Electronics Production | September 07, 2011

Nine-part series of articles for midmarket OEMs

“While the landscape of the global EMS industry has been in flux for well over a decade the rate of change has accelerated dramatically since the economic downturn of 2008/2009. It is our observation that this pace of transition may now be beyond the experiential discernment of the C-level suite at many OEM companies.”
This rather ominous warning was issued to Outsourcing Navigator Council members last year (2010) in conjunction with our report on the escalating disruptions being driven by what we defined as the ‘Goliath Fringe’ of the outsourcing industry, which includes the two largest contract manufacturers, Foxconn and Flextronics, the top five ODMs, and their global mega-OEM customers. These companies collectively are the heavy-hitters of the market segment known as the “3Cs” (communications, computer, and consumer).

The reason we issued this warning this particular way was that the mainstream industry and financial press, the primary source of insight for the C-level suite, had yet to recognize the pace or depth of change taking place in the global outsourcing industry and were stubbornly focused on the debate surrounding the status of the economy. Unfortunately, this overshadowed the importance of the warning and even in those few cases where it was passed up the chain-of-command the message generally went unheeded.

Why is any of this important?

The investment community watches what happens with Apple and Hewlett Packard closely and evaluates business decisions based on their own woefully inadequate understanding of the relationship between manufacturing and innovation. These perceptions filter into boardrooms of all sized companies, whether publicly held or not, and are accepted as gospel, leading to cascading bad business decisions.

What’s good for Apple is not good for everyone, to say the least. Some are beginning to see the light in this area, e.g. Forbes’ contributor, Steve Denning, and debaters on The Economist, but by and large, Wall Street is not able to accurately assess manufacturing strategy. See Marc Andreessen’s recent rant, Why Software Is Eating the World.

So, the Goliath Fringe has come to dominate the availability of components and global manufacturing capacity. If something that big fails, or even sneezes, everyone feels it. When mid-market OEMs decide what their options are, i.e. whether to outsource, off-shore, near-shore, or a combination of these, their quote activity is influenced by global capacity and supply chain issues dominated by trends among the Goliath Fringe.

Notwithstanding, current global conditions have created a particularly challenging business environment for the EMS industry going into the next few quarters.

Why is risk going up?

1. Prices are down but costs are up

2. Fewer resources at OEMs worldwide

3. The demand cycle has shortened

4. Businesses are operating at higher velocities

5. Supply chain concentration in Asia

6. Loss of institutional continuity

7. Unpredictable/unstable capital markets

8. Geopolitical unrest & instability

9. Overtaxed infrastructure in low cost regions



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