The OEM Evolution Print E-mail
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Written by Mike Buetow   
Thursday, 02 August 2012 18:53

We often speak of the importance of innovation, but over the past decade, the walk hasn’t matched the talk. OEMs have outsourced like mad, first in order to lower their fixed costs and then to shave dollars off the product price. Nothing is free, however, and the price paid hasn’t been by the consumer; it’s been by the OEMs, many of which have now effectively lost the advantages they had.

As we discussed last month, the industry is ushering in a new era, one in which the supply chain is rapidly changing, even if we don’t quite grasp the degree that this is happening.

We used to ask EMS companies, as they expanded their service offerings into design and logistics, at what point would they be undermining their own models by competing with their customers? In retrospect, that was the wrong question. We should have been asking the OEMs, What are you going to do once your suppliers are positioned to replace you?

Because that’s exactly what’s happened. Consider HTC. Founded in 1997 as a notebook PC manufacturer, it began designing and assembling smartphones in 2006. Today it is a $9.5 billion company and ranked third among smartphone vendors last year.

Or take First International Computer. Founded in 1980 as a desktop PC manufacturer, FIC once was one of Dell’s largest suppliers. Now it is made up of three divisions: FIC, 3CEMS and Leosys. It offers branded PCs (Ubiqconn), tablets (Elija, Tycoon), and servers (Leo). Per FIC’s website, the company provides end-to-end solutions from PCB to system assembly with designing and engineering services, PCB fabrication, enclosures/frames/machining, and global logistics. Design, product build, distribution, logistics, marketing: That’s an OEM!

An even more stunning development is Wistron. Originally Acer’s in-house manufacturing division, it was spun off in 2001. Today it’s a $21.7 billion company with 60,000 employees and a healthy share of markets ranging from notebook PCs to desktops to servers/storage systems. It far outpaces its former parent company, which had $15.7 billion in revenue last year. How long until it eclipses its progenitor as a standalone brand?

OEMs outsourced until they could outsource no more. But by ceding control of the design and BoM, they gave up crucial product knowledge and unwittingly imposed an innovation ceiling on themselves. EMS companies and ODMs don’t stay still. There is little financial incentive for the Tier 1s and 2s to pursue a model of making solder joints. The profits come from elbowing into design and after-market services. Or, in the cases of some of the aforementioned companies, throwing off the customers’ labels and launching their own.

But to stop there would be to ignore the single largest corporate makeover in electronics industry history: Apple.

We tend to think of Apple the company as a design innovator and a great marketer. What we don’t think of Apple as is a manufacturer. We should.

Per its 10-K, Apple ran up a tab of some $4.6 billion in capital expenditures in 2011, of which no less than $4 billion was for manufacturing and tooling. Keep in mind that this is a company that has no manufacturing facilities. This begins to illuminate why Apple has been so nonchalant about the epidemic of employee problems at the Foxconn plants that build all those iPods, iPads and iPhones. Apple has to take the heat because it’s the one on the hook. Apple, it would appear, owns everything except the workers.

So sure, Apple and Foxconn are tied at the hip. But that 10-K gives us a better glimpse as to why. It’s one thing to move a program from EMS to EMS. It’s another to replace a campus, especially one with a hundred thousand workers.

Apple has evolved from a traditional OEM to a design/marketing company to one that performs everything from chip design (it’s been producing its own A4 chips for two years) to effectively owning the plants that build its products. It’s an OEM again.

Apple also dominates its supply chain like no other. In this era of Lean, Apple thumbs its nose. Apple retains complete control of the BoM, pre-buying 150 days worth of components. What other non-military contractor can say that?

Apple shows how IP and innovation go hand in hand. And industry has a herd mentality. Mass change is thus inevitable.

Apple is the most valuable company in the world. Its turnaround will be taught in business schools for years. Sooner or later, the rest of the industry will copy its methods. The OEM as manufacturer will be back in vogue.

P.S. Be sure to register for PCB West:

Last Updated on Friday, 03 August 2012 12:52


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