Prototyping Consumer Electronics has become easy and affordable,
so why is manufacturing so hard?
Despite the ubiquitous nature of electronics in our everyday lives, very few of us understand how electronics are made or what goes into building consumer electronic (CE) devices at volume (let’s say 20,000+ units). Even fewer of us understand how to get a CE device off an assembly line on-time and on-budget. And this lack of understanding is beginning to show.
Only three percent of CE startup products make it to the retail shelf.
Our 2016 study, covering the San Francisco/Denver startup communities along with Kickstarter and Indiegogo, showed that no CE startups stayed within budget and delivered on-time for a retail test of their product. Of those that didn’t have limitations on time or money, the numbers are still depressing – only three percent of CE startups make it to the shelf, any shelf, with more than 20,000 units.
It’s time to get smart about how to manufacture electronics.
Why CE Startups Fail
The American entrepreneur is trained to brush aside the naysayers, take risks, trade human expertise for equity and discover shortcuts that have been overlooked by their slower corporate counterparts. This ‘shortcut hunting’ works in software and service industries, but in electronics the entrepreneur quickly encounters a brick wall of complexity and foreign cultures. There simply aren’t any shortcuts.
In a world dominated by WordPress, 3D printers, and LinkedIn, how could there not be any manufacturing shortcuts?
There are two main reasons:
- Manufacturing electronics is really, really hard; no one can become an expert, or even competent, in a short amount of time.
- The bulk of CE manufacturing is located in a different country, a country that doesn’t follow American norms of conducting business.
The most common response by the American entrepreneur when faced with this brick wall of knowledge and cultural differences is to say to him/herself, ‘how can I do this faster and easier?’ They push forward, blinders on, to find a ‘better way.’ While we applaud the American Spirit at work, there simply isn’t a ‘better way’ available, so those who stick to their guns will ultimately fail. Ignoring the complexities of manufacturing electronics is akin to putting yourself out of business.
And it isn’t just the entrepreneur who is wearing blinders, entire startup ecosystems struggle with the complexities of the hardware business. We attended one recent startup panel that had seven people on stage explaining how to manufacture Internet-of-Things (IoT) devices, yet not a single panelist had ever produced anything at volume and none of them had ever sold at major retail. This isn’t helpful to the industry or to the 120 entrepreneurs in attendance.
Even for those entrepreneurs who understand and accept the difficulty of the manufacturing process, there are still the cultural differences between the United States and China (or Vietnam, Singapore, Taiwan, or Japan) to navigate. Not understanding and giving credence to these differences opens up the entrepreneur to a myriad of failure points as well as the scam artists operating in the field.
We can do better. Complex systems and cultural differences in CE can be managed and learned.
How to Win in CE Manufacturing
Let’s start by accepting these truths about manufacturing CE:
1 . Manufacturing electronics is hard.
2 . Solid, multi-year relationships with Asian manufacturers are a necessity.
3 . The manufacturing industry is a dirty business with charlatans and naiveté at every turn.
1.Manufacturing CE is hard.
Manufacturing in volume requires the work of experts in several fields and cannot be learned in a short time by a single entrepreneur. Yes, prototyping has gotten much simpler and cheaper in recent years, but rapid-prototyping has had little effect on manufacturing a new CE product at scale.
Below we’ve listed about 30 of the broad strokes needed to manufacture a simple CE device. For this example, let’s imagine an IoT device with a Bluetooth radio, a battery and USB charging cable. Let’s further imagine that the prototype for this device was built for less than $500.
The following is what you’ll have to undertake to manufacture this device at volume:
- Non-repetitive engineering (bulletproofing the circuit board)
- Testing the circuit board
- Firmware design (software for the chipset)
- Software design (the app)
- Industrial design (what it is going to look like – in CAD) • Material design (what it’s made of)
- Circuit board prototyping (Gerber files)
- Proof of concept build (ugly box)
- Proof of concept test (ugly box working and tested)
- Prototyping the complete unit (prettier box)
- Prototype testing (prettier box working)
- Sourcing components in Asia (a single critical component can take days/weeks to source)
- Second sourcing every component in Asia
- Tooling (to make plastics molds/metal stampings/etc)
- UL/ETL safety compliance (required to sell in the USA)
- CE compliance (required to sell in the EU)
- FCC compliance (USA)
- Social Accountability compliance
- Environmental Accountability compliance
- Assembly line set-up/logistics
- Fixture creation (testing equipment for the assembly line)
- Component logistics
- Factory-level quality assurance and safety compliance
- Factory auditing for social/environmental concerns
- Packaging/Insert design
- Master carton design
- Packaging Quality Assurance
- Product Quality Assurance
- Safety labeling
- Retailer MDF (manufacturer development funds – the advertising dollars you must spend with your retailers to stay on the shelf)
- Return-management (repairs, sales of refurbished product, recycling)
- Customer service
As you can see, manufacturing even a basic electronic device is a great feat. There are no shortcuts for getting hundreds of thousands of components to a single assembly line in Shenzhen on a particular Tuesday in September, securing a safety compliance mark from a Federal Testing Lab, meeting New York state’s packaging requirements, or… well, you get the picture.
2. Relationships are everything.
Manufacturing electronics in Asia (especially China) is done with friends, and only friends. It is the ‘way of work’, and it can’t be ignored or bypassed without losing a great deal of money in the process. If you go it alone, prepare to spend millions.
This way of work is called ‘Guanxi’ in China, which is literally translated as ‘relationship’ in English. Guanxi represents the lifeblood of CE manufacturing. Apple recently spent five years building a relationship with an Asian contract manufacturer (CM) before letting them build the iWatch. They didn’t go overseas a few times to visit, communicate over email or get quotes, rather they went to dinner several times a month for five years before giving this CM a contract. This is how manufacturers do business.
These relationships and their vast importance have an unintended consequence in the world of manufacturing electronics. Companies who enjoy good Guanxi are secretive and unwilling to help startups with their projects. Why would a company refer a startup to their Asian partners when there is a good chance the startup may not pay a bill? Stop a project mid-run? Or ask for freebies like they do in the United States? If a startup performs poorly with a CM after a company has spent years building Guanxi, it reflects badly on the referring company and damages their hard-fought relationship. This is also why you won’t see many blog posts on manufacturing or ‘how to’ books explaining the process. People are protecting their relationships.
Guanxi is so important to manufacturing that our company is still discovering perks to strong relationships after 14 years of working with the same partners. Because Guanxi is written about so little and remains a mystery to most, overlooking it is a leading source of failure for American startups. Ignoring Guanxi doesn’t make it go away. Spending a few months in China or sending money does not build a solid relationship you can count on. These relationships take years, and bucking a system that even Apple has to play-by is a fool’s game.
3. Manufacturing is a dirty business.
Manufacturing CE is wrought with fraud and scams like any other profession. But the cultural divide between Asian manufacturers and American entrepreneurs amplifies the potential for harm and makes scams more difficult to recognize. How is an entrepreneur supposed to vet the manufacturing rep who says they can take a startup to China? For the entrepreneur, it is more convenient to take people at their word, especially if they ‘speak the language’ and make a few promises.
Why do entrepreneurs fall for scams so often? After stints with local accelerators and watching dozens of startups go through the process, we think we know why: entrepreneurs are simply overwhelmed.
The daunting nature of manufacturing coupled with the genuine surprise that there are no shortcuts is just too much to take in for some entrepreneurs. When there’s a guy standing next to you promising success in an ecosystem that is hard to quantify, it is natural to jump at an opportunity. Forging ahead in the midst of a scam only works with millions of dollars in your pocket and the time to move to Asia for a prolonged period. Most startups don’t have that luxury. Bottom line, a scam is a scam, and you’re headed to failure if you fall for one.
((Appendix ONE is a list of scams we currently know to be operating in the San Francisco/Denver startup communities.))
Considering the pitfalls associated with building an electronic device, how does a startup succeed?
The Three Successful Models to Building an Electronic Device:
1 . The VC Model
The first way to manufacture a startup CE device at volume is to raise a great deal of money. We call this the ‘Venture Capital (VC) Model.’
This model showers the startup with money from day one. Intelligent startup teams with manufacturing experience use this model to find a good ‘manufacturing rep’ who will partner the startup with the right CM in Asia. Inexperienced entrepreneurs often choose to go it alone. With piles of cash, these entrepreneurs can afford to make mistakes and still succeed.
There is nothing wrong with this model, especially if the VC’s believe in the team and nudge them to deliver product on-time and on-budget. Manufacturing, like everything else, becomes much easier when there aren’t financial barriers holding you back. Pebble, Fitbit and several other high profile CE companies have had great success with the VC Model despite going into Asia completely blind. Strong teams, resolute investors, and a great deal of money allows even the inexperienced to find success.
2. The Outsourcing Model
The second way to manufacture a startup CE device still involves money, but only half as much as the VC Model requires. We call this the ‘Outsourcing Model.’ If you can raise four to six million dollars and are comfortable not learning the mysteries of manufacturing, this model is for you.
Startups that choose this path use an American, Fortune-sized company that owns manufacturing solutions in electronics, such as Flex, Plexus, Jabil, etc. These companies build many of the big name products we see on the shelves today from HP, Sony, Kensington, and Monster Cable. Hand one of these Fortune manufacturers your product requirements and after several months you’ll have a container of product delivered to your door.
The upside to the Outsourcing Model is that it’s safe and the work is usually guaranteed. This can be a comfort to any startup and one of the perks to paying an outsider for the design and manufacturing of your product.
One downside to this plan is that solid social or environmental stewardship standards, while reported, are not always practiced. This can be a deal-breaker for some entrepreneurs. In addition, these larger companies don’t have an entrepreneurial passion about products, which we’ve found to be very important for startup founders.
3. The Bootstrap Model
The third way to manufacture reliably, and if you’re on a budget under $4M, is to choose a ‘manufacturing rep’. This is someone who has built a relationship with one or more CM’s over time and is willing to work with startups. We call this the ‘Bootstrap Model.’ There are many companies who reliably take startups to volume manufacturing. We’ve included a list of the qualities you should look for in choosing one of these companies in Appendix TWO.
The downside to the Bootstrap Model is that most of the scams in manufacturing are perpetrated here. Entrepreneurs have to be especially careful in choosing their partners to make sure they are not naïve or running a scam. Along with the qualities you should look for in a good rep, we are also including some warning signs to be aware of when choosing partners (also good for the VC Model). See Appendix THREE.
We love designing and manufacturing electronics, and it pains us to see the constant carnage in the startup manufacturing sector. We feel it is time for American entrepreneurs to face the challenge of manufacturing electronics head-on. It is also time for our startup communities and investors to educate themselves, even peripherally, on the difficulties associated with manufacturing CE. We need to learn as an ecosystem that complex systems and foreign cultures are navigable with the right knowledge and tools and with our eyes wide open.
So get out there and raise some money for that wonderful electronics device that is going to change the world. We hope this article helps you make great decisions about your partners and helps alleviate some of the complexities of manufacturing electronics.
This article was originally published in 2016, but has been updated to reflect the startup electronics landscape in April 2018. Our findings on the percentage of failure have also been validated by CB Insights – thanks guys! From CB Insights: “Only 24% (of CE startups) raised a second round compared to 46% for tech companies generally. A full 97% of the consumer hardware companies we tracked died or became zombie companies. Although we did include business plan competitions and crowdfunding in our hardware funnel, the stark difference cannot be explained away fully.”
List of current manufacturing scams
This is not a complete guide, but rather examples of manufacturing scams that are currently at play in the American startup landscape (plus one common mistake):
- The charlatan manufacturing rep: There are more American con artists selling manufacturing services than there are legitimate manufacturing reps. In short, don’t forget your business acumen just because the process is difficult. Find someone you trust, vet them for real and long-standing relationships with manufacturing partners, and the rest will fall into place.
- The charlatan Asian factory salesperson: We know of at least two sales groups targeting local California/Colorado startups right now (April 2018). These groups target meetups and tech accelerators and usually connect with entrepreneurs via email. They declare themselves to be salespeople and speak with all the right buzzwords, and they make promises that seem almost too good to be true. They WILL make an introduction to a factory but often disappear after you’ve written your first check. The result is that you have now paid an Asian factory to build your product without a solid relationship – a sure disaster. Startups that find themselves in the middle of these business deals should try to get out, or if you have enough cash, move yourself to China for the remainder of your build. Only if you’re present in-country can you save a poor introduction from wreaking havoc on your product.
- The factory ‘investment:’ This scam often involves bringing an entrepreneur to Asia, where you’ll hear from CM’s about ‘new business schemes,’ and see recent work done for Apple or Sony or some other big company. Promises are made for free container shipping, discounted BOM costs, free quality assurance, etc. What these ‘factory investors’ don’t tell you is that they are working on commission, or in one popular instance, supporting a crowd-funding platform that is really a matchmaking service for a few big CM’s and Alibaba advertisers. Of the hundreds of startups that have chosen this path over the last few years, those that have succeeded with on-time and on-budget projects are, again, zero. Asian contract manufacturers do NOT give away free engineering to startups they’ve just met. They don’t offer free units as an incentive. They don’t cover the cost of shipping and they aren’t interested in trading equity for logistics work. If it sounds too good to be true, it is. NOTE: If an Asian company offers you a cash investment at good terms, our suggestion is to treat them like any other investor. But take dollars only, not services.
- Internet Sourcing (not a purposeful scam, but with the same results) Alibaba, the Hong Kong Trade Development Council (HKTDC) and hundreds of other websites match unwitting entrepreneurs with electronics factories. To the entrepreneur who doesn’t understand the importance of Guanxi, this is a popular option. In more than a decade of designing and building electronics, we’ve never seen an Internet-sourced factory relationship succeed in the short term. Even if an entrepreneur travels to China to meet with their new partner, or lives there for months, he/she doesn’t have the solid relationship necessary to build at volume – it isn’t a cultural norm to develop a working relationship in months. This takes years. NOTE: We have great respect for Alibaba and have worked with HKTDC, but their referral services are not a good fit for those seeking manufacturing. These referral sites were intended to serve the market for pre-made products, not for building anything new or unique.
How to vet manufacturing reps in either the VC or Bootstrap Models of manufacturing.
- You are looking for a company that has been to Asia more than 10 times but has NEVER been embedded in Asia for more than a month. Do you watch-over the mechanic who is fixing your car’s transmission? If a manufacturing rep has to babysit their CM they don’t have Guanxi.
- Once, twice, three times isn’t enough. Look for companies that have prototyped at least a dozen products and have built in volume at least 3 times.
- Differentiate between engineering professionals and those who have experience manufacturing at volume. There are very few mechanical or electrical engineers who take people to China successfully.
- We debated whether to list this and decided it was an important insight. Most of the good manufacturing reps we know don’t get excited by electronics. They live with electronics every day and have seen hundreds of products heralded as ‘the next big thing.’ They’re over it.
- Good reps also consider what they do as ‘work.’ They don’t think of manufacturing as a new, fun experience and don’t look forward to 22 hours on a plane. So while entrepreneurs often look forward to Asian trips, good reps feel the opposite. A good rep will advocate going to Asia less, not more.
- Honesty about capabilities. There are usually several CM’s involved in an electronics build. Good manufacturing reps will advocate for particular CM’s, but should honest about what those CM’s can/can’t do well. So if a manufacturing rep’s CM doesn’t have injection molding facilities, you should hear about that up-front.
- A good rep understands the importance of relationship and talks about it. This is where the value in what they do is realized, so make sure your rep mentions relationship and has a few stories to back it up.
- Listen for clues that your rep is factory-direct. Many reps are shills for a middleman or some sales organization. If there’s a middleman between your rep and the CM, you aren’t talking to a real rep.
- Every good rep will guarantee their work. Look for companies that guarantee to a 5% failure rate (that’s half the CE average) or to zero-failure if desired. Watch out for ‘factory Q/A’ only – this isn’t acceptable.
- Price guarantees are also commonplace. You’ll have to sign-off on change-orders, but that’s OK; you are entitled to know the price of things before you start building.
Warning signs in the world of manufacturing.
Don’t be the victim of naïveté or a scam. Our goal here is to put the scam artists out of business and to bring more transparency to manufacturing. The following are warning signs, so proceed with caution if these traits become evident. If you see the word ‘RUN’ next to a particular warning sign, we suggest you do just that.
- Any company or person touting that they’ve ‘been to China a few times’ with one-off projects. The person you are looking for talks to, visits, or builds with their Asian partners on a weekly basis, for years. If they’ve only sourced in China a few times, understand you are taking a risk.
- A company/person who claims to own a factory or have a friend or family member in manufacturing. RUN!
- Any engineer or product manager touting that they’ve ‘worked with HP’ or ‘lived in Asia with the Fitbit team’ or ‘helped design Pebble’ or have other big-company experience. Engineers or product managers who happened to go to Asia with a large company most likely don’t know that relationship is the most important driver of success in overseas manufacturing. It isn’t their fault that they don’t understand this concept. You need the relationship person, not the brilliant engineer or successful product manager.
- Companies that insist that Mandarin or Cantonese are necessary for electronics manufacturing. This is a sure sign of a novice.
- Any company/person connected with the sales arm of a CM who isn’t completely upfront about that business relationship. There are some good salespeople working with Asian CM’s in the American marketplace. They usually don’t spend their time with startups, but when they do, they will not offer free trips to Asia, free shipping, or promise engineering work at no cost. If you hear about ‘incentives’ for manufacturing your device, RUN. Tip: scam artists usually mention their factory partners by name early on, while good manufacturing reps will safeguard their partners’ identity until you’ve negotiated a contract.
- Any company with less than 10 employees who insists on having a team ‘on the ground’ in Asia. For smaller shops an Asian team is a waste of time and resources and is often a sign that they, the manufacturing reps themselves, are being taken advantage of. RUN.
- Any company that tries to sell you on reduced BOM costs. Your Bill of Materials is a list of commodity components. This means that most BOMs cost roughly the same. Not understanding that BOMs are a commodity cost is a sign that the manufacturing rep doesn’t use Asian sourcing teams or simply doesn’t know what they are doing. RUN. (Note: Both Avnet and Arrow, two trustworthy American component sales companies, are enticing startups to use their services with discounted BOMs and an initial investment (April 2018). Don’t be fooled, BOMs are still just a list of commodity products. And we would avoid an investment that locked us into any commodity relationship… what if you need a chip they don’t sell?)
- Any company that claims to NOT spend time or money on their Asian relationships. There is ALWAYS a time/money budget to nurture relationships since they are integral to business in Asia. Sometimes this is built into the BOM, while other times it is a separate charge. Either way, the cost is roughly 20% of your manufacturing costs. NOTE: This seems like a great deal of money to the American entrepreneur. Yet this is how business is done, and every electronic device you’ve ever held was built with this cost included. Every device.
- Any company suggesting circuit boards or injection molding tools are best manufactured by hand. RUN! Good CM’s don’t produce tools or circuit boards by hand. If they do, they are likely hurting people and the environment.
- Any company who tells you that the factory will do QA to your satisfaction without guaranteeing the work on their own. If your product isn’t guaranteed by a United States business, you could end up with a container of worthless junk. This happens all the time. Good manufacturing reps guarantee their work.
- Any American manufacturer who insists they are competitive with Asia in terms of manufacturing costs. We work with American CMs constantly for prototyping, tweaking the assembly process and building small runs. We LOVE our American manufacturing partners. But the math doesn’t work for volume. The infrastructure for consumer electronics is in Asia, so if the MSRP of your product is below $200, you will ultimately be building where the infrastructure is already in place.
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