Choosing providers: EMS or ODM?

By Joseph Wei

The landscape for outsourcing electronics manufacturing services (EMS) has changed significantly in the last ten years resulting from a combination of the emergence of Taiwanese original design manufacturers (ODM) and the consolidation of traditional EMS providers.

Companies such as Foxconn, Flextronics, Jabil, Sanmina and Celestica are often referred to as EMS vendors, while companies like Compal, Quanta, Wistron and Inventec are referred to as ODM vendors.

Meanwhile, the convergence for these two types of service providers began a few years ago as both have been expanding their core disciplines and capabilities, so, OEM executives need to pay more attention to each vendor’s latest capabilities and performance to select one that does indeed match the OEM’s outsourcing objectives.

Acer founder Stan Shih was recently quoted in DigiTimes that many EMS providers will disappear and be replaced by (a term I believe he coined) design manufacturing services (DMS) companies, as EMS providers such as Flextronics and Foxconn (Hon Hai Precision Industry) started to strengthen their R&D abilities. Meanwhile, many ODMs are currently expanding their services to match the capabilities of EMS providers, so, they, too will end up being DMS providers.

An ODM differs from an EMS provider mainly on the capability of providing original design products, thus, saving the OEM customers significant non-recurring engineering (NRE) costs associated with product development.

Top 10 impacts to EMS/ODM quote pricing OEM programs
Difference between EMS, ODM, CEM, CM, ECM, design house

While many ODMs do not yet have the expertise for very high-end system design, they are indeed experienced in consumer electronics due to deep design talent in Taiwan, and gradually expanding to China, as Taiwanese ODMs start to move more of their operations onto mainland China for even lower labor costs.

Asia Pacific’s growing consumption
Intel’s 2008 annual report showed revenues derived from the Asia Pacific region grew from 28% in 2006 to 40% in 2007 and to 51% in 2008.

Part of the driver for this incredible growth is attributed to the expansion of China as a consumer market; however, it is also driven by the growth of the Taiwanese ODMs who have established a large eco-system with full design, manufacturing, and integration operations in the region.

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The EMS / ODM sector is a very dynamic market with recent rises in M&A as well as vendors re-focusing on newer markets. It is crucial for OEM executives to survey and understand their potential EMS / ODM partners’ latest capabilities and business strategies, core strengths, as well as historical performance verses the OEM’s own outsourcing strategy to enable the OEM to select the most optimal outsourcing partner to gain cost advantages while minimizing supply chain risks.

In this first article of a four-part series, we examine some of the critical factors for OEMs to consider when selecting their EMS or ODM providers.

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