Many small and mid-size Japanese EMS providers are struggling to expand their businesses outside of Japan.

For years Japanese EMS providers relied on Keiretsu to help differentiate their services. But as more EMS and ODM providers become vertically integrated and operational and supply chain experts Japanese EMS provider differentiation becomes more diluted as a competitive operational strategy.

Japanese OEMs have long been a coveted customer sought by most EMS providers. Japanese EMS providers have been successful at serving this huge market because Japanese EMS provider business practices, cultural nuances and folkways are aligned with those inside Japanese OEMs. Sure, many non-Japanese EMS providers have won Japanese OEM business but the Japanese OEM remains a coveted win for most Western and European EMS firms with interest in electronics industry in addition to electronics industry participants and capabilities in Southeast Asia and India.

 

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Japanese EMS provider listings
EMS providers with factories in Asia

 

The challenge for many non-Japanese EMS providers is difficulty aligning their business practices with practices internal Japanese OEMs. Whereas the challenge for Japanese EMS providers is difficulty aligning their marketing and business development techniques with non-Japanese OEMs.

Knowledge does not equal wisdom
知恵のない知識はお尻の背面にある本の負荷です

Dozens of books have been written on the EMS industry and what EMS providers can do to help their chances for prospecting and winning OEM programs. There are also numerous research papers published that speak to EMS and ODM business models.

You can find papers written from a market positioning perspective but fewer written from an EMS operations perspective.

One paper speaks specifically to the primary Japanese EMS model. The authors discuss three things they believe can help mid-sized Japanese EMS providers:

1. Re-structure manufacturing supply chains to reduce Keiretsu obligations

2. Embrace economies of scale through acquisitions to leverage negotiations; and

3. Use IT technology to achieve lean and increase responsiveness to market changes

 

The paper is well written but still it leaves too many questions unanswered. And even if the above are performed collectively, its unlikely the desired outcome Japanese EMS providers want will materialize: differentiation, sales growth with increasing margins and increased market share.

Malaysia, Vietnam, Thailand, Philippines, India and other Asian countries have long been improving manufacturing efficiencies and cutting into the world’s factory (China) for years as Japan relied on Keiretsu. But no competitive advantage is sustainable forever.

Additionally, since Japan’s financial crisis in the 90s, the Japanese economy (and competitors in economies outside Japan) have put relentless pressures on Japanese OEMs.

The need for Japanese electronics OEMs to outsource non-core manufacturing activities to become more competitive will never go away and many believe the Japanese economy is not going to achieve the pre 90s economic level for years to come, if ever.

Japanese OEMs must do something in the meantime, and portions of many of their internal OEM programs must be sourced somewhere. A lot of this business went to China previously. A lot of it went to Japanese EMS provider locations in China.

But asset and revenue concentration in China, for many Japanese EMS providers, became their Achilles heel in recent years.

The trend we see these recent few years for moving production out of China is driven by various reasons beyond just rising China labor costs. The move out of China by Japanese EMS providers partially addresses Keiretsu obligation concerns, but it does not influence the larger and more important EMS operational and industry culture issues. (More on this below)

Questions for Japanese EMS provider decision makers

1. What are the root-causes confining many Japanese EMS providers to marketing their services to a captive Japanese OEM target market?
2. Why are many Japanese EMS providers being squeezed out of their own Japanese OEM market by non-Japanese OEMs? (This is happening even though many Japanese EMS providers have world-class technologies and qualities)
3. Why are many Japanese EMS providers unable to break into Western and European OEM markets?
4. Why are some Western and European EMS business development, sales and marketing techniques able to attract and win Japanese OEM business?
5. What enabled Western EMS supply chain and EMS operational processes and corporate culture to eclipse benefits previously offered by Japanese EMS providers / Keiretsu?
6. The worldwide trend of outsourcing electronics will only become larger. As this occurs will the Japanese EMS provider market share become smaller? (It doesn’t have to be this way)

 

Systemic challenges facing Japanese EMS providers

To understand Japanese EMS challenges it’s important to understand the broader, global EMS industry. Also, a lot of published materials (books and research papers) on the EMS industry seem to be limited to the business development, sales and marketing functions.

Attracting new OEM business is important. But doing this without of a broader, long-term business strategy keeps any EMS provider in a constant state of playing catch up.

Some Japanese EMS providers have expressed interest identifying / partnering with Silicon Valley-based manufacturers / EMS providers, and similar companies in various other US technology corridors to improve their chances of winning Western and European OEM business.

But if Japanese EMS providers don’t identify and fix what’s wrong, they’ll have no leverage with Western / European counterparts and will always be in a lower negotiation position. It appears many Japanese EMS providers need Western EMS providers more than Western EMS providers need Japanese EMS providers.

To create a more level playing field for Japanese EMS providers and for placement of Japanese service capabilities in front of a broader range of market opportunities and geographies, below are some high-level items Japanese EMS must address:

• Create more innovative ways Japanese EMS provider Websites operate, communicate with, and target prospects. In short, Websites should effectively communicate and help sell your service capabilities while you’re sleeping.
• Gain a better understanding of Western business culture and social and folk ways.
• The Japanese mindset is more geared toward innovation vs. invention. Invention requires thinking outside the box and most Japanese corporations tend to remain in their comfort zone. Japanese providers must take more risks.
• Japanese EMS providers internalize everything aspect of their business and lose out on opportunity because they do not make timely decisions
• Many Japanese EMS providers concentrate their customer focus on Japanese OEMs. North American and European OEM sales should be their focus.
• Japanese EMS business development concentration is heavy on consumer electronics and peripherals. The former is one of the most competitive EMS industry segments. Depending on how effectively programs are managed, this can also result in very low rates of return on capital assets.
• One concept it seems Japanese EMS providers fail to completely grasp is that your OEM customer must know you understand his business concerns. He wants comfort, knowing his EMS partner is taking care of his business as if it were his own. How Japanese EMS providers effectively convey this goes beyond just winning Western OEM programs. It should be an integral part of building long-term Japanese EMS provider corporate strategy.
• Japanese EMS providers are culturally challenged when it comes to building relationship with the western OEM.
• Most Japanese EMS providers are left relying on a limited distribution / business channel with few or no human relationships.

 

Creating value in the Japanese EMS provider

To address some of the systemic issue facing Japanese EMS providers:

• Manufacturing rep agreements, some direct sales support from Japan plus, various B2B activities can help extend the marketing reach of Japanese EMS providers.
• Japanese EMS provider business processes and systems cannot be solved solely by IT investment. Well-run EMS providers require specific processes and procedures internally that can root cause issues, bring issues identified to resolution, and hold individuals and functional groups accountable to help employees and provider companies grow together.
• Below are excerpts from a training seminar that was presented to Japnese EMS providers on site in Japan to learn about more effective EMS program management, part of a larger presentation to help create deeper accountability in Japanese EMS functional groups and a greater sense of EMS corporate urgency. But none of this matters if your OEM prospects and customer don’t notice a difference.

 

• EMS providers (Japanese, or not) should commit investment in embedded computing software development (full technology stack capabilities) to help target connectivity IoT markets like infrastructure / industrial electronics, medical, security, surveillance. Ideally, suitable bench strength to leverage cloud sophistication with multi-tenancy, device telemetry and data command and control flow creation and management.
• The digitization of manufacturing requires a broader, dedicated EMS management with a clear corporate strategy for execution.

 

Operations, growth and management execution

From where I sit, many EMS providers have little idea how to identify and market company differentiation.

Many reading this will recall Nam Tai. This Asian EMS provider had RF capabilities, some direct chip attach technology and it was investing in FPC development – each of these differentiators among same size peers serving similar markets. Nam Tai also counted a long list of Japanese OEM customers.

Yet the Nam Tai EMS business still closed. I can speculate why and can recall much higher margins were theirs to lose.

Many good Japanese and non-Asian EMS providers have very capable service offerings but these companies can also limit their opportunities for growth due to concentrated footprints, geographic sales concentration, heavy revenue concentrated on just a few customers, serving one or two end markets… I can go on.

Hiding behind acquisitions

One reasonably large Asian provider reports nearly 70% of revenues coming from one customer. Surely this surfaces during due diligence, scaring some prospects and encouraging some providers in similar situations to grow simply through acquisition.

 

The chart below shows chances for merger/acquisition success based on whether or not the buyer is acquiring a provider with a technology matching his, or has technology that is an extension of his or, has a completely new technology. The applies along the ‘x’ axis when considering which end markets served by the provider being considered for acquisition.

 

Finding the right mix

Many Asian providers are viewed by OEMs in the West as expert in low-mix and high-volume manufacturing. Unless you’re Foxconn this can be challenging work for any provider.

Front end services, back end services and low-volume, high-mix contract electronics still can drive the best margins in EMS. Just look at P&L statements for providers serving non-traditional markets.

Compared to other geographies there’s ample room among the greater Asia region for capable providers in low-volume, high-mix, high complexity service offerings. This is mentioned in the research paper referenced at the beginning of this article and is spot on (provided other business criteria also influences the mix).

For US and European OEMs seeking Asian providers in the sub $20mm market few options exist. Even fewer at sub $10mm where more opportunity might exist.

The right processes and procedures plus, capable EMS executive management with the right strategy combined with sound execution can set the stage for creating a corporate culture that thrives in Asia and beyond.

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OEMs interested in obtaining knowledge for enhancing their Asian supply chain strategy can request a list of EMS provider locations and capabilities here.

References

Lia, Hui-hong J.K., Tan, Kim Hua and Hida, Atsunori, January 2011. Sustaining growth in electronic manufacturing sector: lessons from Japanese mid-size EMS providers. International, Journal of Production Research, 1-16

Olchondra, Riza T. Japanese Manufacturers Move to Philippines. September 17, 2012. www.inquirer.business.net.

Moriyasu, Ken. Facing rising costs, Japanese companies saying sayonara to China. April 14, 2014. www.asia.nikkei.com.

Bingyang, Lu, 2013. “Why Japanese Companies Want To Pull Out Of China, And Why It’s Not Always So Easy”. February 4, 2013. www.worldcrunch.com .

 

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