Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
Every benchmark study of the EMS and ODM industries that Technology Forecasters has conducted in recent years reaches the same conclusion: The ODM sector generally outperforms the EMS sector.
This year’s study is no different — even when we reclassify all HonHai’s ODM business as an EMS play.
This raises the obvious question: Why?
The short answer: Because there are fundamental structural, operational and cultural differences between the two sectors.
Most ODMs are Taiwanese, and started in the ODM business - creating their own IP for end products - and only recently have tried to move into the EMS model.
Most EMS companies are North American or European and started in contract manufacturing, where the Golden Rule is, “Thou shalt not compete with thine customer.”
When EMS companies develop products like an ODM would, OEMs see a conflict of interest. The same OEMs do not see conflict of interest when they sign up the ODMs.
Is it possible for EMS providers to morph into ODMs? Some have tried, but it’s doubtful that this will work in the long run.
For one thing, ODMs tend to have more tightly integrated relationships with suppliers than EMS companies. ODMs often have minority or majority stakes in their suppliers. Hon Hai is an extreme example of this, but the others have tight relationships, too.
To boost their margins, EMS players may be better off focusing on offerings in services like design support, logistics and repair, and staying away from the IP business. In these areas, they have an advantage over the ODMs.
Many ODMs have not found the EMS model easy to adopt. BenQ, for example, has struggled since acquiring Siemen’s cell phone factory in Germany two years ago.
ODMs face their own challenges in becoming more like EMS companies, and vice versa.
What are your thoughts?
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I know of two domestic examples where a smaller scale OEM has gone ODM and then morphed into the EMS model. In one case the EMS model has now overshadowed the original business plan and in the other case the ODM model is leading the charge with EMS as an also-ran. Both companies have a different “feel” to their business and operational plan vs. traditional tier 3 EMS shops. It takes some getting used to, but both companies offer unique value added services ( in-house PCB layout, extended RF testing services etc . . . ) not normally available at a typical tier 3 EMS shop.
I think one of the primary keys to success for EMSs - perhaps a BKP (best known practic) they can take away from the ODM model - is to assure ‘tightly integrated relationships with their suppliers’. Whether this is accomplished via acquisition, controlling investment, or otherwise - this strong veritcal, virtual value chain gives ODMs like Foxconn a huge leg-up over their competition in the rapidly escalating stakes of playing the global electronics manufacturing game!
“When EMS companies develop products like an ODM would, OEMs see a conflict of interest. The same OEMs do not see conflict of interest when they sign up the ODMs.”
Then why is Ausustek fast tracking their split up of OEM products and ODM services?
PS-
Foxconn is catagorized as the largest “EMS” company…
Combining the 5pt margins of the ODM business model and 5pt margin of the EMS business model leads to a declining ~6pt combined margin model. The long term test will be if manufacturing survives design value-add or if design value-add survives manufacturing. But since technology innovation doesnt lead to manufacturing services opportunities the “wedge” between ODM and EMS will continue and the models will stay distinct.