Electronics manufacturing services (EMS) providers have been known by many names over the years.

In the early days of outsourcing they were called job shops or subcontractors. "Board stuffers" aptly described the work that many companies did. Then the term electronics contract manufacturers became popular. In recent years EMS provider became the preferred moniker and it would appear to be the most appropriate.

EMS companies no longer just build printed circuit boards, but offer a soup-to-nuts menu of services for OEMs. During the downturn, many OEMs looked to EMS providers to handle more than manufacturing. They began using EMS companies more for design, logistics and repair. The role of the EMS provider, like its name, has evolved and will continue to do so. The continued expansion of the EMS role will be key to future growth for the industry.

Design services will be key to an EMS company's success. EMS providers will be called to become even more involved in design. A lot of EMS design activity has been focused on manufacturability and supply chain issues. In the future, EMS providers will work more hand in hand with OEM's design teams on original designs in addition to design for manufacturability and supply chain.

Eric Miscoll, chief operating officer for Technology Forecasters, an EMS industry market research firm, says design will be a differentiator for OEMs deciding which EMS company to use or to keep.

"The design piece is critical. OEMs say design capabilities of EMS providers will determine who maintains business in the future," says Miscoll. "OEMs are looking for greater partnership in design. They want EMS providers who have robust capabilities."

The point is not lost on EMS providers. Many have already beefed up their design offerings and see it as key to advancing their relationships with OEM customers.

Marv MaGee, president and chief operating officer of Toronto-based EMS provider Celestica, says design services offer EMS providers "an incredible opportunity to expand from traditional manufacturing services into a whole range of value added services for OEM customers."

"We are investing in design services, developing capabilities and making these incremental service offerings very robust so our customers can feel comfortable that the outsourcing business model works well for them," he says.

Other major EMS providers such as Flextronics, Sanmina-SCI and Solectron also have added design capabilities over the years. However, some EMS companies have been strong on design for years. Case in Point: Plexus in Neenah, Wisc.

Plexus started out as a product development company in 1980 and has always had a strong design focus. The company was formed when two companies, one strong in design and the other strong in manufacturing, merged.

"We didn't have good product ideas, but the concept of helping to get product to market by providing engineering and manufacturing was a good idea," says Bob Kronser, chief technology officer. "We found we could take our expertise and help customers get their product to the market place. So we split out a portion of engineers and manufacturing and created what is now Plexus."

He says Plexus has 350 plus people dedicated to designing product.

"They work directly with their OEM marketing people to design the product based on what marketing wants. They set specifications, design it, validate it and build the product," says Kronser.

Another EMS company with a strong history of design expertise is Jabil Circuits.

Jabil has offered design services for about 20 years, says Beth Walters, vice president of investor relations for the St. Petersburg, Fla.- based EMS provider. "It doesn't mean there was a lot of demand back then, but it was something we did in those years because we wanted to expand our value proposition," she says.

She said Jabil started out doing design for manufacturability, but now does the design of the actual product with customers.

She says Jabil and the whole EMS industry have come a long way. "Jabil started out as a business that fixed field replacement units for the computer company, Control Data.

"We used to repair boards. We weren't building boards from scratch, we were fixing and doing field replacement. The work was done in the garage of our founder's home," she said, noting that "neighborhood ladies" were doing the repairs.

"Now we work with OEM customers on design. We build the board, enclose the board, test it, install the software, ship it to the customer and do repair and warranty work," she says.

Increasingly, OEMs are looking for that type of comprehensive approach by EMS providers. In fact with certain commodity products. OEMs are looking for EMS partners to be more like an original design manufacturer (ODM).

ODMs design, build and ship products for OEMs. However, unlike an EMS company, the ODM will own the design or license a design for a product such as a cell phone or a PC. The OEM does nothing but buy the finished product from the ODM and sell it.

In recent years some EMS companies such as Flextronics, Celestica, Jabil and Pemstar have offered ODM services to OEMs. For instance, Flextronics has its Phone One program in which it has designed and made global systems for mobile computing (GSM) and code division multiple access (CDMA) cell phones for leading mobile phone companies.

However, the ODM model is only viable with certain high-volume commodity products, such as cell phones and low-end computers.

"ODMs exist where there is leverage to be gained through volume channels for distributing commodity products and where there is a set of reference deigns," says MaGee of Celestica.

"Communications infrastructure products around communications and IT products in industrial electronics equipment or medical, military and aerospace are a long way from being commoditized. There is a lot of differentiation in the technologies and the design applications by OEMs providing those products into specific markets," he says.

While OEMs will look to EMS companies for design, they rely on them to handle more final systems assembly. Consider: Most OEMs outsource 90%-100% of their printed circuit board assembly to EMS providers. "But only about 50%-60% of box build is outsourced," says Miscoll.

But as OEMs are under pressure to further reduce cost, they will turn to EMS providers to build more of their systems, not just boards. "It's slowly moving into that direction," he says.

Besides box build, OEMs are looking to EMS providers to handle logistics. For Flextronics, logistics is more than just shipping product. Rather, it involves postponing completion of a product and product configuration based on customer requirements, says Tom Wright, vice president of logistics for Flextronics.

Flextronics' logistics operations center downloads firmware, and adds memory and/or peripherals to the base product based on the customer's order.

Typically, large OEM customers use these services, but smaller- to medium-sized companies can also take advantage of them," says Wright. The logistics services reduce cost and improve time to market for any size OEM.

"We provide an opportunity for OEMs to simplify their supply chain. We take logistics and manufacturing functionality and combine them in a way we believe brings added value to the customer," he says.

Wright says a key logistics trend will be EMS companies shipping directly to consumers. Most EMS companies will ship a finished product to its customer's client. So an EMS company may build PCs for a computer company and then ship the computers to a retail store chain. However, Wright says it is starting to see demand by OEMs to have product shipped to individual end customers. So Flextronics would ship a computer to an individual customer at his or her home.

"We will ship more product directly to the consumer," says Wright. "This is new for us. We do ship to all channels today, but where it involves shipping product directly to the end user, that is something that is limited in scope so far, but it's coming."

OEMs like the idea because it will mean less inventory for them and they can "take a node out of the supply chain and move product directly to the point of consumption," says Wright.

Besides logistics, many OEMs would like EMS providers to take a greater role in sourcing and materials management. But many OEMs don't believe EMS providers are good at it and believe it is in their own best interest to maintain sourcing control of key materials.

Some OEMs say the inventory glut of 2001 and 2002 was caused by EMS companies double and triple ordering of parts right before end equipment demand dried up. In fact, the charge is unfair, because EMS companies were buying parts based on forecasts for end equipment by OEMs, says Miscoll.

EMS providers believe that materials management is core to their business and EMS companies say that they can often buy parts for less than OEMs because their volumes are larger. In many cases that is probably true, but large OEMs such as IBM, Motorola and Hewlett Packard believe they have more buying clout than their EMS providers.

That's why some large OEMs engage in price masking. OEMs will negotiate a price with a supplier at a discount and then re-sell the parts to their EMS provider at a higher market price. The OEMs don't want the EMS company to know the true price because they are getting a preferential price and believe it is a competitive advantage.

Some EMS purchasing executives says OEMs don't always get a better price than EMS companies.

"OEMs sometimes think they are getting the best price for the part, but often they are not. We often have larger volumes and can get better price," says a vice president of purchasing at a large EMS provider.

While OEMs maintain control of critical high-volume components, EMS companies actually handle most of the day-to-day purchasing of parts. These are used in the equipment being built for the OEM and they also play a role in overall supplier management.

"We purchase 99.9% of the materials that we use," says Kronser of Plexus. "From a procurement point of view, we manage measurement of suppliers and supplier quality, and we find new and better suppliers. We are constantly looking at re-sourcing for existing higher dollar items which typically means going to new sources or global source versus a local source," he says.

While OEMs may be leery of turning over strategic sourcing to EMS providers, Flextronics, the largest EMS provider, believes it has superior supply chain skills and provides analysis and advice to OEMs on how to manage a supply chain. It has a group called SimFlex which provides consulting services and software to OEMs to help them improve their supply chain.

"Most companies have squeezed as much as they can from the supply base, but they still need additional cost reduction," says John Sedej, Flextronics vice president. "They tell us what their high level business objective is and ask us for the best strategy to meet their goals."

Sedej says SimFlex analyzes the OEM's supply chain, looks at alternative strategies and makes recommendations on what they should do.

The SimFlex software evaluates an OEM's supply chain network. It looks at where the OEM is doing manufacturing, its capacity, the location of current suppliers, where the OEM is doing distribution as well as its inventory strategy.

It then looks at possible alternatives, such as having manufacturing in China rather than in Mexico, locating manufacturing closer to the market where the OEM's products are being sold, or using different suppliers for certain commodities.

"The main thing OEM customers want is to minimize the amount of inventory they have in their supply chain and to free up operating cash," says Sedej. "But they are also confronted with increasing customer service expectations. Traditionally you would balance that by maintaining a lot of inventory, but people can't afford to do that anymore," he says.

Sidej says it has had 150 SimFlex engagements with OEM customers including telecom, computer and consumer electronics companies. Flextronics expects the number of engagements to grow as OEMs outsource more manufacturing and more manufacturing heads to low-cost regions.

While the role of the EMS provider has expanded, so has its geographic and customer segment reach. Computer and telecommunications have long been the bread and butter business for many EMS companies. However, during the industry downturn, EMS companies started to make a push to service other industries such as medical, consumer electronics equipment manufacturers and the automotive industry.

The automotive industry is appealing to many EMS companies because it is a large volume business. More EMS companies are pursuing tier one automotive suppliers such as Delphi and Visteon.

Flextronics has been doing business in the automotive segment for about eight years, but is making a bigger push into the industry, says Joe Minville, senior director business development, global automotive markets.

He expects it to account for a greater percentage of sales moving forward.

"We focus on entertainment and information, navigation, telematics systems. We have deep vertical integration capability, everything from design to boards, metal stampings, plastic molding, electronics assembly and logistics, which the automotive industry needs, says Minville.

He says EMS business with tier-one auto companies will increase because they are having a hard time meeting the cost targets of the auto OEMs. He expects tier-one companies to rely on EMS providers not just for manufacturing but for design services as well.

The tier-one company may use a design house for a new system. "There are lot of design houses out there that can design automotive products, but they are focused on generating design revenue," says Minville. "They don't care about manufacturability or price. The tier one will go to an OEM and show a design for a new product and talk price and find that the price target cannot be met."

This is an opportunity for Flextronics and other EMS providers who have design expertise. "When we design, we design with manufacturability and target price in mind. We design from day one to achieve manufacturable products at low cost," he says.

"OEMs are just pressuring the heck out of tier-one suppliers," says Minville. "If you look at tier-ones, their average gross profit margins last quarter ending in December was 9.1%. The average gross profit of the top five EMS providers was 5.6%. So there are advantages to outsource. The problem is if tier ones buy from us at 5.6% gross profit and try to sell it to OEMs at 9.1% they are taking 3.6% of margin and I'm not sure if the OEMs will tolerate that long term," he adds.

While many EMS companies are trying to penetrate new markets, they are also penetrating new geographies such as Asia. Example: Jabil. "We expect Asia to account for 30% of our revenue in 2004, up from 26% in 2003," says Walters. "The Americas was 42% in 2003 and will go down to 36% in 2004. It was 70% several years ago." Besides Jabil other major EMS providers, such as Celestica, Flextronics, and Solectron have moved manufacturing to China. But in the next several years buyers can expect even smaller- or medium-sized EMS providers with sales of between $100 million and $1 billion to head to low-cost countries.

"It doesn't have to be China or Asia and it may not have to be this year or next, but a lot of OEMs are putting pressure on EMS companies to prepare for offshore manufacturing," says Miscoll. "For some it will be Mexico, for others southeast Europe. India is also a possibility."