think about this again, let's think about the whole thing, not just try to duplicate the way things were. Things move on and we can perhaps be a bit more smart, a bit smarter, as we look forward. So yeah, it certainly should be on the table. Absolutely, Zach. Yeah, good idea.

Zach Peterson:

So one thing that, of course, comes up every single time, the onshoring debate comes up. I don't care if it's PCBs or something else, but price, right? There's always the pricing pressure. And of course, one of the main motivators for even going overseas in the first place was because you could access the capabilities you need at a lower price. And of course, with companies thinking about things on a quarterly basis, you can see why they would be so price motivated. Now in order to overcome the pricing pressure, I think maybe for more general purpose stuff, but I could also see this applying for more specialized stuff. There's been talk that there's a lack of automation, and it's been said to me that if you look at the fabrication process 50 years ago versus today, you probably wouldn't see much of a change until you start looking at the HDI stuff. So I think that begs the question, to what degree would innovations in automation, and maybe greater digitization, affect the pricing pressures in the PCB fabrication process, and even in the PCB assembly process?

Alun Morgan:

Well, of course they affect it, but I mean, we need to analyze this discussion a bit more. In fact, the reason why the market went to Asia was offshore was because of price. And actually, there are certain projects, especially consumer projects, whereby if you'd carried on with the developed Western world costs, so the cost in Europe, the cost in the US, you would not have been able to develop these products. I mean, if for example, a smartphone cost you $5,000, you wouldn't sell very many because we didn't have the capability to produce that item, the cost the consumer would actually pay. So it's a necessary thing to have had that move in the first place, and it's not entirely built around greed or around profit margins, it's built around actually capability in the end. There are certain products that would not grow, would not fly at all, if you had the overhead and the cost that we've had previously in the West, so that's the kind of background we're coming from. Coming away from that now, you've got to think about... There will probably always be a differential.

I cannot imagine that automation is going to solve all those issues, by the way. Certainly we see more automation, and if you look at some of the modern plants, you look in Europe now, many of these are very automated. They use AI features as well, many of them have single piece flow. So actually, you actually end up with manufacturing plants that know what every panel is, and it adjusts the process line per panel. This is the kind of technology now that's available within PCB manufacturing suppliers, so that can all be done, and of course, it reduces the cost to some degree. But I think the thing we have to get our heads around is, if people are going to insist on having, let's say, a more local supply chain, a more robust supply chain, more supply security, there's a price to pay for that. You can't have all of that stuff and the same price as you've had it in the past.

So people need to get their mindset beyond the idea of building a secure, robust supply chain back in our local manufacturing in North America or Europe at the same price, they can buy the board anywhere else. And as long as people have the anticipation that they're going to be able to do that, we won't get very far. So resilience costs money, security costs money. So I think yeah, for sure, there's a step by automation to make this better. But let's not forget, plants in China are very automated as well, they've already got that benefit too. And they have of course, managers, supervisors paid a lot less than we pay them in Europe and North America, so we do have that problem. We have also, of course, our local costs, energy costs, much higher in Europe than they are in China. Factor three to five, more or less. We have probably taxation much, much higher. Many, many things are much more difficult. Interest rates on loans, much, much higher. So we have a lot of costs that will always be there, and I don't see any way of actually making this parity.

So if people have the anticipation they're going to actually bring even small parts back at the same price that we can do them in Asia, this isn't going to be the case. There will always be somebody, whether they're in China, whether they're in Thailand, or Vietnam, or wherever, that will have the benefit of having lower labor costs, lower manufacturing costs, lower managerial costs to be able to produce these boards cheaper. So yeah, there's a step in that direction, but please let's understand, we can't have everything. We can't have the lowest cost, and the most efficiency, and the, say, the best security, and the most resilient supply chain. All these things don't coexist. Something has to give along the way somewhere, and there is a value to having resilience. People benefit by having more resilience. I think that's worth money, and that's worth the premium, and I think that's the thing we have to get in people's minds. I think consumers understand that too.

Consumers, in the end, of course like to pay the lowest price for everything, but we have, perhaps, become a bit more used to price rises in the last year or so. Inflation's been running a double-digit in many of our economies. You look at the way things have increased in price, and it's pretty dramatic. Many, many things. Automobiles, your normal grocery shopping, electronics, everything has got more expensive. And the reality is, if you don't pay the price, you can't get the goods. So people have to come around to this way of thinking in the end. And our manufacturing base has to also understand nothing is free. So yeah, step in this direction, Zach, sure, but let's not pretend we're going to get back to the same cost, a landed board in Europe, as the manufacturing cost in China. We're not going to be able to do that in the same cost base, the same benefits we saw before. So yeah, those are my thoughts on it, and I hope people get their minds around that.

I think consumers have come around to that way of thinking, they have to pay the price and manufacturers should not use this as an opportunity to hike better profits out of the business. They must understand this cost has to be absorbed by everybody, including them as well.

Zach Peterson:

Well, one of the reasons I bring up the automation aspect is because that's yet another dimension of potential investment that I think it's unaccounted for. I mean, you have to invest in, of course, your workforce, you have to invest in the production assets, but if you really believed or it was proven that automation is going to be the secret sauce that relieves that excess pricing pressure and gets you much closer to parody, that also takes a set of investments in software. And some of that could be developed in-house, some of that could be purchased through a vendor. However you get it, there's an investment there. And this is actually pertinent now, because there's one manufacturer here in the US, and they marketed themselves as a software-driven manufacturer. They just laid off, I think, 70% of their staff, and they're on the verge of going out of business, and this is after going public not too long ago.

So some folks might know who I'm talking about, I don't want to say their name on the show, but that just illustrates that automation is not going to be the magic bullet that solves the pricing pressure, like you've been saying.

Alun Morgan:

Yeah. No, I think the automation brings two things really. I mean, of course, it does give you potential to reduce cost. I mean, there's no doubt it reduces labor. It does. I mean, that's the reality of it. It also improves the reliability of the process. I think that's the... The thing you see, you go to China, you don't see factories full of people manually processing boards, you see massive automated production lines. They don't do it because they want to save costs necessarily, they do it because they want to improve the reliability and the consistency of the product. And that, again, is a big drive for all of us, to improve the consistency of the product. So it's not just there to reduce cost. The way I see automation, and the way I get excited about automation in general, is when you have a process that has many sensors, understands what's going on in the boards being processed, and then has an AI or self-learning function as well. And we're beginning to see this coming through now. AI can bring a lot of potential benefits.

Humans, of course, we think pretty well generally, but we think within our parameters and within our paradigm. When you see some AI solutions, they're not constrained by the history or the tribal knowledge, they're not constrained at all. They're perfect learning machines, and they can analyze what's going on, and improve things. So I think there's potential for that to get better. And I think I can see AI being quite useful, in terms of even production flow scheduling, for example, because when you've got several hundred process steps, it's pretty hard to calculate how you should do this in the optimum way. Of course, an AI can do that much better than we can as humans, because it doesn't have the baggage. And it can also learn from what works and what doesn't work. So I think the next phase of investment we're going to see in automation for sure is coming, and I think pretty sure we'll have a fairly heavy AI content to it as well, as many things do now. So I think there can be benefits there, but for sure it's not the secret sauce. It's not going to solve all our issues.

You cannot build a fully automated PCB plant in Europe at the same cost of production as in China, so that's a concept that isn't going to ever fly. But I think we can certainly reduce cost to some degree, and I think using AI in there, we can probably improve the quality of the production in there. We can make it more consistent, we can reduce our waste and our scrap levels, which again, are important things. One big thing driving the market now is consumer pressure for greener products, using less energy. Of course, there are plants now, ones that Alex Dubinsky produces, which are basically waste free, fantastic concepts, wonderful thinking by starting again. And I think that's the kind of mindset we need for the future. So if we're going to carry on, we are going to build more plants or bring things back, whatever we do, let's do it in a much more smart way.

And I think the green way of doing it, the automation, the AI, all these things will end up, I think, bringing... Whatever manufacturing we do bring back, whatever specialization we bring back into our Western world, will be a lot better than it was when it left. And I think that will be a big gain and a big win for us all.

Zach Peterson:

Well, thank you for bringing up the Sustainability Act aspect. I think that's an important point to end on, and very insightful point because there's been a lot of talk of sustainability this year, including in our industry, and I think you lay out a very compelling vision for the future. So thanks for talking with us today, this has all been very interesting.

Alun Morgan:

It's been my pleasure. Thanks for having me on, I really appreciate it, and I've enjoyed the discussion with you, Zach. Thanks a lot.

Zach Peterson:

Absolutely. To everyone that's watching on YouTube, make sure to hit the subscribe button, you'll be able to keep up with all of our episodes and tutorials as they come out. And we've been talking with Alun Morgan today, Technology Ambassador at Ventec, President at EIPC. Make sure to check out the show notes to learn more about Alun, and to get access to some great resources where you can learn more about some of the topics we've been discussing today. And last but not least, don't stop learning, stay on track, and we will see you next time. Thanks everybody.