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Handset Manufacturing: Not a Simple Endeavor
December 31, 1969 |Estimated reading time: 5 minutes
Convergence in handsets has caused greater product stratification. Along with this comes a new set of design, sourcing, manufacturing, and life-cycle requirements. These new demands create challenges and opportunities for OEMs, ODMs, and EMS firms.
By Mitch Schoch
Outsourcing continues to change to meet evolving customer and market needs. A prime example of this change is cell phone development and production. Cell phones were often used as a typical outsourcing operation, and were some of the first products to be outsourced to EMS companies. Outsourcing often began as a solution for companies producing high-volume/low-mix products that wanted to cut manufacturing costs. Relatively lightweight and easily packaged, shipping and handling was not a significant cost factor. Outsourcing was mainly a manufacturing operation. When the need to lower costs even further led to sourcing and manufacturing in China, the cell phone was one of the products caught up in the trend.
Convergence in handsets has caused greater stratification. A phone begins as a relatively simple product, but becomes complex when it also functions as a camera, MP3 player, a repository for games, a PDA, or a GPS device. Phones are also a fashion statement, requiring a variety of color schemes, sizes, and shapes. They are being personalized for each user and demographic - from elementary school students to senior citizens. Although handsets are still high-volume, there is a lot more mix. More complex manufacturing processes, smaller production runs, and a higher level of technical expertise are increasingly required (Figure 1).
Figure 1. Hand soldering cell phone PCBs on assembly line.
The need for more designs and customization has put a greater demand on the EMS partner. Where once four or five new models every year was the norm, now it is more like 20 to 30 models, and the life cycle for these products is getting shorter. Although the sales life of some high-quality, high-cost phones is about six months, the time to design and bring these phones to market can be nine months to a year. The OEM still expects constant cost reductions and on-time delivery. OEMs must shift more internal resources to design to accommodate requirements for more models, forcing them to rely more on outside partners who can respond quickly to manage sourcing, sustain engineering, supply, manufacturing, logistics, and design. This is the appeal of full-service solutions and suppliers.
Original design manufacturers (ODMs) who create the basic design, then transfer manufacturing back to the OEM or a designated EMS to incorporate the unique software, housing, and markings, have often designed cell phones. But the roles are changing.1 Several ODMs now manufacture the entire phone, and are starting to put their own labels on the phones. Some EMS companies have their own design centers in-house, or have affiliations with design houses. The OEM, who must keep up with these demands and changes, must evolve to a more collaborative relationship with the EMS firm or ODM to take advantage of lower costs, while getting product to market more rapidly.
Just as mobile phones have demanded more stratification and complexity in manufacturing and sourcing operations from EMS firms, so have EMS companies manufactured products for other industries, such as networking and computing, and taken on more responsibility for manufacturing higher IP and complex products. Convergence has occurred there as well.
With more diversification of products and shorter time-to-market requirements, China traditionally has offered the lowest labor costs, and has been the location of choice for low-cost products, though this is changing rapidly. Increasingly, China is not the ideal geographical manufacturing location, nor is it the least expensive. Many other factors now come into play when choosing a design, manufacturing, and sourcing location. One of the most important determining factors is where the product will be sold and used. That’s why, in addition to China, EMS companies specializing in the manufacture of cell phones have opened plants in India, Brazil, Mexico, and Russia, where proximity, service, and flexibility can offset lower labor costs (Figure 2).
Figure 2. SMT line in EMS plant.
Landed costs have become a more operative way to determine where to manufacture a product. For example, the OEM must ask what taxes and tariffs are involved, how fast the product can reach its destination, what inventory demands are, and what flexibility there is in getting the product into a customer’s hands. Manufacturing low-volume/high-mix products, and larger products such as set-top boxes, has been known to be more cost-effective when manufactured close to the customer. All products now are being examined more carefully. Several larger EMS companies that manufacture in various locations have new product introduction (NPI) centers close to the OEM to design, prototype, create the manufacturing process, and initiate volume manufacturing. From there, the EMS can transfer volume production to the geographical location that makes the most sense.
EMS responsibilities often go beyond design, sourcing, manufacturing, and getting a quality product to the customer on time. After-sales services are becoming a larger part of the process, especially with a heightened focus on the environment and laws for recycling and reuse mandated by the European Union (EU) and states such as California. OEMs are looking to EMS providers to handle warranties, repair, recycling, and product end-of-life.
Conclusion
The challenge for ODMs, OEMs, and EMS firms is to do all these things well - design, source, manufacture, and after-sales service. It is unclear if one company can do this all well, and if so, will they be able to secure enough business to remain competitive. ODMs, OEMs, and EMS providers must define competencies and realistically evaluate where they fit in the product life cycle. The blending of roles and tasks brings into question the ownership and legal responsibility for each part of the process, and what expenses and costs each party will bear. Sorting that out will have major ramifications on the future model of outsourcing. This is working itself out in the handset market. Outsourcing of many other products face the same challenges.
REFERENCES
1 Boisvert, Michelle M., “EMS Providers: The Design Partners,” SMT Magazine, February 2006, pg. 55.
Mitch Schoch, vice president, Elcoteq Americas, may be contacted at (972) 560-0735; e-mail: mitch.schoch@elcoteq.com.