Outsourcing trends among small and mid-sized OEMs

By Bruce Rayner, VP Consulting and Research, Technology Forecasters Inc.

Apr 19, 2007

At the recent Technology Forecasters' Quarterly Forum in Monterrey, Mexico, TFI consultants presented a number of new research studies covering a wide range of topics relevant to the supply chain and outsourcing needs of the electronics industry.

This article covers Part 2. as shown below. The third part will be published next week.
Part 1 (published last week). The state of Lean adoption in the electronics supply chain
Part 2. Outsourcing trends among small and mid-sized OEMs
Part 3. Supply Chain software trends among OEMs and EMS providers

Reports on manufacturing and design outsourcing typically focus on the top-tier electronics companies such as Apple, Cisco Systems, Hewlett Packard, and others. But they are not alone in tapping contract manufacturers. Small and mid-tier companies, especially entrepreneurial, high-growth companies utilize contract manufacturers - and not just for production - and the pace of outsourcing is increasing.

The level of outsourcing is significant among these companies. Collectively, the thousands of electronics OEMs with annual sales below $1 billion produce about $140 billion worth of products and represent about 13 percent of the total global electronics market. About half are in the computer and consumer sectors of the market with the remainder split between communications, medical, automotive, industrial and aerospace/defense equipment.

Many of these companies are relatively young and started life with no intention of building factories. Instead, out of the gate, they focused on design and development and turned to contract manufacturers for prototyping and production.

TFI's survey findings included a number of interesting trends among this group of companies:
-- Printed circuit board assembly (PCBA) outsourcing is the norm among these smaller, fast growing electronics OEM; however, many also outsource parts of their product design.
-- Cost, quality, and protection of intellectual property are the major challenges faced by the smaller OEMs outsourcing.
-- Cost reduction, flexibility, and reduced cycle time are the three main reasons they outsource.
-- China and Southeast Asia are the primary areas cited by these small companies for production expansion.

Based on the interviews TFI conducted, the outsourcing of PCB assemblies among these small, high-growth OEMs may have reached saturation point. Currently the firms surveyed outsource PCB assemblies over 90 percent of the time. That's because internal production of PC boards is not justified in their business model.

While PCBA dominates the outsourcing trend, opportunities exist for other contract services. Sub-assembly and final assembly are now outsourced about 35 percent of the time, according to the survey sample. And small OEMs are using logistics services 21 percent of the time to ship final products to customers or distribution centers.

TFI asked these OEMs what they considered to be the most significant challenges they faced in outsourcing electronics. The issue of cost management appeared at the forefront with quality close behind. (See Chart 1). As might be expected among smaller, fast-growing companies, the risks associated with protecting intellectual property is a major concern as they look to outsource manufacturing.

An unexpected finding was the willingness among this group of companies to outsource design. Approximately 15 percent of their design activity is outsourced. In some cases, the outsourcing of design was seen as a short-term strategy; the in-house design teams simply didn't have the bandwidth to handle the volume of design work. Outsourcing design allowed them greater flexibility as they grow the business. However, a number of the OEMs TFI interviewed indicated that they plan to decrease the outsourcing of design as they add internal resources.

"We see product design as one of our core competencies and we want to move more of that in house," said one consumer OEM executive.

A trend among large OEMs for the past decade has been the shift of manufacturing to low-cost regions, with a focus on China. Now because of cost pressure and the growth of new markets, smaller OEMs are increasingly seeking out low-cost manufacturing centers for their production as well.

The tremendous economic growth in India and China, for example, creates a boom in consumer spending in these areas. To serve these untapped markets, smaller companies will, by necessity, need to develop strategies for serving these growing markets, which typically include locating production and distribution operations close to these markets.

When we asked the survey respondents where they were considering outsourcing in the future, China and Southeast Asia were the predominant responses. Although all the companies interviewed were headquartered in either the United States or Western Europe, they showed a distinct preference for outsourcing to Asia. Even those companies that currently serve the US market and use only a domestic supply base said they could not ignore today's global marketplace.