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EMS Role & Future in Design Services: When Strategy is Successful
December 7, 2012 |Estimated reading time: 7 minutes
Editor's Note: This article originally appeared in the October 2012 issue of SMT Magazine.The electronics industry continues to remain at the forefront of transformative product design and functionality. OEMs find it challenging to balance the design cycle and the need for faster time-to-market strategy. Launching innovative products ahead of competition is the only viable strategy that can define success of the product.
The EMS market continues to become highly competitive and profit margins are diminishing. As a result, EMS providers have narrowed their sights on building value-add services such as design services. For successful EMS providers, design services can be one of the most rewarding revenue generators and differentiator. The level of quality and time of delivery will remain driving factors for increasing EMS participation in design services. Another major factor driving role of EMS in design is risk diversification of short product life cycle, obsolescence challenges, and flexibility to meet unreliable demand cycle. EMS providers are well known for their ability to mitigate challenges associated with short component lead times, inventory management, uncertain demand, and other cost considerations.
As with any outsourcing decision, the primary motivator for an OEM is cost savings. Deploying advancing technology with increasing scalability incurs significant and, more crucially, continuous investment from OEMs. Most EMS providers have the core competency and exposure from different end-user vertical industries to efficiently keep in pace with evolving design, test, and manufacturing requirements. This has helped encourage additional OEM outsourcing to EMS providers. Additionally, EMS revenues from design are anticipated to grow from 5.7% in 2011 to 6.9% in 2018. OEMs are expected to depend on their EMS providers to focus on product differentiation during the forecast period.
However, EMS providers still have a few major challenges to overcome and these include:
- The ability to balance design services with internal service offerings;
- Encouraging OEMs to overcome inertia and embrace design outsourcing; and
- Competing effectively against original design manufacturers (ODMs) and pure play design companies.
Frost & Sullivan’s research, “Opportunity Analysis for Outsourcing in the EMS Design Market,” discusses the evolving role of EMS providers in design services. Unlike manufacturing services that account for the bulk of EMS revenues, design services still account for a small percentage. The study highlights new opportunities for EMS providers, new products that offer growth potential, and a strategic roadmap to capitalize on future opportunities.
Key Findings of the Study
EMS revenues from design services totaled $11.93 billion in 2011. The market is anticipated to grow to an estimated $29.62 billion in 2018.
Increasing technological and design advancements will be primary driving factors for the growing outsourcing trend to EMS providers. The key factors expected to drive growth for global EMS design revenues are:
- Increasing customer focus on reducing cost;
- Increasing dependence on EMS providers for design for manufacturing (DFM), design for testing (DFT) and design for supply chain;
- Design responsiveness and expediency;
- Manufacturing flexibility--scalable volumes and fast ramp-up to full volume manufacturing after prototyping; and
- Increased needs for OEMs to emerge as idea generators or thought leaders.
Figure 1: Revenue growth rate for the EMS design services market. Geographically, North America and Western Europe will continue to lead in terms of design and innovation. However, EMS providers are likely to benefit from impetus from countries like China and Singapore to promote innovation and research and development (R&D). This is opening up a plethora of untapped opportunities for EMS providers globally. As a result, EMS penetration into design services is expected to grow from 5.7% in 2011 to 6.9% in 2018. This will be a testament to EMS providers’ efforts of constantly reinventing their design skills and utilizing that to elevate their customers competitive positioning.
Competitive Overview
For EMS providers, traditional services such as manufacturing and supply chain services offer thin profit margins. Offering design services is a smart strategy to achieve an added differentiation as well as boost a company's bottom line. This has also elevated the level of competitive rivalry within the EMS market. For EMS providers to achieve sustainable differentiation, they need to rethink marketing based on price competitiveness and focus on the true benefits and strengths they can offer.
EMS market participants will also face increasing consolidations during the forecast period. Furthermore, EMS providers are expected to face increasing competition from pure play design companies, especially in North America and Europe. Also, Asia Pacific is host to a new breed of competition, particularly software companies and local R&D centers that offer strong software and design support.
Tier 1 EMS providers are already shrinking their in-house R&D and design costs by partnering with technology thought leaders, OEMs across all verticals and through mergers and acquisitions (M&As).
As competition intensifies, the need to differentiate in terms of product offerings, price competitiveness and full-service providers will intensify EMS competition in design. EMS providers are expected to continue ramping up design expertise through strategic alliances with pure play design companies and through mergers and acquisitions. Well-proven design capabilities will set the stage for EMS providers to capture increasing design outsourcing from OEMs.
The Road Ahead: Opportunities and Challenges
The road ahead for EMS design outsourcing opportunities holds tremendous opportunities as well as pitfalls. EMS providers seeking to create a strong foothold in design services must realize a very crucial element--to understand how the strategy to expand/diversify into design translates into the overall business model. Once this is achieved, execution is the next big goal to achieve. In harsh competitive realities, it is often easy for companies to be misled by the notion of diversifying without proper research. Attaining and maintaining growth momentum in design service will be a constant challenge. Successful diversification and expansion into design services requires adaptability, ability to sustain long design cycles, financial strength, creative branding, and strong strategy.
One of the biggest challenges EMS providers face is visibility and branding. EMS providers are still considered manufacturing experts and this continues to be the core definition of their services. This has had a two-fold impact on EMS design growth. OEMs are still hesitant to outsource design or partner with EMS providers as they are unsure of the latter’s expertise in the area. The impact of this challenge gets more pronounced in high-reliability markets such as medical or aerospace and defense (A&D). For OEMs, the choice of the outsourcing partner is founded on more of a segment-based benchmarking. OEMs look for EMS providers with prior experience in product applications, manufacturing, and supply chain, among other qualifications in traditional markets. However, in highly mixed markets OEMs seek integrated manufacturing engineering to support their end customers. By combining manufacturing and design, there is more value compared to pure play design companies or manufacturers.
For EMS providers, a key weakness is the inability to market design services without meaning to compete directly with their customers. Interestingly, there are two varying approach to design strategy. Many EMS companies view design and engineering as a means to augment manufacturing services. A few others view design as a core offering, which, in turn, will grow manufacturing and other services proportionally. These companies want to be viewed as design experts, as opposed to merely manufacturing experts. In this case, complete design and engineering services include consulting, product development, product realization services, quality, testing, compliance, and certifications. To be successful in this, EMS providers need to be aware of complete product life cycle support.
Apart from this, many aspiring EMS providers often lack the necessary resources to manage the responsibilities that come with offering joint design or design services akin to ODMs. Flexibility is a vital factor, as design cycles have ups and downs. EMS providers need to be an extension of their customers’ engineering teams, as opposed to following rigid rules and business models. At the end of the day, OEMs want to know what EMS providers will bring to the table--long-term commitment through investments in skill and technologies quality, service, and cost.
The last five years have witnessed a transformation in OEM perception of the EMS role. Most OEMs are a lot more receptive to the idea of an EMS provider partaking in sub-parts of assembly, such as the auxiliary part of the design. As EMS providers continue to build trust, they are expected to gradually participate in the complete design and manufacturing set up. Currently, an end-to-end design partnership is still significantly less present compared to solely designing a few sub-elements.
It is estimated that the next three to five years will set the stage for EMS penetration in design services. An increasing number of OEMs are utilizing global EMS partners to complement their corporate strategy for identifying opportunities in emerging markets and explore cost-competitive countries to achieve manufacturing success. Yet, a lag remains in terms of embracing design outsourcing. Nevertheless, as OEMs attempt to overcome challenges and focus on innovation they will set new directions in partnering with EMS providers. It will depend on the competency of the EMS provider on their level of success will vary. The level of penetration into design is directly proportional to the EMS provider’s competency.
Lavanya Rammohan is research analyst and acting manager within Frost & Sullivan's Electronics and Contract Manufacturing practice. She has over eight years of experience in research, strategic consulting solutions, and project management, particularly for electronic devices, contract manufacturing, as well as supply chain providers. Since joining Frost & Sullivan in 2005, Rammohan has completed several research studies and consulting projects in the SMT equipment, electronics manufacturing equipment, semiconductor, and contract manufacturing markets.