After semiconductor non-OEM components manufacturers jump through hoops to get their chipsets on the OEM AVL, more work remains so they can secure purchase orders for their now ‘qualified’ components.
The buyer can be the OEM, and it can be the contract electronics (EMS) provider. The latter comes into play when considering build location for the OEM product and whether the EMS or (original design manufacturer) ODM is involved in the bidding (and the ‘buyer’ is the contract electronics solutions provider).
The way a semiconductor vendor secures POs for their components from OEM and EMS/ODM companies can involve up to five (5) scenarios. These are not entirely sequential, and this depends whether a ‘step’ occurs exclusively with the EMS/ODM company instead of the OEM.
Scenario 1: OEM bids for components
Bidding for components by the OEM can be separated into OEMs that have their electronics design and product manufacturing in-house, and OEMs that outsource these activities. Where OEMs source these activities to contract electronics solutions (EMS/ODM) providers, drivers supporting this vary.
Given the materials COGs for OEM product, OEMs need frequently updated components cost understanding to help them with product ASPs, which plays into OEM forecasting MCOGs and gross profits.
Additionally, a great number of EMS contract service level agreements are negotiated against cost-plus pricing and fixed materials pricing. In wanting to minimize EMS/ODM costs OEMs do what they can to try and feel comfortable they are getting the most competitive bid from their EMS/ODM suppliers who typically have deeper access to understanding component-pricing trends.
OEM requests for updates on component pricing also help OEMs further develop and maintain important relationships with component vendors – important because OEM product innovation and marketplace dominance can often rest on OEM product innovation and technology that comes from the components OEMs place in their products.
In the past, a lot of OEM bidding took place on a quarterly basis. This is being replaced by annual bidding with OEMs wanting quarterly cost reductions across the term agreement which can push more risk onto semiconductor manufacturers as prices for raw materials like copper, gold, and oil fluctuate.
Scenario 2: OEM outsources to EMS provider (location dependent)
The OEM trend in outsourcing will only become more embedded in supply chains as companies and marketplaces become increasingly more competitive.
Of noteworthy mention, even the companies offering semiconductor assembly and test (OSAT) like ChipMOS, Hana Microelectronics, Shinko Electric, and Tianshui Huatian Tech, to name a few…providing outsourced integrated circuit (IC) packaging services (v. being captive to the die manufacturer) are also outsourcing equipment and module design and manufacturing to the components manufacturers and EMS and experiencing steady growth year-on-year while doing so.
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6 Steps how semi components get on OEM approved vendor list (AVL)
For OEMs outsourcing to EMS providers, the semiconductor vendor must have knowledge of which EMS provider(s) the OEM is partnering with and the EMS factory locations for the OEM customer program builds.
An OEM outsourced build model introduces some additional challenges for semiconductor vendors seeking purchase orders, the first being access to, and lack of, information. A wall often exists between semiconductor sales people and OEM buyers and EMS buyers; the two buyers don’t often have a relationship with the same components sales person.
There is also lack of motivation from OEMs to communicate their EMS partner factory locations to components manufacturing sales people mainly because they’re busy working on other supply chain challenges.
Lastly, attitudes and relationships get in the way. Competing vendors with preferred supplier status. Even when a semiconductor vendor identifies the EMS factory build location for the OEM, the OEM’s preferred supplier status with a competing vendor often prevents an alternative semiconductor vendor from bidding at the EMS factory to obtain POs.
A lot of opportunities regularly are not known and/or not acted on because purchase orders are executed against sole-sourced arrangements, even for highly-commoditized components.
Scenario 3: EMS/ODM bids for components
EMS bidding for semiconductors is similar to when bidding takes place at the OEM but differs from reasons why the OEM would conduct their own bidding in-house. One main difference here is purchase price variance (PPV) because EMS providers can aggregate demand for components across multiple OEM customer programs.
Aggregating demand allows EMS and ODM firms to achieve better components pricing than many of their OEM customers can leverage. EMS companies will typically keep most of the price differential (components cost v. price) for themselves.
Another difference between bidding by the EMS providers compared to OEM bidding are the terms and conditions vendors will often concede to when negotiating with EMS providers. Lower components costs, higher stocking levels and better delivery or payment terms often translates to better ROIC for EMS providers, especially important in the capital-intensive EMS industry.
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In some contrast to what might be good for OEM customers, EMS providers can also be tempted to shift components market share of their business to preferred suppliers. This will help OEMs if PPV is openly shared with customers but not all EMS providers practice open-book costing.
Scenario 4: Revised bid
Preferred components suppliers can achieve preferred status for a number of reasons, some not always transparent. In situations where a preferred components supplier is not competitive enough with their lowest price, EMS and OEM buyers may request a revised bid.
Changing vendors always involves some administrative work so some buyers (OEM and EMS) will even suggest a revised ‘target price’ the supplier should work toward to help re-secure the business.
Some may view this is unethical while other may justify the practice. In support of the practice it can offer a degree of manufacturing continuity. Even though each component on the AVL is considered approved and may be swapped out for alternates also on the AVL, some components specs for two exchangeable components may not be exact and once volume production begins and FGI enters into the marketplace the switching components, ECOs and updating inventories can be costly and introduce room for additional problems.
Additionally, asking for a revised bid is another way of the OEM and EMS provider to let the components manufacturer know the relationship is valuable and highlighting this importance to vendors can be considered a favor by OEM and EMS buyers that also comes with a favor request in return – better components contractual terms and conditions for the OEM or EMS provider.
Downsides to a components vendor being asked to revise their bid in order to secure additional purchase orders can result in losing the sale and/or higher revenues but tighter profit margins.
Scenario 5: Winning components purchase orders
Following the above, the OEM or EMS provider reviews the various quotes they receive and determine PO awards which are followed by contractual purchase orders. In the EMS industry most OEMs and EMS providers decide and award purchase orders based on unit cost alone. Unfortunately, looking at the greater supply chain this making decisions on unit price alone is less than ideal and does not take into consideration total cost of ownership for OEMs and EMS providers.
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