Outsourcing is different from outsourcing

Contract electronics manufacturers (CEM), or electronics manufacturing services (EMS), are responsible for about one-quarter of today’s electronics assemblies. Within the next ten years more than half of all electronics will be assembled by them. The EMS industry has grown from „sweat shops“ into respected corporations. EMS providers have elevated their relationships from job shops for additional capacity to strategic partners. Some companies have gone from virtual unknowns to some of the largest employers in several European countries. Contract manufacturing is accelerating in particular in Eastern Europe countries such as Hungary, Czech Republic, Romania and Poland. Flextronics for example expects 40% of its fiscal year’s revenues to come from European operations.

While the EMS industry is growing at a compounded annual growth rate (CAGR) of 25 to 30%, the larger providers are growing at a CAGR of more than 50%. Very big OEMs have recently accelerated their rate of outsourcing. This, along with sophisticated requirements for selecting a partner, will further increase the growth rate of the greater EMS companies, thus increasing the size disparity between the top providers and the rest. It would not be surprising, therefore, to see further consolidation, especially between „second tier“ companies.

Larger contract manufacturers are located in low-cost regions and have significant buying power, so it is difficult to compete only on price. In addition, they are very good manufacturers. OEM selection criteria, therefore, have shifted from price and traditional manufacturing metrics to areas such as logistics, capabilities, engineering competencies and technology roadmap. These, along with corporate culture and vision, now make up the differentiating battle grounds.

The contracting industry is going through a significant change. This complex turn includes both process and product developments. Until recently, OEMs developed almost all of the manufacturing processes. The OEMs also took responsibility for transferring these to and qualifying their manufacturing partners. Many OEMs are no longer investing in the development of manufacturing technologies, so the EMS provider is now expected to take responsibility for developing and implementing the technologies required for next-generation products.

This shift is complicated because the technologies are now more sophisticated and the rate of change is accelerating. In the past, assembly was limited to through-hole or surface-mount technologies. Compare this to the extensive range of technologies used in a dual band GSM phone, including three types of chip-scale packages, PCB line widths down to 110 em and 125 em micro-via technology, bare-die and integrated passive devices.

The OEMs had years of well-proven experience for developing and implementing technologies, but except for a few, this is new to most EMS providers. It is therefore important that OEM and EMS companies not underestimate the significant differences between process development and implementation or sustaining engineering. Product development cycles have gone from 3 years to approximately 6 months This combined with the need to improve times to volume and lowest cost, OEMs are relying on EMS providers to assist in product development. Many providers are therefore acquiring engineering companies and establishing product introduction centers at an increasing rate.

Outsourcing product development, however, is very different from outsourcing manufacturing. In most cases, the OEM treats the EMS providers‘ engineering team as an extension of their own or as a contractor for specific projects. The OEM expects the provider to have the ability to seamlessly launch products from one introduction center to multiple factories in different geographical locations. To meet these requirements and enable collaborative design and ensure adequate communication, virtual integration and well-defined methodologies may be even more important in product development than they are in manufacturing.

Nicholas E. Brathwaite, VP Advanced Technolgy & Engineering Services