In a sign of the growing influence EMS providers are exerting in the area of OEM design, a number of suppliers are tapping their contract manufacturing partners for a service that historically has been offered by distributors: demand creation.
EMS companies are offering these design collaboration services to major OEMs-in some cases virtually for free-in an effort to gain more volume- manufacturing business. While distribution still accounts for the vast majority of demand creation programs, major component suppliers like Murata Electronics and Texas Instruments are sharing more information about their latest technologies with EMS providers in hopes their products will find their way into more OEM designs.
"Some component suppliers, like Motorola and Texas Instruments, have been very aggressive," said Latchman Venkatesh, vice president of global supplier management at Sanmina Corp., a San Jose contractor. "They spend lots of time with [our engineers] to get their products designed into our customers' products."
David Loconte, national sales manager at Murata North America, Smyrna, Ga., said it's in his company's best interest to work with major EMS companies. "They're getting more involved with design, and OEMs are giving them more latitude to effect change on the approved-vendor list (AVL)," he said.
Murata also continues to work with distributors, depending on the design project. "Distributors still have a role," Loconte said. "We want to work with as many people in design [as possible]."
Demand creation has typically fallen to distribution, which has used it to reduce material costs for OEMs and increase profit margins. Distributors rely on field-applications engineers to create designs and register them with component suppliers. When the design is sold to an OEM, distributors can often increase their margins by more than 25%.
While some suppliers are beginning to lean on EMS providers to create demand, others are sticking with distributors. Vitesse Semiconductor Corp., for instance, signed a North American distribution deal last week with Nu Horizons Electronics Corp. specifically because of the demand cration possibilities. (See story on page 10.)
"Some suppliers are significantly better than others at protecting the distributor's design registration," said Rick Timmins, senior vice president of engineering and design services at Arrow Electronics Inc., Melville, N.Y. "Suppliers with a narrower, more proprietary product line, such as Altera and Xilinx, tend to protect distributors more than those with commodity products."
Xilinx Inc. doesn't sell direct to contract manufacturers, preferring to work mainly with Avnet Inc. "When they get a build from an OEM, we encourage the CEM to go through distribution to protect our distributors and make sure they are financially compensated," said Steve Haynes, vice president of worldwide sales at Xilinx, San Jose. "CEMs lack the expertise and the focused resources."
But as more EMS providers identify opportunities to secure business early in the design process by aligning themselves more tightly with suppliers and OEMs, distributors are facing competition, said Kevin Kane, an analyst at IDC Corp. in Austin, Texas.
"The more distributors lose mind- share, the weaker their relationships [with component suppliers and OEMs] will become," Kane said.
EMS gaining support
The EMS demand creation opportunity stems largely from the fact that OEMs increasingly are abdicating control over AVLs to their contract assembly partners. "Every one of my customers wants me to influence component design to drive down total cost of ownership," said John Boucher, vice president of global supply chain at Manufacturers' Services Ltd., a Concord, Mass., EMS company.
As the AVL gatekeepers, EMS companies have become important to the supplier base, which in many instances is now willing to collaborate on designs to win business.
"A lot of the memory guys like Samsung are interested in showing us their technology roadmaps," said Bhawnesh Mathur, senior vice president of supply chain management at SCI Systems Inc., Huntsville, Ala. "Component suppliers in general come to us and say their products are different and can provide better, faster service to our customers."
Pemstar Inc., a Rochester, Minn., contractor specializing in product design and engineering support, struck a deal in July with TI's Optical Wireless Solutions group for a new reference design, according to Pemstar president Allen J. Berning. "On some designs we will collaborate with OEMs, and on some designs we'll work with distributors and semiconductor companies," he said.
A question of motive
Some suppliers and distributors contend that demand creation should be their responsibility alone. EMS providers are building a large engineering infrastructure, but they are not vendor advocates, they say.
"Some would say most contractors only do design services for the purpose of creating downstream revenue for their manufacturing business," said Jim Schaeffer, vice president of Avnet Design Services. "It wouldn't surprise me to find out they are giving design services away to attract the volume-production purchase orders from the OEM."
EMS providers that specialize in design/engineering services, like MSL, Pemstar, and Plexus, charge OEMs for their design expertise. Others, like SCI, only charge OEMs "engineering consultant fees" for design projects they hope to expand into full-volume production.
Although the value of the design is lost in the overall project, EMS providers still benefit, according to Shawn Severson, an analyst at Raymond James & Associates Inc., St. Petersburg, Fla. "If you can provide a service to a customer at a high engineering level, you're into the customer early," he said. "That should allow you to win the larger-volume production." OR