Customers have changed. The shift to Cloud companies and business models are ravaging classic manufacturing models. Customers, like an OEM or ODM, are a smaller and smaller market segment. Manufacturing empires grew on the backs of these former giants, and customers are crying out for a new model. One that says get off my back and help me!
Foxconn, the largest of large manufactures, learned to take on cell phones early in this market shift. They acquired and developed new strategies to capture market share. Eventually, they partnered with each customer to provide clear value in ways their partner could not. Apple was the flagship customer for this transition. Today they are a diversified dynamo. But not without complaints.
EMS by size: 2018
- 1 Hon Hai Precision Industry (Foxconn) — Tucheng City, Taiwan
- Flextronics International Ltd. — Singapore
- Jabil Circuit — St. Petersburg, FL
- Celestica — Toronto, Canada
- Source: EE|Times
Under the shadow of Foxconn sits a host of smaller contract manufacturers. Each plays to specific sectors of the economy, such as Automotive, Server and Storage, Hyperscale and Cloud, Networking, Consumer Goods, Tailored Infrastructure, or generic white box provider. In all cases, each represents a particular set of skills and capacity. In all cases, they struggle to maintain a business on meager margins. Former giants of the industry ravaged by the new Cloud Business Models, struggle to keep up.
Former heavyweight players, NetApp, HP, IBM, Cisco, and a host of others shifted their business models in response. They all decided to become software companies. The software needs hardware, so they pushed hard to follow Cloud providers into the low margin business model. NetApp is heading to its five year low. HP broke up into parts and bought software companies by the dozens. The only way to save money in this model is to shift the burden and demand more from contract manufacturing.
This business model is terrible for everyone with Cloud models making it much worse. Cloud grew on the backs of open source software over commodity hardware. Relentless to cut costs and improve performance, these new giants squashed the old giants, bludgeoning manufactures with 1% margins and highly leveraged logistical demands. They partnered with ODM’s to build reference designs. Until they, too, realized the pain of unmatched hardware and software is an Achilles heel. Cloud providers have shifted to making specific hardware solutions again. And soon, manufacturers will have to respond, and it won’t be with 3% to 5% margins. Welcome to the world of more work for less money.
ODM’s by size
1. Pegatron
2. Quanta Computer
3. Compal Electronics
4. Wistron
5. Inventec
Lowering costs is the holy grail of all companies. In response, contact manufacturing mastered high volume low wage global footprints. That cup overflows now, and manufacturers are drowning in a sea of red. Unable to create substantial buying leverage with suppliers, they struggle to offer the value at lower costs. Yet, they don’t provide new models of service. They strive to lead but are genetic followers. Veterans of the old models continue to pilot the ship. Old maps are running them into the rocks.
ODM and EMS remixed by size in the new age
- Foxconn
- Quanta
- Pegtron
- Flextronics
- Compal
- Wistron
- Jabil
- Inventec
- Sanmina
- Celestica
Customers now speak with one voice. All customers want low or no-cost hardware manufactured to specifications that can’t be used by anyone else. Unique by feature or function, systems like this put intense pressure on contract manufacturing across the globe. Look at the order above. Service value players rank much higher than the arms and legs providers of the past.
It’s panic on the shop floors that now drown out the customer’s voice even more. A view that won’t be silent without new ideas and new structures. If Contract Manufacturers don’t start a new dialog soon, they will be deaf, dumb, and blind.
So what can be done? See my next article where I will layout a 3 part plan so you can join the chorus of customers who will drive change in this troubled industry.
