Vertically Integrated Service Providers
December 31, 1969 |Estimated reading time: 5 minutes
Growing numbers of OEMs are placing greater emphasis on their core competencies. As a result, they are turning entire projects that include design, fabrication, assembly, and parts procurement over to competent EMS providers.
By Zulki Khan, Nexlogic Technologies
OEMs are increasingly looking to EMS companies to provide more vertically integrated services, such as PCB layout, fabrication, assembly, parts procurement, and sub-system and full-product testing. In this regard, EMS firms are moving toward full-service companies, so they must incorporate all aspects of product management. They may not need to bring all the components of these additional services in-house. Some can be outsourced to third parties, but OEMs are looking for more of a complete solution of services contracted out to multiple suppliers and service providers.
A part of vertically integrated services involves EMS providers working in conjunction with intellectual property (IP) providers in North America and India. In the past, OEMs designed products and outsourced some manufacturing and test to EMS companies. Today, portions of a design, or entire designs, are outsourced to EMS providers jointly operating with IP providers/hardware design companies.
OEMs are also increasingly relying on outsourcing designs, especially to countries such as India. Not only does such a country have developed talents and expertise to do complex designs, such as IP outsourcing, but also going to these design houses offers cost savings because of currency parities between countries. These designs, once considered “sacred” and kept in-house by OEMs, are now performed by third parties like original design manufacturers (ODMs) and EMS companies.
OEMs are increasingly favoring full services. An OEM may develop a given product, and then turn the complete project over to an EMS provider, or in some cases, delegate the complete design, fabrication, and assembly responsibility to the EMS provider. That level of relationship has become advanced enough that the OEM will permit the EMS provider to ship these products directly to end customers. This concept began with consumer products developed by EMS companies in China or Taiwan and shipped to U.S. retailers directly. That same idea is being adopted by several market segments, including medical electronics, networking, and industrial. OEMs from these sectors want EMS providers to handle everything, even return material authorizations (RMAs) and after-sales service and support.
This dramatic increase in outsourcing is occurring because OEMs are concentrating more on core competencies such as designing and marketing their products. As a result, greater pressures are being placed on EMS providers to fabricate, assemble, and manufacture flawless products. Yields have to be exceptionally high, product quality must be excellent, and product must be delivered on time. Therefore, OEMs are searching for EMS providers with the know-how, experience, and trained cadre in various product development disciplines. They are not that concerned as to whether all the work is done in-house or outsourced to third parties, as long as they get an excellent product that is delivered on time.
Figure 1. Upward curve showing increasing distributor/re-seller functions.
A subset of these trends is that traditional component re-sellers and distributors are responding to OEM outsourcing. Tier I distributors are creating their own design centers to support OEM product development. In the 1970s and 1980s, distributors serviced the industry by leveraging their buying power with component manufacturers to bring OEM customers best-possible pricing and delivery based on economies of scale. This trend is changing, whereby distributors and resellers are providing more services to create value-add for OEMs (Figure 1).
Now they’re moving forward and designing OEM products, using component lines that historically were carried in their inventories. Those same activities were handled with OEMs or EMS providers previously. These design resource centers also give OEMs access to hardware evaluation and development kits, reference designs, associated product documentation, and support technologies. They are vertically integrated similar to that of EMS providers, and supplying not only components, but also doing reference designs and boosting revenues by exclusively using their own product lines.
Another trend involves production volume quantities. Previously, huge production quantities (100,000 or more pieces) were going to countries such as China and Taiwan. Now, EMS companies in these regions are willing to take medium to large quantities (5,000 to 50,000), but provide an end-to-end solution to act as a fulfillment center. Due to growing competition and more advanced manufacturing required by high-end products, EMS companies are willing to take medium to small production runs.
Nowhere to Hide from RoHS
RoHS and WEEE compliance also plays a part. Some OEMs hope these regulations will go away, but that is not the case. In fact, the opposite is true; RoHS governing bodies are looking at exempt companies under Categories 8 and 9 to see when medical applications, for example, can be included under the compliance umbrella. It is just a matter of time before exempt OEMs will be fully involved in lead-free production. EMS providers offer guidance and leadership, whereby they train, direct, and transition OEMs.
Figure 2. Leaded parts prices rise, while lead-free prices decrease.
Other RoHS-exempt industries are already learning that freedom from RoHS compliance is no longer advantageous. They are currently experiencing price increases for leaded parts, whereas lead-free components prices are dropping (Figure 2). Some RoHS-exempt OEMs are willing to acquire leaded parts on a non-cancelable, non-returnable (NCNR) basis. Many are also buying leaded parts inventories years in advance to be on the safe side. Prompting this behavior is the fact that medical-equipment OEMs are taking into account the lengthy period for product approval and FDA certification required for product-design changes and modifications. RoHS compliance likely will make leaded components uneconomical, and in many cases, obsolete.
Up until three to five years ago, $5 to $10M contracts for after-sales support were considered decent-sized orders. Now, EMS giants see $50- to $100-million contracts from huge OEMs for after-sales service and support. This growing trend is showing more emphasis for OEMs moving toward outsourcing. Large OEMs previously managed their own after-sales support. Recently, however, EMS providers realized they could leverage their expertise and technologies to grab a major share of this market. Some EMS providers receive $150 to $300 million worth of annual contracts. Hence, new revenue streams are coming to EMS providers’ coffers.
Larger EMS providers have also developed a vast storehouse of detailed knowledge as the basis for after-sales support and maintenance. They are using databases from their testing operations to study and sample areas that are most prone to failure. That way, they can leverage this knowledge to increase efficiencies for after-sales service, support, and material returns.
Conclusion
EMS providers have pinpointed where failures can occur most often, and are fully supported by volumes of product documentation they can readily access. Fully armed with this knowledge, they are quickly and efficiently performing after-sales maintenance at a lucrative profit.
Zulki Khan, president and founder, Nexlogic Technologies, may be contacted at (408) 436-8150, ext. 102; e-mail: zk@nexlogic.com.