Consumer electronics OEMs consider outsourcing options
Less than 15% of consumer electronics equipment is built by contract manufacturers
By Jim Carbone -- Purchasing, 12/4/2008 9:36:00 AM
Buyers involved in outsourcing decisions at consumer electronics OEMs may be busy next year evaluating and qualifying electronics manufacturing services (EMS) providers because of the global economic slowdown. Such a downturn often results in companies reviewing their value proposition and whether it makes sense to manufacture internally or to outsource.
“In a downturn, OEMs will either decide to tighten up their manufacturing or cut back capacity to clear their balance sheet and focus on core competencies,” says Adam Pick, EMS/ODM analyst for researcher iSuppli in El Segundo, Calif. That’s what happened in 2001 during the last big electronics industry downturn. Many communications OEMs decided to reduce or eliminate internal manufacturing and sell their facilities to EMS providers and then use them for manufacturing.
So far consumer electronics companies have been slow to outsource in this downturn, but that may change. If they do it will be for the same reason other OEMs outsource.
“Cost, cost, cost,” says Pick. “It doesn’t matter if you are doing consumer electronics or industrial controls, EMS providers are going to try to get the best cost for their client.”
However, while EMS providers such as Foxconn build name-brand consumer products, most consumer electronics manufacturing is done by the OEM. Electronics contract manufacturing has penetrated about 14.5% of the consumer electronics market, according to iSuppli, which is low compared to other industries. For instance, about 65% of wired communications and 40% of wireless communications equipment is outsourced.
Eight years ago consumer was not a big chunk of what EMS providers were doing, says Pick. “It was mostly datacom, telecom and enterprise. But then there was the tech wreck and at that time a lot of EMS firms decided to diversify.”
He says some EMS providers expanded facilities or started consumer business units, while other acquired facilities of other consumer-focused companies. However, choosing an appropriate EMS provider is no easy task for a buyer at a consumer electronics OEM.
“One of the fundamental challenges for a consumer OEM is EMS supplier selection,” says Pick. “There is no one criteria in choosing. You need to get into the weeds and determine where the fit is.”
Foxconn is the leading consumer electronics EMS provider, which means they can be more choosey about the business they take on, Pick says. “A consumer OEM may find out Foxconn won’t even talk to them, not because Foxconn doesn’t want the business, but because it may not be good match.”
Some EMS providers like Foxconn, Flextronics, Jabil and Celestica have a strong and growing consumer business. Other providers may not be able to handle the large volume requirements of consumer electronics or don’t have the purchasing and supply chain capabilities that consumer electronics companies require.
There is no magical formula for determining a good match. Rather, careful analysis by OEM buyers involved in outsourcing decisions is needed. Charlie Barnhart, co-founder of Barnhart and Associates in Maui, Hawaii, says OEM buyers should use the following criteria to determine the appropriate EMS supplier match.
Scale: An OEM should choose an EMS provider that is similar in size to the OEM.
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Capabilities: Different EMS providers have different skills, experience and industry knowledge and technology know-how. Those capabilities need to match the needs of the consumer electronics OEM.
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Commitment: Is the EMS provider committed to the consumer electronics segment? And is it dedicating resources to it or does it dabble in the sector?
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Total cost: Is the EMS provider competitively priced on a total cost of ownership basis and not just on lowest manufacturing cost?
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Scope: The EMS provider should have the appropriate global footprint to support the OEM in markets in which it sells its equipment. It also needs to have the manufacturing technology and the supply chain in place that the OEM needs.
Also see: Jabil to form consumer electronics division
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