Watching the competitive jockeying of the world’s largest handset brands has its pleasures-the neck-and-neck excitement of a horserace, the tragedies of thrown jockeys and doomed steeds and, naturally, the wagering, er, investing.
Behind the scenes, however, the major handset brands all depend to some degree on original design manufacturers (ODMs) and electronic manufacturing services (EMSs). That relationship allows chest-thumping brands to meet global demand, including in-country manufacturing that serves local needs at razor-thin margins. (No pun intended.)
The nether world of manufacturing, if anything, is even more cutthroat than the branded battleground viewed by consumers and casual industry observers.
For one thing, the drama playing out in the world of ODMs and EMSs typically unfolds behind the scenes. The brands don’t talk about their relationships with ODMs and EMSs, favoring the impression that their best steeds are products of their own stables-which they largely are, but more on that momentarily. Naturally, the ODMs and EMSs-like other subordinates in the wireless value chain-are mum, because mum’s the byword for continued business.
Analysts, however, have their methods, sources, tear-down reports and connect-the-dots spadework. And a couple of analysts watching the OEMs and the ODMs and EMSs that serve them point to issues both familiar to the branded world as well as entirely different pressures bearing down on ODM and EMS players. Familiar themes include increasing dominance by fewer players, more consolidation even as the overall revenue pie grows and the never-ending shift from partner to partner in search of the lowest costs.
High stakes
Competitive pressures are even blurring the distinction between an ODM and an EMS.
Traditionally, ODMs would cook up new designs and products based on their own investment in intellectual property and offer them to an OEM for branding, carrier deals and distribution, according to Adam Pick, senior analyst, EMS and ODM services at iSuppli Corp. EMSs churn out a product to the OEM’s exacting specifications. Now, players in each category are increasingly invading the others’ turf. EMSs are pushing “forward” in the value chain to include design and ODMs are pushing “backwards,” getting into components. Price competition drives down margins.
“In this industry, if you look at gross and net margins, they’re just abysmal,” said Pick. “The players don’t make a lot of money because it’s so competitive. Each house is looking to steal business from others. Everyone is looking for a recipe to cook up margins, excite shareholders and create value for their company.”
Despite reputations to the contrary, top OEMs are increasing their reliance on ODMs/EMSs as product cycles grow shorter, sudden ramps in volume are needed to serve hot markets and cost-cutting leads to a focus on core competencies, Pick said.
“Manufacturing is not a core competency for electronic manufacturers anymore,” Pick said. “They use ODMs and EMSs to focus on their true competencies-brand, intellectual property, design and supply-chain management or, in other words, cost effectiveness.”
The trend holds even for brands such as Nokia Corp. that excel at the manufacturing process. According to Pick, the people who manage manufacturing are really where Nokia’s competency lies.
“Nokia understands the value chain so well that they can start their engineers at the very beginning of the process and say, ‘Let’s design this product for supply-chain excellence,'” Pick said. “That means exploiting all processes to enable manufacturing to be swift and economical. It’s all about time and money in a business where product life cycles are so short.”
Best bets
Nokia’s search for the best ODM or EMS partners, meanwhile, can give its manufacturing partners wings or send them tumbling from the track. For example, according to Pick, Nokia’s increased use of Foxconn International Holding, Jabil Circuit, Flextronics International and BYD (a Chinese EMS) hit traditional partner Elcoteq hard last year. (Elcoteq’s slight increase in revenue in 2006 from the prior year led to a major restructuring to reduce headcount and plant capacity.) In contrast, Sony Ericsson Mobile Communication’s remarkable growth helped grow Flextronics’ revenue.
Flextronics, of course, recently made headlines with its acquisition of EMS Solectron. Solectron offered a strong balance sheet with more than a $1 billion in cash, non-traditional vertical industry customers in health care and services and a customer portfolio that included more than $2 billion in revenue from Cisco Systems. The deal adds to Flextronics revenue and continued competitiveness with a diversified product line with higher margins.
“If you look at their footprints, there are significant opportunities to wipe out some redundancies that will really drive both capacity utilization and revenue per square feet,” Pick said. “The deal also enabled Flextronics to signal to the world that it’s not just about competing with Foxconn, which will grow to be a $50 billion business this year,” Pick said. “Flextronics got the chance to beat its chest and say, ‘We’re in this for the long haul.'”
The thesis of Pick’s latest report in the space is that contract manufacturing, once China’s claim to fame, may be shifting to locales where in-country manufacturing can take advantage of lower wages. Vietnam’s share of revenue in the space is forecast by iSuppli to explode from $136 million today to $1.8 billion within four years.
