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The growing need for handset outsourcing

Posted: 14 Nov 2007 ?? ?Print Version ?Bookmark and Share

Keywords:handset outsourcing? handset industry? OEM?

At times of shorter time-to-market and shorter product lifecycles, outsourcing enables mobile phone OEMs to sustain business profitability. The commoditization of the mobile handset industry is reshaping market dynamics on a global scale as major OEMs struggle to keep pace with consumers whose demands for product replacement rate is growing higher and higher.

Market forecasts from leading industry analysts such as iSuppli, IDC and Morgan Stanley confirm the increasing role played by third party service providers in the handset ecosystem, with the EMS/ODM market for mobile phones expected to reach more than $260 billion by the end of the year, a 10 percent growth over 2006. In the next few years, the EMS industry is expected to attain a revenue growth rate of at least 10-12 percent.

Outsourcing business models
For the past 20 years, handset makers have been subcontracting different parts of their production process to third party manufacturing suppliers. Virtually none of the major OEMs today keep all the elements of their supply chain in-house.

What used to be a simple straight-forward outsourcing relationship has become increasingly complex as the industry matures and grows. Different outsourcing business models have emerged for OEMs to cope with continuous advances in technology and rapid changes in consumer market realities.

Original Design & Manufacturing (ODM): Where a product is designed and manufactured independently by a company then later given an OEM specific industrial design and branded by the OEM. The ODM owns its design and will reuse and sell similar products based on different industrial designs to a number of OEMs.

Joint R&D: A relationship that arises when an OEM hires people and resources from a design company to help design a product. In this arrangement, the OEM manages the program and is responsible for the design of the product. The OEM holds the exclusive right to the intellectual property.

Collaborative Design Manufacturing: Where an OEM buys a combination of design services and manufacturing services from another company and the product is usually based on the OEM's proprietary technology. In this arrangement, the partner usually manages its part of the program independently under the supervision of the OEM. The outsourcing partner contributes to the design and is responsible for the manufacturing of the product. Intellectual property from this arrangement usually belongs to the OEM.

Finding the right model
Choosing which of these business models to be used depends heavily on the relationship between the OEMs and their outsourcing partner. As the industry is undergoing constant transformation, ability to adapt and realign business models is a prerequisite.

The primary focus of an EMS provider must be to drive the OEM's success, which prevents the EMS provider from competing with its own customers, and thus builds trust, co-development and long-term partnership.

The short-term approach to outsourcing is not sustainable. The ideal outsourcing relationship entails a long-term commitment with tough requirements that go beyond the transfer price of a single product. This structural relationship approach focuses on process alignment, co-evolution and mutual long-term commitment. Cost reduction is not an outsourcing strategy; it's a result.

An ideal outsourcing partner gives an OEM several value propositions:

  1. Coordinate and execute global supply chain!Time-to-market and time-to-volume are some of the primary concerns of the handset industry. The former always gets attention, but outsourcing parties on both ends of the spectrum are well advised to give equal attention to time-to-volume.

  2. Flexibility and responsiveness!Using an outsourcing partner with a global footprint and the ability to provide rapid response to changes in capacity and services allows OEMs to optimize their supply chain without incurring restructuring costs.

  3. Greater focus on core competencies!In the electronics industry, manufacturing is regarded less and less as a source of competitive advantage for OEMs. Many of the world's most successful OEMs today are working with an outsourcing partner, allowing them to focus on their core competencies such as product innovation, brand image and product sales.

  4. Long term sustainable cost structure; protection of the OEM's reputation and brand image!Under the right outsourcing arrangements, an OEM can create a sustainable competitive edge through long-term cost reductions. It is important, however, that these arrangements are carefully monitored in order to protect the OEM's reputation and brand value, for example, ensuring that suppliers operate in a totally ethical manner.

  5. Reduced total cost of ownership!The EMS industry exists to reduce the total cost of ownership (TCO), which should be more than just the transfer price of a product or the complete product life cycle cost. The essence of a TCO product approach is to invest sufficient resources and money in the early stages of a product program in order to get the lowest possible TCO and therefore providing the best value and profitability.

Outsourcing trends
The latest research issued by Morgan Stanley in February 2007 reveals that OEMs will continue to rely on outsourcing partners to get products to market. The research estimates that most OEMs have outsourced about 60 percent of their production and the bulk of the opportunity for further outsourcing is concentrated on the telecom and handset end markets.

Despite some OEMs being bullish on outsourcing and having gained success by doing so, there are still several of the world's top handset OEMs that are yet to start their own outsourcing activities. Morgan Stanley expects OEMs to continuously raise their level of outsourcing over the next five years as recent successes among OEMs have been linked to their rate and experience in outsourcing that has helped them be more flexible and capitalize on market opportunities.

Perfect outsourcing recipe
Ultimately, outsourcing is about trust and commitment. Elcoteq believes that cooperation between two parties requires transparency and openness. Both OEMs and EMS providers must have a common view of the future and must be committed to the continuous need to develop faster than the market.

EMS companies operate in a very competitive environment. Some EMS companies have structures in place that enable design and manufacturing of handsets in a low cost and sustainable way. It has been found that having an open costing and pricing structure with the handset OEM can increase understanding of cost structures and supply chain issues. In a partnership model, the OEM and EMS can jointly work towards a competitive cost level.

OEMs can be hesitant to work with an EMS company since they have already developed the technology and established their own sourcing relationships. By working together from the R&D stage, building on each other's strengths and expertise, and practicing open communication, the two companies can reuse what the OEM has already invested and can combine that with the services of the EMS provider to achieve an optimized TCO.

Collaboration and transparency help both the OEM and EMS anticipate the market's movements and provide agility to evolve with the market demand. When the OEM and EMS work together from the design phase, share their expertise, and consider the product's entire life cycle, there are fewer chances for unexpected changes and costs. They are also able to anticipate changes in the supply chain and react to them more quickly. When there is an honest exchange and understanding of the goals of both the OEM and EMS, and an open appreciation for what it takes for each company to be successful, the companies can jointly reduce cost of ownership and increase each other's profits.

Elcoteq vision
Rigorous growth and continuous changes in handset outsourcing business models put considerable pressure on all companies in the value chain. EMS providers continue to transform their business as they seek ways to improve alignment and integration with their OEM customers' design, manufacturing and other operational processes. The pressure for change stems naturally from the development of their customers' markets and competitive situations.

Elcoteq anticipates market movements and has the agility to respond to them. It has expanded its service offering from manufacturing to product development and after-sales throughout the product lifecycle. The company focuses on enhancing efficiency in its operations, expanding its service range and reach.

Broadening its current EMS service offering, the company is evolving with the market with its Integrated Electronics Manufacturing Services strategy that gives emphasis in the expansion of its service offering to increasing its mechanics expertise, and to strengthening product development services that combine both electronics and mechanics.

- Patrik ?hgren
VP, Sales and Business Development, Personal Communications

- Folkert Wierda
Director, Business Development, Personal Communications
Elcoteq SE

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