What Drives Regional EMS Success?

04 July 2008

Susan Mucha

Back in April, my column focused on the optimism found in the US regional electronics manufacturing services (EMS) sector. That optimism seems to be continuing, in spite of the fact that some much larger Tier One EMS players have posted earnings warnings. I thought this might be a time to take a look at elements of that business model that help drive success.

Characteristic #1 – Clear vision of the business model. High performing regional EMS providers have a clear vision of their strengths and weaknesses. They focus on attracting and growing accounts that are aligned with their strengths. The business model includes a high service focus and often greater degrees of flexibility than found in larger companies.

Characteristic #2 – Focused flexibility is used to “lock in” key customers. Often regional EMS providers are selected for hard to source projects. When they perform, the reward may be more of that hard to source business. High performing regionals find ways to support and grow customers in ways that turn hard to source business into profitable, hard to move business.

Characteristic #3 – Keeping overhead low by working smarter. Regional EMS companies typically have lower overhead structures than their much larger competitors because they have a much smaller footprint. While small footprints can be a disadvantage for projects needing global sourcing options, some OEMs like the sourcing model of dividing business between global providers and small regionals based on project requirements. Regionals who keep costs in control through automation, strategic alliances, continuous improvement initiatives or a strong focus on taking non-value added cost out of the equation offer a very strong value proposition, particularly for complex lower volume, high mix projects.

Characteristic #4 – Focused on less volatile industries. Many regionals grow at a much slower pace than the top end of the EMS market, but they also tend to be less vulnerable to large scale downturns than their faster growing competitors. Often the primary driver is the industries that they focus on. Industrial, instrumentation and medical markets have traditionally been a strong regional EMS provider focus and they tend to be more stable than consumer-driven markets such as computers, consumer electronics, telecom or automotive.

Characteristic #5 – Vertical integration or strategic alliances. Successful regionals often have unique business models which share expertise from either sister divisions or strategic alliances. This expertise may be used to support faster product development, lower procurement costs or ensure availability of critical parts as products near end-of-life.

Characteristic #6 – Customer-focused. Successful regionals listen to their customers and make the technology, equipment, systems and people investments necessary to support their key accounts. It is not unusual to see fairly well developed automated inspection and test capability even in the smallest regionals. Most offer a choice of RoHS compliant and leaded manufacturing. Continuous improvement initiatives and Lean manufacturing principles are also often part of the business model.

Characteristic #7 – They can tell a good story. Most successful regionals have strong stories to tell about the solutions they’ve provided their customers. Experience with projects of similar size and scope is always in an OEM’s decision team’s mind during final contractor selection. Successful regionals usually have strong track records in a variety of complex projects.

Perhaps the most interesting impact of the characteristics described above is that many OEMs now expect this full service support at the regional level. Companies that have enhanced capabilities gradually are in a much better position than those who have not. This competitive challenge will only grow stronger. As labor costs increase around the globe, many regions have suppliers chasing the lower volume, high mix complex projects in which US regionals have specialized. Increasing logistics costs and weak US dollar help keep US companies competitive today, but it is always important to recognize that the world is full of strong regional players ready to compete for business should playing field advantages change.
Another interesting trend is that the supply base management model that has been developed so well by the EMS industry is now cross-pollinating to other supply bases such as suppliers of metal or plastic components. In those cases, electronics manufacturing is often the commodity that is purchased by a custom component supplier who also manages final subassembly or assembly. In short, competition is taking many forms.

The characteristics that have built successful regionals will continue to help them compete even as competition grows geographically and across the supply base. The key factor in continued success is aligning that successful vision with the changing playing field.

Susan Mucha is president of Powell-Mucha Consulting, Inc., a consulting firm focused on training, strategic planning and marketing positioning. Her new book, “Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services,” is available through Pennwell Books, other online retailers, IPC and the SMTA.

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