Comparing Services for Contract Electronic EMS Manufacturers, CM, CEM, ECM, ODM, JDM Providers and Product Design Houses
The design and manufacture of electronic hardware equipment products is divided into two primary camps: OEM brand companies and contract electronic solutions providers.
This article outlines the electronics OEM brand company business model. I then compare it to the different types of business models in contract electronics solutions industry. I also explain why knowing the differences is important.
It's important to first understand how the electronics OEM equipment manufacturer (OEM) is categorized in contract electronics industry. The OEM is the primary target of contract electronics solutions providers.
OEM - Original Equipment Manufacturer
The original equipment manufacturer (OEM) is the electronics hardware equipment brand owner. The OEM's company logo displays on it's final product. Think: Cisco, Dell, Samsung, Lenovo, LG, Microsoft, Apple …
For example. Apple’s iPhone has the Apple logo clearly visible to users. Apple is an OEM. Apple designs its products but Apple outsources the majority of iPhone manufacturing production to contract electronics solutions providers. Both EMS and ODM. Apple does this to leverage cost-to-scale, among other reasons.
Its cheaper for OEMs to pay premiums solutions provider to purchase and carry land and factory overhead costs and purchase and deploy expensive production and test equipment (P,P&E), and then pay the solutions provider to hire staff and train employees inside costly factories external to Apple's organization.
Removing P,P&E from the denominator increase ROIC. Apple's solutions providers then can manage vendors and suppliers in Apple's supply chain. Apple also has large staff to manage its vendors and suppliers but Apple does not have 100% of this responsibility internally and Apple does not carry P,P&E on Apple's books.
Apple still hires qualified employees trained in the dynamic art of contracts electronics program management and managing some of the risks associated with managing multiple providers in Apple's extended supply chain operations as a result of outsourcing such large volumes, and distributing risks tied to iPhone production.
Providers of Contract Electronics Solutions
Contract electronics solutions providers contract their services and solutions to technology OEM 'customers' to help OEM customers bring the OEM's products to market. By lowering the OEM's materials cost of goods sold (MCOGs) this creates a more feasible business model. instead of keeping manufacturing and related activities in-house.
Contract electronics solutions providers become the OEM's operational experts. The OEM remains the marketing expert.
This OEM-contract electronics provider arrangement also supports why OEMs earn higher margins. OEMs carry all of the product market risk of failure, while contract electronics solutions providers remain risk averse, but also to providers' detriment, often trailing OEM technology by years.
Meanwhile, contract electronics solutions providers can be further subdivided into a basket of different acronyms: CM, CEM, ECM, EMS, ODM, JDM...
Electronics design houses are even more specific. More on that later.
Some contract electronics solutions providers only provide electronics design services while others offer only contracts manufacturing services. The latter will use product equipment designs provided by the OEM. In this scenario providers builds-to-spec. This is the case with Apple iPhones.
OEMs partner with contract electronics solutions provider for various reasons. The article inset below discusses how OEMs leverage contract solutions providers for OEM current market product revisions that can help protect OEMs against price erosion vs spending valuable cash for costly new product introductions.
Many contract electronics solutions providers offer both product design and manufacturing services. Then there are others who are fully vertically integrated providing full, end-to-end services with large industrial parks.
Vertically integrated solutions providers have more, and higher, operating input costs which impacts quote pricing of their services. Vertically integrated providers are also more subject to operating margin contraction risks during periods of soft demand given inventory concerns of costly MCOGs pipelined for OEM customer programs. Qualified buyers and planners earn their salaries and can make a name for themselves in contract electronics industry because one of the big profit centers for EMS manufacturers is inventory warehousing.
Because MCOGs are so important to solutions provider profits, EMS program managers (internally and externally) of contract manufacturer services make a concerted effort to effectively manage OEM customer program work-in-progress (WIP) and materials scrap.
Contract Electronics Services
In addition to offering front-end design of sophisticated components and materials, as well as after market services like shipping finished goods inventory (FGI) product to customers or end-users, including repairing of customer field failures (reverse logistics). Read more about provider transportation and logistics services in the article inset, below.
Various contract electronics services offering, from front-end services, manufacturing and a full suite of back-end services, can be seen in this matrix below. Columns to the left of Manufacturing Services are front-end services. Columns to the right of Manufacturing Services are back-end services.
Front-end services, before actual manufacturing, and back-end services (after manufacturing) carry higher profit margins for solutions provider compared to margins only from surface mount technology (SMT) and printed circuit board (PCB) assembly manufacturing.
Some solutions providers only offer their services to OEMs that serve specific industry markets like medical and healthcare, industrial equipment, consumer wearables, automotive… to name a few. You can read more about some of the different services providers offer here.
Contract Electronics Solutions Industry Acronyms
Contract electronics solutions providers just focusing on R&D services, like embedded systems design, and staffed with lots electrical engineers (EE) are called design houses. However, EMS and ODM, ECM, JDM providers offering design services also staff EEs.
Mark Zetter
EEs enable providers to build expertise in front-end electronics design services which are highly profitable for providers. This is partly because the paces at which new product introductions (NPI) come to market becomes faster as companies try to increase value to maintain market-buyer relevance, market share and market vertical competitiveness.
Its also common for any of the other types of contract electronics solutions business models (EMS, CEM, ECM, ODM, CM…) to obtain additional insurance, liability and certification requirements.
Not surprisingly, each of these areas, in addition to others, provide opportunities for solutions providers to differentiate themselves against competing providers when estimating quote pricing prospective customer product bill-of-materials and determining profits for their services.
CM – Contract Manufacturer
Contract manufacturers, or CMs, will contract their services to OEM customers. Either term is suitable in any manufacturing industry or market where production manufacturing is outsourced and is used in the electronics industry. This is reasonably assumed in other industries such as pharmaceuticals, supplements, books, foods, and so on.
CEM – Contract Electronics Manufacturer
Unlike CM, contract electronics manufacturers (CEM) distinguish themselves from contract manufacturers which might produce any variety of non-tech, non-electronic items.
CEM providers primarily serve the electronics industry. This can also include wire-harness cabling, plastics mould injection and any number of other services.
To this point, CEM is interchangeable with CM, but CM is not always interchangeable with CEM.
ECM – Electronics Contract Manufacturer
Electronics contract manufacturer (ECM) is an acronym similar to CEM. ECM is always interchangeable with CM, but CM is not always interchangeable with ECM. Whether or not the contract manufacturer offers electronics solutions is the differentiator.
EMS – Electronics Manufacturing Services
Electronics manufacturing services providers are also referred to as EMS providers, EMS manufacturers, EMS companies….
The EMS provider business model has evolved over the years beyond offering just core manufacturing services.
Mark Zetter
If you have already obtained a quote from a CM, CEM, ECM, EMS provider you can use this calculator to help determine 'make vs buy' decisions as well as profit or loss outcomes, costs associated with different program volumes, in addition to various other 'what if' scenarios.
The competitive readiness document below can also used for holding costly contract electronics functional group (supporting manufacturing) indirect labor accountable (S,G&A) for driving provider workflow accuracy, timeliness, and productivity execution. The document is suitable for helping to manage CM, CEM, ECM, EMS plus, some aspect of ODM business model outsourcing.
ODM – Original Design Manufacturer
Enter the original design manufacturer (ODM). Up until about 2005, this terms used to apply to companies only in Taiwan. Today, ODM providers and related services can be found nearly everywhere EMS providers are located as the line between the two models is now too blurred for most industry analysts.
ODM white box label v ODM private label: ODM manufacturing can be broken down into white label and private label.
ODM white label is when the ODM designs, manufactures, distributes non-label, generic FGI products to various outlets or retailers. These retailers then sell the ODM product under their own brand logo.
ODM private labeling is when the ODM sells FGI product produced exclusively for a particular retailer.
Competition among pure electronics ODMs in Taiwan remains fierce. Its to the point today margins have remained tight since 2017.
JDM – Joint Design Manufacturer
In a narrowing scope of the contract service level agreement between OEM and provider partners, where product design contribution is shared between OEM internal engineering and provider engineering, the two parties jointly design the product.
Typically, both parties will share in ownership of design IP but JDM providers can also claim payment in the form of ‘earn outs’ where JDMs receive payment based on particular terms.
JDMs, being similar to ODMs, typically will offer manufacturing but often will often outsource this services with a sub-contract agreement.
Electronics Design House
As the name implies, the main focus of services offered by a design house is electronics design. Similar to electronics design services offered by other types of providers, some design houses can offer a full range of electronics design services including both hardware design as it related to electrical and electronics and firmware design across a wide variety of product verticals and end markets.
The audit article above provides information with links to other resource documents that can be a reasonably good starting point or checklist when auditing and evaluating design-for-manufacturing (DfM) capabilities for any solutions provider.
Your ability to bring product to your customers in a timely manner with the right quality, at the right price… is a cornerstone to your survival. For information about formulating contract electronics strategy please visit ventureoutsource.com.