Skyrocketing energy prices are driving up transportation and operating costs that electronics companies will have to pass onto customers.
The effect of relentlessly rising energy prices on the electronics industry has become painfully clear. In June, Dow Chemical Co. announced it would raise prices by as much as 25 percent and implement freight surcharges, respectively of $300 and $600, on truck and rail shipments to customers. Meanwhile, DuPont announced a price hike of up to 20 percent, effective immediately, on the films, adhesives and other products that are a bedrock of modern electronics. Both Dow and Dupont cited energy costs as a key catalyst for the price increases.
During his 30 years in the industry, Al Wasserzug, director of business development at Hudson, N.H.-based Vulcan Flex Circuit Corp., has never seen energy costs affect electronics companies the way they are now. “We’re seeing our shipping costs go up; we’re seeing our raw material costs go up,” Wasserzug says. “We’re seeing the price of everything go up.”
Developments such as the DuPont price increase are affecting the industry globally. “The price increase in dollars of some products is going affect our industry, but I don’t expect price increases in euros due to the exchange rate,” says Bernard Bismuth, general manager of CCI Eurolam in France, Germany and the U.K., a leading supplier of services and materials to the printed circuit board industry in Europe.
What to Expect
As a result of the unprecedented rise in energy prices, particularly oil, in the past year, broader industry price increases will soon manifest, says Nick Koop, manager of technology at Minneapolis-based flex circuit manufacturer Minco. “We’re starting to see evidence that we’re going to see fairly substantial price increases as a result of energy prices,” he says.
Rising energy costs hit the flex industry particularly hard, says Mark Finstad, applications engineering manager at Minco. “All of the flexible substrates that are used in flex circuit manufacturing are plastic, so they’re petroleum-based,” he says. “As the price of petroleum goes up, the price of plastic and other raw materials will go up, as we are seeing now from our flex circuit material suppliers.”
A related issue for Minco is its typically thin operating margins are being devastated by increases in the costs of other raw materials, such as copper. “We know more price increases are coming,” Finstad says. “There are rumblings about them.” Ultimately, Minco and other companies will have no choice but to pass on increased costs for raw material and energy to customers.
That is a lesson others are learning now. “We deliver products locally to our customers who are within driving distance,” says Bob Blumberg, chairman of San Diego-based EMS firm SMS Technologies. “Obviously, our vehicle costs are going up dramatically.”
CCI Eurolam has aggressively addressed the issue of shipping costs, Bismuth says. For example, the company has raised the minimum purchase amount that qualifies for free shipping from 1,000 euros to 1,500 euros. By the end of the year, Bismuth thinks it will be 2,000 euros. In the end, he says, energy costs will force a fundamental change in the way business is done, and everyone will have to make some consolidation in order to get free transportation. “Free transportation of goods is not something you will see any longer automatically,” he says.
Surviving Winter
The next jolt to the industry will be heating bills this winter. “The big jump in energy costs has just happened in the last couple of months, so we haven’t had to go through a winter of high energy costs yet,” Finstad says. “When our bills go up, we’re going to have to pass that cost on and increase our [prices] to cover it.”
Although any price increase is risky in a highly competitive industry such as electronics, Koop points out that in the case of running a facility, companies have no choice but to pay the higher costs. “Quite honestly, there isn’t much you can do if you want to run your factory at a certain temperature and relative humidity,” he says. “It’s not like you can just turn off the heat.”
The other way higher energy prices will affect companies such as Minco is that it will make them scrutinize the costs of travel more closely. “We traditionally do a fair amount of travel to visit customers,” Finstad says. But because of rising airline ticket costs, companies will travel less, which in turn could affect the quality of their key customer relationships.
But the inescapable practical reality is that there is little the electronics industry can do to alleviate its plight, Blumberg says. “All we can do, because we’re a very low-margin business, is pass costs on to our customers, the OEMs, as quickly as we can,” he says. “They don’t want to hear that, but that is what’s coming.”
Already, SMS Technologies is passing on increased transportation costs. “No one likes it, but they understand,” he says.
