At a glance the present global economic climate for electronics manufacturers looks ripe for consolidations, mergers and acquisitions (M&A), and related corporate shifts due to opportunistic capital and currency shifts. Despite these indicators, analysts are not forecasting much M&A activity in the Electronics Manufacturing Services (EMS) and Original Design Manufacturer (ODM) sectors, respectively. In support of this forecast is the short-term historical data showing M&A activity remaining down for over two consecutive years.
Industry and value chain maturation
Financial, industry, and academic analysts describe electronics manufacturers as having reached a maturation stage both economically and structurally; this stage represents a more sophisticated level of economic knowledge and strategic business growth characterized by new motivators and opportunities. The industry shift towards maturity is important because of the level of stability and supply chain modularity that it entails. Additionally, as the industry reaches higher levels of maturation, the roles of ODM and EMS providers expand and mature as turn-key solutions emerge in response to OEM requirements. In this manner, maturation can be seen as promoting simultaneous, organic growth along the value chain.
The significant data supporting classification of the industry as having reached critical maturation stages include the following:
- Since 2000, the peak year for M&A, there has been a relatively consistent annual decline (with Y2005 an outlier), the last two years having seen a 14% and 18% drop, respectively (MMI Vol.18:2, p.1). "An argument can be made that the latest M&A total reflects the maturity of the EMS industry. […] Generally, a mature industry means that the largest players, who in the past were significant acquirers, aren't making as many deals." (ibid., p.1)
- The close degree and patterning of the electronics industry's growth cyclicity to the global gross domestic product (GDP). The explanation of this correlation (0.90) is based both in "the moderate growth rates of key end-markets" (Lehman Brothers The Semiconductor Handbook, 6/2007, p.16), and in the smoothing of the semiconductor growth cycles – a direct reflection of industry maturity in terms of demand and production forecasting, inventory management, and key players (OEMs and semiconductor vendors) (ibid., p. 25).
- The complexity and modularity of value chains in the semiconductor industry, particularly those linking OEMs, EMS and ODM (cf. "New Value Chain Strategies Defining the Electronics Industry," in MarketWatch Quarterly Vol. 1:2 Summer 2007). As noted by many business theorists, the electronics industry's modular value chains reflect the high level of decentralization and resulting efficiencies throughout a product's lifecycle – from research and design through post-production support.
As the above maturation stages are reached, a new, relatively stable set of turn-key solution providers appear on the market (particularly for Tier I and II firms). The industry can then be understood as having "supply-bases [that] come to be comprised of large, highly capable suppliers [and designers for whom] the prospects for increased outsourcing are improved" (ibid., 2001:4):
[t]o meet the growing demand for full-service, or "turn-key" outsourcing solutions (Sturgeon, 1997), suppliers have in many cases had to add entirely new competence areas, increasing their scope of activities while improving quality, delivery, and cost performance. (Sturgeon, T.J. and J-R Lee, in Global Taiwan: Building Competitive Strengths in a New International Economy, Suzanne Berger and Richard Lester (eds.). Armonk, NY: M.E. Sharpe. 2005, http://web.mit.edu/ipc/publications/papers.html)
The present EMS and ODM shifts support the analysis of the electronics industry as engaged in co-evolutionary processes based on complementary and emerging competencies of turn-key providers. Dr. Sturgeon, MIT, argues that the co-evolutionary moment is recursive: improved capabilities lead to increased efficiencies and economies of scale to be gleaned from outsourcing. These increased capabilities then increase the levels of production of the turn-key providers, and back around again.
Co-evolution and organic growth promise healthy future for EMS and ODM sectors
The relationships between firms along value chains is dynamic and various roles shift over time; during these shifts, some industry changes promote organic growth that arises from the co-evolution of both the industry and the firms along value chains. An example of a major shift in industry is OEMs’ need for turn-key providers. This OEM requirement became apparent at the same time that EMS and ODM players began offering new value added services and thereby became turn-key providers, respectively. In this manner, EMS and ODM firms appropriately positioned themselves for strategic growth in order to meet the changing needs of the OEM. Although both sectors, EMS and ODM, have historically different beginnings and continue to operate primarily along different parts of the OEMs' value chains, the present shifts and growth are triggered by the same set of industry changes arising from increased OEM outsourcing.
By looking at the industry growth as co-evolutionary, we see the ebb and flow between value chain partners' roles and domains of business. Historically, the EMS and ODM providers operated in mostly non-overlapping domains based on geography, business model, and markets/products, to name some major areas. These differences are still clearly visible and continue to underlie many of the market and business decisions for each set of firms. As the ODM sector began to move beyond the traditional stronghold of the PC/notebook industry, the EMS sector found itself going head-to-head with ODMs in the mobile phone and LCD/flat panel TV spaces. Meanwhile, a few EMS firms have been moving into notebooks.
Multifaceted change highlights co-evolution
Because the sources and types of changes presently experienced by the EMS and ODM providers are similar, despite their obvious differences in domain and history, they will be considered together to underscore their co-evolutionary moment. The OEM increase in outsourcing is not only opening new business and market share opportunities to each set of providers, EMS and ODM, as both sets of providers evolve their turn-key status, they are doing so in relationship to the other’s domain expertise. In this manner, not only is the sector growth co-evolutionary based on OEM to EMS and ODM, but also co-evolutionary between EMS and ODM, as they affect each other's successes in branching out to provide new services to the OEMs. Finally, by considering EMS and ODM providers together below, it is not intended to imply that these two sectors have merged or are the same.
Place as a variable
Geographically, the ODM hub has been Taiwan and the U.S. North America continues to be attractive for research, development and design due to recent currency devaluations, the strong IP regulations and financial support afforded by government and universities. EMS providers and certainly many lead firms continue to hold design teams in North America (and Europe). Through consolidations, the EMS providers have taken a dominant position in offering multinational reach as a critical value add to their clients. But, does this regional spread and initial offerings overlap contribute to an intended competitive move or is it a residual variable of independent business models?
To provide the type of turn-key supplier value that OEMs demand, EMS firms must be able to offer nearly immediate regionalized responses, necessitating a multinational presence. ODMs, having chosen the more narrow product domains of personal computing initially, and more recently mobile phones and flat screens, have not had to contend with the same distribution issues as EMS companies. However, as ODMs move into the larger flat screen TV sector, new logistical problems arise.
Product as a driver of 'co-opetition'
Lead OEMs such as Nokia, with its well-reported value chain and business model successes, have spurred important growth and healthy competition among EMS and ODM providers (within and across the two groups). EMS and ODMs alike are now seriously engaged in the ongoing mobile sector growth. As lead OEMs pursue expanded outsourcing models while presenting innovative strategies for their own market expansion, shifts in how to meet outsourcing demands arise organically. In this manner, there is a healthy 'co-opetition' among EMS and ODM providers as traditional lines are erased and new opportunities for growth arise out of the increasing outsourcing needs of OEMs.
ODM growth continued to outpace EMS growth for 2007 at a rate "far above what was predicted" (MMI Vol. 18:3, p.5). Will the mobile phone market segment prove to be a battleground since the notebook sector is so obviously dominated by ODMs? Perhaps, since according to iSuppli and MMI’s reporting of shipments have declined for the ODM sector (by 3.9 points) in the face of EMS shipments rising (by 4.5 points).
The strategy of pursuing branding of products is an important differentiator between EMS and ODM companies, especially from the OEM perspective. In this business strategy, ODMs and EMS are not in competition. Some ODMs have decided to self-brand, while no EMS firms have. However, some EMS providers are competing with ODMs by offering design solutions because the value of design capabilities has proven to be increasingly important in today's value chain, according to iSuppli. Yet, there remain important differences in levels of competency and expertise in some critical design areas. 2008 will prove an interesting time for monitoring design as part of a turn-key solution set for EMS providers as well as the ongoing monitoring of ODM branded product successes.
Technology drives industry change
Nanotechnology brings with it exciting new opportunities and innovations along with significant complexity issues for design and manufacturing. For one, the costs associated with the shifts to increasingly smaller nanometer architectures necessitate collaboration among firms at the R&D and manufacturing stages. A secondary outcome of these costs and complexity in manufacturing is the shift in the level of IP and amount and type of data that must be entrusted between value chain partners. The lines of design and IP begin to blur somewhat because nanotechnology's complexities and costs require a reorganization of the roles of business partners. As these lines blur, it may be that a more directly competitive relationship arises between EMS and ODM providers. This new competition is also likely because of the increased awareness of the profitability and inherent exclusivity of design IP.
Where are the EMS and ODM sectors going?
There are clearly larger business and market transformations that arise when exploring the reasons behind changes to today's EMS and ODM providers. It is arguable that a convergence of economic, market, and new technology/product shifts are spurring organic growth in the EMS and ODM sectors aided by increased outsourcing by lead OEMs. These shifts are part of a mature industry's healthy co-evolution as new strategies are developed to promote and efficiently design, manufacture and distribute products based on revolutionary (yet costly) technologies in complex and volatile global economies.
OEM outsourcing to ODM and EMS providers is set to continue through 2008 and beyond. This outsourcing trend underscores the co-evolutionary pattern in the industry. As OEMs increase outsourcing, they are requiring their value chain partners to increase services that they previously had done themselves. In this manner, EMS and ODM providers are increasing their domains and capabilities, an indicator of organic co-evolution that promises sustained growth for the sector.