Celebrations… and the evolution of the contract market
26 July 2010
EMTWorldWide can boast three years in existence now, but we share a publishing house with a printed magazine that is about ten times as old.
It is an excuse to run a number of ‘bigger picture’ type articles that examine the past, present and future of the electronics industry and I intend to bring the relevant viewpoints, like the one below, to readers of EMTWorldWide.
Before launching into an excellent insight into the evolution of the electronics outsourcing, I will just briefly explain the relationship between Electronic Product Design (EPD) and EMTWorldWide.
EPD has been a component part of the UK electronics design industry since its launch in September 1980. A couple of years later a sister title was launched, Electronics Manufacture & Test and this in turn gave rise to the global, electronic version that lands in your inbox every Tuesday – although admittedly it took us a couple of decades to make this last step!
EPD has therefore been part of the electronics industry as it has boomed through the computer and mobile phone years and has seen the technology and applications move from pioneers to mainstream. The overlap between design and manufacture has become more acute in this time, expertise in one discipline is no longer enough - an understanding of the ‘other’ discipline being crucial if the end product is to be commercially viable. For this reason we now publish EPD and Electronics Manufacture & Test as a single magazine in the UK (although there is still a clear identity and delineation for the two sections).
The electronics industry has also, more than any other industry, become global. EMTww is therefore ideally placed to participate in EPDs anniversary issue, but equally some of the content is well worth distributing to our global manufacturing readers. One series of articles in the magazine will be based on the thoughts of EMTww’s global correspondents and I will filter them out over the coming weeks. However. I also asked Intellect, the UK’s largest technology trade organisation, to comment on the changes in the outsourcing sector of the electronics sector in the UK. I now pass you over to the thoughts of Marco Pisano, Intellect’s Electronics programme Manager:
Thirty years of outsourcing in UK electronics
Much has happened since the rise of the electronic contract manufacturing industry in the 1980s. Outsourcing has presented obvious benefits such as less capital expenditure and less management headaches, which allowed companies to focus on core competencies giving them a competitive advantage. Contracting out thus made financial and strategic sense and, as a result, most of the world’s electrical or electronics original equipment manufacturers (OEMs) ceased to assemble their own products at the component level, resulting in a rapidly growing, albeit fragmented, global contract electronics manufacturing industry. Those companies subsequently began to offer a series of additional services hence the labels electronic manufacturing service (EMS) and original designer manufacturer (ODM).
Outsourcing in the electronics industry has evolved dramatically during the last 30 years. In its earliest and most basic form, OEMs’ “make vs. buy” decisions were based largely on opportunities to reduce costs or meet specialised manufacturing needs. Such a traditional approach to outsourcing served electronics OEMs well into the mid-1990s, when demand was relatively predictable, competition was less fierce, and products were simpler. Then the forces of globalisation kicked in and the business world changed forever presenting not only new challenges to Western companies but also fresh opportunities. Products became more complex and the pace of innovation increased dramatically, leading to shorter product life cycles and increased pressure to decrease time to market. Customers became increasingly demanding and fickle in a business where market share was king. In response to this new trend, a number of OEMs have used outsourcing to enter new markets quickly and cost-effectively. By teaming up with an experienced partner, an OEM could significantly cut the time and cost involved in developing new products. At the same time, as with other areas of UK manufacturing, many OEMs have taken the strategic decision to move their manufacturing requirements offshore to low cost economies. Most ‘tier one’ high volume EMS providers, who previously located facilities in the UK, have relocated offshore as a result. This caused a rapid decline that has affected the UK EMS industry quite severely.
Companies that remain in the UK tend nowadays to focus on medium to low volume manufacture of highly specialised products. Even though the EMS sector in the UK is smaller than has historically been the case, the support provided to OEM customers is vital. In particular, their role in successful product development is crucial. UK EMS providers can and do make important contributions to overall product design, even though they do not own the intellectual property (IP) behind the product they are contracted to manufacture. This kind of support is often not available to OEMs who use manufacturing facilities outside of Western Europe. Also, when an OEM is manufacturing a new product, it will often need to make a substantial number of changes to the design after the initial production run. In this context, it is necessary that the manufacturing facility lies in close proximity to the OEM and can offer flexibility for constant amendments to product design. Only the UK EMS sector can meet this requirement. At the other end of the scale, the role that EMS providers have to play in supporting small UK based technology ‘start-up’ companies is also important. These ‘start-ups’ are in many ways the lifeblood of the UK technology sector, and are the standard bearers for UK innovation. With the right support, they can grow into global players.
Recent success stories include Cambridge Silicon Radio, who invented ‘Bluetooth’ technology now installed as standard in almost every mobile phone handset. Without the UK EMS sector, many of these products are unlikely to get beyond concept stage. Technology start-ups need localised and highly skilled manufacturers who can cater for the innovative nature of their products, and help them move from design to production. The UK sector’s specialisation and flexibility fits this requirement very well. However, the UK is already at a disadvantage in that much of the intellectual property it develops in the technology sector is exploited by other economies. A vibrant EMS sector can help reverse this trend to facilitate a thriving high-tech manufacturing sector within the UK. Another interesting business model in the semiconductor’s world is ARM, a British IP provider, responsible for designing the architecture used in low-power highly efficient chips for smart phones, hard drives, and other devices. ARM designs chips, licenses those designs, and collects a royalty for every chip made using ARM's design.
As we have seen, there are reasons to believe UK outsourcing is not dead: it is simply changing and adjusting to a new environment. Our members tell us that lack of visibility across the supply chain, rising prices of raw materials and increased lead-times are the current issues but the opportunities outweigh present challenges and there is much room for optimism. It is true that, over the long term, market conditions could remain difficult for EMS and ODM firms due to OEMs following commodity purchasing patterns and new waves of consolidation. Alternative service providers are likely to pose a greater competitive threat to the EMS industry and EMS firms will be challenged to keep providing new value to their customers. Focus should therefore be placed on allowing OEMs greater flexibility, improved cost effectiveness, reduced cycle time and time to market, with the ultimate goal of granting sustained or higher quality. Achieving these objectives is incumbent on both the OEM and its manufacturing outsourcing providers. For OEMs new to manufacturing outsourcing, starting small is advisable. Outsourcing relationships take time to develop, and the OEM's culture and organisational processes will need to adjust accordingly. Starting small also makes it easier to monitor results and allows for adjustment of the model before implementing any large-scale change.
The UK has been hit hard by the recession. Consequently, a series of headlines have emerged about the need to rebalance the economy towards manufacturing. As James Dyson rightly highlighted: “Manufacturing isn’t just assembly; it’s intellectual property, technology, design and specialist engineering.” The coalition government assured its aim is to create ‘the most competitive corporate tax regime in the G20, while protecting manufacturing industries.’ Good intentions are welcomed but the government ought to have a clear strategy for high tech manufacturing in the UK. Whether this takes the form of attracting large foreign manufacturers willing to engage with the domestic supply chain or encouraging the creation of indigenous high tech start-up companies, Britain needs an inspiring vision to address some pressing issues such as skills shortage in STEM subjects and the need to rebalance the economy. Given that emerging economies have lower costs that the UK is unlikely to match competitive edge on non-price factors must be sought by moving up the value chain. Fresh thinking is required and it is essential that the government plays a major role without a considerable amount of public spending. New opportunities may also arise in emerging markets such as greentech or major infrastructure projects.
Intellect is committed to ensuring that the overall environment for the electronics sector is conducive to its future success and growth. We are keen to establish firm links with the new government and facilitate information exchange on the relative health of the UK electronics manufacturing sector and the policies that could be developed to help ensure it is able to expand on its already important role in supporting the UK technology sector as a whole.
I wish EPD and EMT a happy 30th anniversary and ongoing success!
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