How do you organise a supply chain that operates increasingly internationally, while local collaboration is at the very heart of its success? During a TalkING session, organised by ING, Link Magazine, and Altman Solon, companies from the semiconductor industry discuss how they deal with that tension. ‘The unique thing about our region is how closely intertwined we are. How do you travel the world with such a composition of abilities?’
– Balancing between adapting to customers’ globalisation strategies and maintaining control.
– ‘ASML produces a few hundred machines a year. In the world of manufacturing that is nothing.’
– International scaling up requires substantial investments, while the financing side of things doesn’t always keep pace.
– ‘Before you’ve built a machine factory in Asia, you’re years down the line.’
The chain follows the demand, the demand becomes local
After a period during which things slowed down, the semiconductor market is picking up again. Orders are returning, investments are increasing and the supply chain is opening up with room to start looking ahead again. With that, the conversation shifts as well. Whereas the emphasis during the previous TalkING session last autumn was still on diversification and reducing dependencies, growth is now central. And how to organise that in a world where customers increasingly want to be served locally.
After a word of welcome by Raymond Klaassen, sector director of Industry, Food and Agriculture in the ING South-East Region, and a market analysis by Joost Eyck, associate partner at consultancy firm Altman Solon, moderator and industry veteran Simon Bambach kicks off the discussion with an observation: ‘We all use the same supply chain in the semiconductor industry.’ In that single sentence, he immediately establishes the interdependence within the ecosystem. He looks at William Hermkens, director of Operations Excellence at Thermo Fisher Scientific, and asks: ‘How do you see the developments in the semiconductor market?’ Hermkens emphasises that, in addition to semiconductor customers, his company also assists many life sciences companies. ‘But we do feel the changes in that market. The electron microscope division has an industrial footprint in the Netherlands, the Czech Republic and the United States, as well as a strong customer base in Asia. We closely monitor market changes and how China, the US, and Southeast Asia develop geopolitically. You need to think carefully about where you want your presence to be.’
ASML expects its suppliers to move along with them, towards Asia and the United States, closer to the customer.
At the large conference table in the Philips Football Stadium in Eindhoven, things quickly start becoming more concrete. ASML expects its suppliers to move along with them, towards Asia and the United States, closer to the customer. But that movement is not a sum of individual choices. The companies in the region are closely intertwined, both technically and operationally. The action of one affects the other. Growth therefore automatically means collaboration – also outside the region.
Local for local
The shift towards a local presence is recognisable to many companies at the table, yet becomes more distinct as dependence on ASML grows. For many suppliers, the question whether the supply chain needs to operate more internationally is no longer an open question. The answer is largely determined by the strategy of their largest customer.
Roy Janssen, business director of high-tech system builder AAE, sets out an alternative approach alongside. ‘We have our own strategy for globalisation: local for local’, he says. ‘Eighteen months ago, we made the move to America through the acquisition of Solara Automation. A step that is explicitly broader than just semiconductors. After all, you’ll need other customers and other industries well. But you fill in the blanks yourself, don’t let yourself be pushed around too much and stay in control.’
Mark van den Heuvel, ceo of cable and connector specialist 2Connect, fully supports a local-for-local strategy, but adds another dimension to it. ‘High mix, low volume, that’s what we’re good at’, he says. ‘And there are many markets that also demand that. Aerospace, for example, because no two aircraft are the same. The medical world and defence too call for high mix, low volume.’ In 2023, 2Connect invested in the US through the acquisition of Components Express. ‘From that position, we look more broadly at that market, not only at semiconductors but wherever our proposition fits.’
The pressure to produce closer to the customer increasingly stems from strict requirements in tenders and geopolitical reality, Hermkens explains: ‘There are more and more clients, in China and the US for example, who explicitly request a domestic product in tenders. That too can be an important driving force to start producing locally.’ Costs play a role in this, but they are not always decisive. ‘If you can’t meet that requirement, you are sidelined’
Asia is not Europe
At the head of the table, Bambach steers the conversation back to the chain as a whole. The question is not only where you position yourself, but how you do so in conjunction with others. Precisely because companies in the ecosystem rely so heavily on each other. ‘The unique thing about this Eindhoven region is how closely intertwined we are’, he says. ‘We know how to find each other and outsource a lot, because we know that the neighbour can do it better or faster. How do you travel the world with such a unique composition of abilities?’
‘In Asia, they work together very differently than we are used to here’
Bambach recalls how KMWE director Edward Voncken threw his arms in the air at a similar meeting two years ago and shouted: ‘Come and help us.’ With a presence in Southeast Asia for sixteen years now, Voncken is an expert by experience. ‘In Asia, they work together very differently than we are used to here’, he says. ‘An Asian supplier will keep serving you for as long as he thinks he can make money, but he drops you just as hard when he’s lost interest.’ KMWE therefore regularly conducts business in Asia in-house that normally it would have outsourced in the Netherlands. ‘We are forced to do so, because you want to keep control and customers expect you to solve it.’
According to Voncken, the quality of the local supply chain is another point of discussion. ‘ASML’s requirements are underestimated in Asia. There are only very few suppliers who can deliver quality at that level.’ He sees major challenges ahead, especially in specialist processes. ‘Sheet metal, we have major problems finding local suppliers for that. And surface treatment is another field they simply know very little about.’
The mismatch in expectations leads to friction in practice. ‘I’ve already heard from a number of Asian suppliers that they cancelled orders from ASML products’, Voncken says. They do not have the expertise and are unwilling to invest in knowledge building. ‘We’re not used to that. But that’s the reality in Asia.’
LM Systems is a Tier-2 supplier in the semiconductor chain. ‘We took a bold step and approached our Dutch customers with branches in Asia’, sales director Jason Kant explains. ‘That’s because we hear from them how erratic the local supply network is. The first delivery is still good, but after that it deteriorates in most cases.’ To mitigate that risk, the Veenendaal-based motion specialist offers a solution. ‘We’ve built up a local stock. This way, customers receive exactly the same specifications and cleanliness as when they were still producing in the Netherlands.’
Gaps in knowledge
It is not only technology and processes that prove difficult to move. Finding and retaining people is a structural problem in Southeast Asia. ‘The shortage of skilled workers is just as bad there as it is here’, Voncken notes. ‘Here we train professionals who can machine complex parts on a five-axis machine, because you really won’t find those kinds of specialists over there.’ Culture plays a role in this too. ‘In Asia, they believe careers are built in an office wearing a white shirt, not behind a machine in blue overalls.’
On the other side of the table, Christian Rademaker, purchasing manager at VDL ETG, recognises that sentiment. ‘The problem is retaining the right people’, he says. ‘Because once they’ve been properly trained, they’re being poached away just like that. You’re constantly busy training people.’ Over there, loyalty has a different meaning than it does in the Netherlands. ‘You invest years in such a person, but he doesn’t pay you back and switches to someone else without a second thought.’
Bart Tuijnman, director of SMC Netherlands, sees that exact same pattern. ‘The high-tech knowledge on say cleanliness and surface treatment that we’ve built up over all those years in the ASML chain is lacking there’, he says. ‘Yes, we can deliver products there, but in terms of cleanliness, it is not the same. That’s why, for example, we train our Malaysian colleagues in the Netherlands, so that we can maintain control and continuity.’
Speed and friction
At the same time, Voncken makes it clear that these experiences are not one-dimensional. According to him, the speed at which the Far East is developing is difficult to comprehend. ‘If you’ve been away for a few years, you won’t recognise it anymore. When I returned to Penang, Malaysia, after the Covid period, it was like a new city had arisen. Here we are wrestling over electricity supply and adding a few houses. Over there, they build a complete city from scratch in no time. You need to see it to believe it.’
It is precisely that combination of speed and structural limitations that makes the transfer more complex than is often assumed. ‘Every now and then, we still have to order components in Europe that we actually wanted to source locally in Asia. That only makes the supply chain only more complex’, Voncken explains. Rademaker sees the same thing happening: ‘Some materials listed in the TPD can’t be purchased locally. This means you have to return to the Netherlands and lose a large part of your cost advantage in the process.’
Choosing the right location can be complicated as well. The limitations outlined by Voncken and Rademaker play an important role in this. Robert Loijen, Managing Director at Neways Electronics, outlines how the Eindhoven-based company weighed various options against each other. ‘We wanted to find a good location next to China. In Vietnam, we noticed that there was insufficient knowledge within the semiconductor ecosystem. Penang offered limited opportunities, with too much competition in finding staff.’ Neways ultimately opted for Shah Alam, near the Malaysian capital Kuala Lumpur. ‘The region offers plenty of infrastructure with good international connections.’
Conquering the world together
Now that more and more links in the Dutch chain are spreading their activities across multiple continents, the need for control is emerging, so that mutual ties and informal collaboration remain optimal. Bambach suggests that a driving force is needed, a company that takes the lead. Voncken disagrees: ‘Not when you’re dealing with such a complex chain. Everyone is heading that way anyway. But you do have to consider what is smarter done together.’
A more fundamental question arises at the table: where does the role of the European chain lie if production partially shifts? As for Joop Essing, ceo of system integrator VHE Industrial Automation, the answer lies in the early phase of product development. ‘That’s the key to success’, he believes. ‘Ensuring that you deliver added value.’ According to him, that role does not stop at the first design. ‘Making new product introductions and then letting it go is a waste. If we have to move to another region anyway, let’s take the design along so that we can produce over there as well.’
Voncken responds to this by exposing a weak spot. ‘We’re skipping a step’, he says. ‘The industrialisation part. We design something and then often think it can go into mass production straight away.’ The consequences thereof become particularly visible as soon as products are produced outside Europe. ‘It then turns out that such a design was never properly industrialised, whereas that is in fact what we’re good at here in the region.’
Moving along or choosing otherwise
The question of what the direction should look like becomes clearer when the role of ASML comes up for discussion. Eric Hezemans, semiconductor advisor at the American industrial group IDEX, raises strong concerns about that. ‘ASML produces a few hundred machines a year’, he says. ‘In the world of manufacturing that is nothing.’ Yet at the same time, he can see expectations being set that do not fit that fact. ‘They come up with drawings that are incorrect and ask suppliers to structure their entire organisation according to their wishes. With that, we see regular attempts to purchase in an automotive-like manner, by targeting the lowest price. But we are talking about completely different volumes than in the automotive industry.’
‘Don’t let yourself be pushed around too much and stay in control’
Hezemans believes that suppliers should not blindly make the move towards Asia and the United States simply because a customer asks you to do so. ‘Globalisation is not an end in its own right’, he states. ‘You need to ask yourself: why do you want to make that move? Because everyone does it, or because it makes sense for your business? Be careful not to chase that movement like a blind horse. You have to make sure that it works for your business and that your customers remain satisfied. That’s what you have to base your choices on.’ Bambach adds a caveat to that. For him, the necessity to operate internationally is not up for debate. ‘ASML and many other OEMs can’t afford to stay in one place. They need to spread their wings.’
Erik Ham, programme manager of Strategic Sourcing at Nearfield Instruments, sees another reason to expand to Asia: ‘We’re still small players for many of our suppliers. Some involve more standard components, while other suppliers make unique products for us. We’ve got a wonderful story to go with it, I mean you can see the hockey stick, but we still have to make it happen. That means being very transparent with your suppliers. And that you know each other well and build trust, at all levels within the organisations. So that they don’t let us down when demand in the chain rises and they have to choose between us or another customer. Yes, that’s quite daunting for an emerging company like Nearfield. And so to reduce that risk, we’re looking at partners in Asia. Especially now that our production numbers are starting to rise.’
European with an Asian mindset
According to Hezemans, the way the supply chain functions in the Netherlands cannot simply be copied. ‘We’ve got a culture in which you know each other and can switch gears quickly, in a way that Americans and Asians don’t understand. We shouldn’t let ourselves be convinced that the way we do it is somehow wrong.’ For according to him, it is precisely that culture that is the basis of the success. ‘Why is it that no one else in the world has been able to build such a complex system as an EUV machine?’, Hezemans wonders aloud. ‘That’s due to the way we work together here, But if we start treating it as if it were an automotive chain, then there is a short in the circuit somewhere.’
Miel Ramselaar, director of Operations at Nearfield, approaches it from the opposite side: ‘Our pitch abroad is that we are a European company, but with an Asian mindset. The drive and commitment you see in Asia, we in Europe can still make the necessary progress in that area.’
New region, new rules
If you decide to expand into Asia or America, what will you encounter in practice? Andra Tech Group, a group of manufacturers of high-tech precision components and submodules, recently made an acquisition in the US. Ceo Geert Ketelaars explains that the idea behind it was two-fold: ‘On the one hand, F.K. Instruments is a highly attractive company and an important supplier to the local semiconductor and defence industry. On the other hand, America is a very large economy where we see many opportunities.’
He can now see the first differences with the Netherlands. ‘In America, the distances are of course quite a challenge. Whereas everything is close by in your ecosystem here, over there you sometimes need to send your stuff to technology partners much further away. And that’s where you really lose control for a moment’, according to Ketelaars. ‘Setting up a production structure is quite a challenge as well, because you have to pay import tariffs on machines.’ And the labour market works differently. ‘People are willing to move to come and work for you; which is great, but due to that higher mobility, they are also more likely to be looking at other projects.’
Building it up takes years
Voncken looks to the east with KMWE: ‘In Asia, the primary difference is labour of course.’ That makes it tempting to move production quickly, but according to him, the reality is different. ‘Before you’ve built a machine factory at the level we’re used to over here, you’re years down the line. And it takes much longer to earn that back.’
That’s why it’s better to approach such a foreign operation differently. ‘Start with an assembly plant to put things together. ‘That’s a relatively quick step which at the same time is where you gain an advantage’, Voncken advises. We deliberately invested in machinery only later, because we first wanted to see if the volumes were stable. If you want to add more complex operations and processes, you really need to invest in machines, knowledge and people. If you take that road, it becomes a completely different ballgame.’
Continue developing
That long build-up period makes the question of what remains in Europe itself more urgent. Thermo Fisher still feels closely connected to its home base in Eindhoven. Hermkens: ‘Especially when things get more complex, we still have it made here in the Netherlands.’ At the same time, he wonders how that will work in the future if everyone keeps bringing knowledge and know-how to Asia. ‘Since competencies in Asia are growing, how long will this region remain competitive?’
Loijen picks up on that: ‘You are right, if we don’t act, the business here will disappear. It’s therefore important to continue developing ourselves and to be working on plans for five or ten years from now. We have a lead, but we’ll have to work very hard to keep it. If we only take it to Asia and don’t invest here, we are doomed.’
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