VentureOutsource.com, in partnership with IDC’s Electronics Manufacturing research initiative, presents exclusively for VentureOutsource.com readers, a detailed look into 11 reasons why the electronics manufacturing services (EMS) industry must restructure. Also, considered in this analysis is original design manufacturing (ODM) services.
Changes in the EMS marketplace, combined with the nature of the EMS-OEM sales cycle and, industry-specific demands placed on EMS companies by their OEM customers, are just some of the reasons why the industry should take a serious look at restructuring how business is sought after, won and managed. (See, also: Defining a new value proposition for the EMS industry)
1. Organizational development remains a core issue for many EMS / ODMs
Large, U.S. based firms are undergoing realignment of capacity and reorganization of business units and regional operations. Flextronics is working through its acquisition of Solectron and other firms as well as its ODM PC and server group.
For ODMs, ASUSTeK has split itself into three components; Arima is refocusing on optoelectronics while milking its communications business, and Qisda has emerged from the reorganization of BenQ. Many large firms are devoting a significant amount of executive attention on various forms of organizational development to optimize operations.
2. EMS value proposition to OEMs includes: capacity, flexibility, and complexity management
EMS firms invest in the operations and management of global manufacturing processes, with the commiserate risks, while OEMs can tap into this capacity and operations on an as-needed basis. In the end, the risks and rewards appear to be unbalanced between EMS firms and OEMs.
3. Portfolio of products and clients determines the success of EMS / ODMs
EMS firms’ growth is tied to their customers’ success in the market, shipping sufficient volumes to allow the EMS partner to generate a sufficient run rate to achieve profit goals.
4. Profit sources remain steady, but limiting under current conditions
EMS / ODMs generate revenue and profits from manufacturing fees; the spread on component sourcing, various engineering, design, and test fees; fees for logistics; and fees for repair services, among other sources. All of these have been in place, with few real new sources being created within the industry. The challenge is the constant cost reductions OEMs require, which eat into the ability of EMS firms to grow profit margins within specific lines of business.
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5. End-market strength drives industry and demand forecasting remains critical for EMS / ODMs
Given the EMS industry business model and the inherent flexibility in contracts (when orders can be cancelled; delayed, or accelerated at the pleasure of the OEM), demand forecasting is critical for EMS firms to ensure they can meet fluctuations in demand, mitigate inventory risks, and plan investments.
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