Motorola Inc. appears to be in the midst of reordering its phone design and manufacturing strategy, moves that could yield either boon or doom for those along its supply chain. Motorola’s exercises also highlight the complex, cutthroat nature of electronics manufacturing.
Specifically, Motorola last year cut off ties to Taiwanese contract manufacturing company BenQ. Although neither company would comment on the situation, those in the industry said Motorola dropped BenQ because BenQ began selling phones under its own brand while at the same time designing phones for Motorola. And BenQ may not be the only company that will fall out of Motorola’s favor-industry analysts say Motorola is re-evaluating all of its design and manufacturing partners.
“I think they’re trying to streamline their outsourcing and ODM relationships,” said Albert Lin, a telecommunications analyst with American Technology Research.
Indeed, Motorola just last month hired a former IBM Corp. executive to oversee its global supply chain operations. Stuart Reed, IBM’s former vice president of worldwide manufacturing, will report directly to Motorola Chief Executive Ed Zander. As head of the company’s supply chain, Reed faces a complex web of manufacturing strategies and partnerships. Reed declined an interview request from RCR Wireless News.
Motorola builds most of its phones in its manufacturing facilities in China, Singapore, Brazil, Malaysia and Korea. However, the company outsources about one-third of its phone manufacturing to companies like Flextronics, Solectron and others. Further, about 22 percent of Motorola’s revenues come from phones designed by other companies. So-called original design manufacturers like BenQ, Arima and Compal design handsets and then sell those designs to original equipment manufacturers like Motorola. The vast majority of ODMs are based in Taiwan and generally offer low-end handsets.
Although outsourcing the manufacture of handsets is fairly common, outsourcing the design of handsets is relatively new. Motorola is not the only company to purchase handset designs-Sony Ericsson, Siemens, NEC Corp. and others also purchase designs from ODMs. Indeed, almost 13 percent of the 670 million phones sold last year were designed by Taiwanese ODMs, according to market research and consulting firm iSuppli Corp. Outsourcing the design and manufacture of mobile phones can reduce costs and risks, but can also result in lower-quality products.
However, the market contains additional complexities. Some manufacturing companies like Flextronics are introducing their own design services in an effort to tap into the growing ODM market. And some ODMs offer their own manufacturing services as well as design services. Further, some ODM vendors are trying to push their way up the supply chain by selling their own designs under their own brands. iSuppli describes these new players as original brand manufacturers and counts BenQ, Dbtel and others as leading OBMs.
OBMs tread a delicate path. They must please their OEM customers with compelling products while at the same time promoting their own brands-potentially with the same products. The conflicts of interest are obvious. Indeed, in a recent survey iSuppli asked if OEMs are threatened by ODMs with competing brands. The firm said 43 percent said yes, and 60 percent wrote anti-competing clauses into their ODM contracts.
Thus, BenQ stands as an example for the rest of the industry. The company in its first quarter reported a slump in its mobile-phone shipments along with a drop in profits and revenues, according to reports. At the same time, Compal reported a jump in its phone shipments-which many in the industry believe is due to increased orders from Motorola. Compal does not sell phones under its own brand. Motorola has declined to name its ODM partners.
Indeed, Compal could become a major Motorola partner in the coming months. According to a research note from JP Morgan, Compal could enjoy major handset shipments due to its contract with Motorola. The firm said Compal is supplying low-end phones for Motorola’s new sub-$40 handset deal with the GSM Association. Motorola announced in February that it would sell 6 million low-end phones through the agreement.
“How much does Motorola want to do in the design aspect?” asked American Technology Research’s Lin.
Lin said Motorola has been testing the ODM market for the past few years, essentially experimenting with the players and the business model. Although the company could continue to shake up its ODM partnerships, most expect the company to continue to outsource around one-fourth of its handset design operations.
