An expert on electronics manufacturing argues that the first EMS providers about to move up the manufacturing value chain will have a leg up on other competitors seeking to expand their operations.
However, the end markets in electronics are shifting in a manner which
will create very difficult decisions for EMS companies. The evolution of
the end-markets is as follows:
- The vast majority of
electronic content is driven by three large consumer markets (computing,
mobile phones, tablets). These markets are very cost sensitive and
require large capital investments for an EMS.
- The rest of the
market consists of lower volume but higher margin businesses such as
telecomm, aerospace and defense, medical, and industrial.
trajectory of the consumer market will be ultimately a shift back to
the OEM/ODM model. Why ? Again, there are two primary reasons. Large
consumer brands already have high volume, so the core values provided by
the EMS (aggregation, specialization, and variable cost) are much
diminished in this environment. Second, EMS profitability is a cost that
can be optimized away for very cost sensitive OEMs.
term trajectory for consumer electronics will be for unified entities,
and indeed the computing market foretells the trajectory for the other
consumer markets. In these markets, the ODMs in Taiwan have driven their
own brands (Asus, for example) and EMS companies such as Flextronics
are walking away from the computing segment out of profitability
concerns. A strategy of blindly following the consumer marketplace with a
focus just on operational efficiency is not likely to end well for the
companies who adopt that strategy.
In contrast, the non-consumer
marketplace has the potential to be a large value generator for EMS
companies. Unlike consumer companies, these enterprises generally have
lower volume, so the demand aggregation function is of real value to
these OEMs. In addition, there is need for these companies to handle
issues such as parts obsolescence and extended reliability. In general,
these companies have a much greater need for maintainability, and
typically are without the skills required to build that capability
Thus, the opportunity to move up the value chain
for EMS companies exists in solutions for design, supply chain and
perhaps even the equivalent of the “ASIC” model for pc-boards. The first
EMS company that moves up this value chain is likely to gain
disproportionate value and very likely create lock-out situation
relative to its competitors.
-Rahul Razdan has over 25 years
executive management experience in the electronics industry. He
previously served as general manager of Cadence Design Systems’
functional verification unit. He holds a PhD in computer science from
Harvard University and a graduate degree in computer engineering