© igor-stevanovic-dreamstime.com Analysis | April 05, 2013
Outsourcing's Next Evolution, how we got here - Part 1
The landscape for the EMS industry is changing - politics, economy and the business climate are all to blame. OEMs are demanding more for less as they re-evaluate their relationships.
The global outsourcing phenomenon is entering a new phase. EMS prices are rising; geopolitical risk and uncertainty are increasing, and many OEMs are reconsidering their global solution, including abandoning outsourcing altogether for certain segments of the product lifecycle. The relationship between OEMs and their EMS providers is worse than it has ever been. The level of mistrust is very high. EMS are disengaging with unprofitable customers at the same time that OEMs are demanding increasingly draconic cost reductions and onerous terms and conditions. Something has got to give. And when it does, global capacity shifts will impact all end markets and sizes of companies, from the Goliath fringe to the most regional. Charlie Barnhart & Associates have launched a series of articles to discuss the key findings from the Beyond Outsourcing Report. There will be five articles, released on the first of the month: 1. Introduction and Background: How We Got Here 2. 10 Macro Trends Driving Outsourcing 3. OEM Risk Ranking of EMS Service Offerings 4. Outsourcing Alternatives 5. Buy or Build? This article will start the series by briefly describing how we got to this point. Originally, OEMs designed, developed, and manufactured most —if not everything—that went into their products, hence the name ‘Original Equipment Manufacturer’. Then as technology evolved and became more pre-packaged and ubiquitous (e.g. integrated replaced discrete logic and modular construction supplanted elemental designs) product differentiation shifted from a matter of functionality to an issue of cost-versus-performance. This created a high-degree of ‘product churn’ in the market place and life-cycles began to shrink. As a result, sales forecasts became increasingly unreliable due to demand fluidity brought about by shifting user preference. In reaction, OEMs looked for methods to shift their fixed-costs to a variable basis, as utilization rates in their internal factories became progressively more difficult to predict and control. The outsourcing industry, initially on a consigned basis, began as a means by which to ‘buffer’ these peaks and valleys in the OEM’s manufacturing requirement, but these companies soon gained greater responsibility as their service offerings expanded. OEMs continued to shrink investment in internal capabilities and outsourced more functions, more often. Eventually they began to dismantle their internal operations and launch large scale divestiture programs. These actions, coupled with the impact of globalization, and an unprecedented economic downturn post Y2K, created a supply-demand imbalance in the EMS industry (favoring the OEM) and prices for manufacturing services dropped precipitously. This advantage was embraced broadly by OEMs who quickly came to rely upon this recurring windfall to prop up their eroding margins. So when EMS pricing ultimately hit the bottom of the pricing curve, they saw little choice but to abandon their existing supply-base and transfer their outsourcing requirements to lower-cost solutions such as China. This left many midmarket OEMs without a supportive, low-cost, local alternative for the early and late stage elements of their product life-cycle, and many simply resigned themselves to off-shoring these requirement to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography. In many if not most cases, this provenance resulted in a cumbersome, expensive, and ineffectual solution that still plagues many of these OEMs, who continue to struggle with a cascading set of requirements that remain inadequately or totally unfulfilled. In short, the “baby was thrown out with the bathwater” a consequence certainly not intended but very real indeed. And while a sea-level change in outsourcing now appears inevitable, the question remains – will these shifting tides ultimately solve the issues that have resulted? Clearly, in-sourcing much of the product life-cycle including; prototyping, NPI, EOL and on-going support (if not the full production requirement) would not be free, but neither would it be as expensive as many people believe. High quality, well maintained equipment of all types is in surplus throughout North America and Western Europe, as are the human resources necessary to perform these tasks. And for a midmarket OEM with an outsourcing spend of as little as $50-100 million per year, a persuasive financial argument can easily be made for in-sourcing. As each OEM’s situation is different, each OEM’s solution will be unique. This series of articles is intended to stimulate a discussion of how OEMs can re-think outsourcing starting with a clean slate. So use these suggestions only as a starting-point and aggressively seek out or craft a wholly custom solution that complements and harmonizes with your requirements. What is most important is not which option you choose, but rather that you choose an option that integrates a life-cycle based solution into your manufacturing strategy.
Volkswagen intensifies e-mobility activities in China Volkswagen has initiated the next chapter for its business in China. The automotive giant plans to increase its share in JAC Volkswagen, its joint venture for e-mobility.
GPV Selects Aegis as global smart factory partner Driven originally by accelerating customer expectations for traceability, GPV has selected Aegis’ FactoryLogix Smart digital manufacturing solution, targeting multiple values and benefits.
REDCOM EMS expands certification for medical device manufacturing New York-based REDCOM EMS has secured ISO 13485:2016 certification, complementing the company’s existing ISO 9001:2015 and AS9100D certifications.
Ozark Integrated Circuits nabs U.S. Air Force grant Arkansas-based Ozark Integrated Circuits Inc., located in the Arkansas Research and Technology Park at the University of Arkansas, has received a USD 750,000 award from the U.S. Air Force.
Norwegian EMS adds employees to Polish unit The last couple of months Norautron has welcomed three new colleagues at its office in Sdunska Wola, Poland.
Daimler’s battery production in Kamenz gradually increases production Local battery production is described as an important success factor for Mercedes-Benz AG’s electric offensive and a key element to flexibly and efficiently meet the global demand for electrified vehicles.
Tepcomp invests in new additional production line Finnish EMS provider, Tepcomp Group, has made a significant investment at its production plant in Turku. The new surface mount technology production line will significantly improve the productivity and energy efficiency of the plant.
Valoe is on schedule with both production and expected deliveries Valoe says it will start manufacturing IBC test modules in Juva, Finland in June and cell deliveries from Lithuania to customers is scheduled to start according to plan.
AMTE Power and Britishvolt sign MoU for GigaFactory AMTE Power and Britishvolt plans to investigate collaborating to build the UK’s first full cycle battery cell GigaPlant, servicing the automotive and energy storage markets.
ALLPCB’s new SMT factory has launched production On May 10 2020, ALLPCB’s new – self-operated – SMT factory in Guangde, Anhui Province, China was officially put into production.
Schweizer starts production at its new location in China Following a construction period of one and a half years, production has now started at the company’s new high-tech printed circuit board plant in Jiangsu, China.
Jenoptik supplies generators to a US customer Through its Vincorion investment, Jenoptik received a long-term order for generators that an unnamed US customer is integrating into military vehicles.
Rolls-Royce takes heavy hit from COVID-19 – reduces workforce by 9000 The impact of COVID-19 on Rolls-Royce and the whole of the aviation industry is unprecedented. RR has already taken action to strengthen the financial resilience of its business and to reduce cash expenditure in 2020. However, this will not be enough.
Data Link Solutions to provide MIDS cabinet terminals to US Navy The U.S. Navy has awarded a USD 3.2 million production contract to Data Link Solutions (DLS), a joint venture between BAE Systems and Collins Aerospace, for new Multifunctional Information Distribution System (MIDS) cabinet terminals.
Incap restarts production in India In a move to contain the COVID-19 pandemic, the government of India instructed all state governments to introduce a lockdown in March. As a consequence, Incap had to close its factory in Karnataka, India on 23 March.
NAND Flash Revenue Undergoes 8.3% QoQ Growth in 1Q20 NAND Flash bit shipment in 1Q20 was relatively on par with 4Q19, says the DRAMeXchange research division of TrendForce. The overall ASP of NAND Flash products also climbed during the period. As a result, the global NAND Flash revenue for the quarter went up by 8.3% QoQ to USD 13.6 billion.
Gorenje reduces the number of layoffs At the end of April, due to a sharp drop in orders and revenues as a result of the COVID-19 pandemic, the Hisense Europe Group launched a redundancy program in four companies in Slovenia.
NA semiconductor equipment industry posts April 2020 billings North America-based manufacturers of semiconductor equipment posted USD 2.26 billion in billings worldwide in April 2020 (three-month average basis), according to SEMI.
AWS Electronics to wear the Incap name Following the acquisition of AWS Electronics Group by Incap Corporation in January 2020, the company's units in the UK and Slovakia will now be trading as Incap Electronics UK Ltd. and Incap Electronics Slovakia s.r.o.
PCB manufacturer SQP invests in new plasma treatment system As part of the continuous upgrade of the PCB manufacturing processes the Slovakian PCB manufacturer SQP International has invested in a new plasma treatment system.
Nordson delivers solid quarter considering COVID-19's impact on global end markets Nordson Corporation reported second quarter sales of USD 529 million, a 4% decrease compared to the prior year’s second quarter sales of USD 551 million.
Cicor expands its clean room set up in Bronschhofen Swiss EMS provider Cicor Group is currently expanding its site in Bronschhofen with a 60 square metre ISO Class 6 clean room.
Senate Dems to Trump: Release details of TSMC plant deal Democratic lawmakers are pressuring the Trump administration to respond to serious questions about Taiwan Semiconductor Manufacturing Co Ltd’s (TSMC) plans to build a USD 12 billion plant in Arizona, which the company announced last week.Load more news