Manufacturing strategies depend on both product and process technologies, including materials, components, design, equipment, process type, operator skills, and economies of scale. Strategies also depend on the type of manufacturer: contract manufacturer (CM), original design manufacturer (ODM), or original equipment manufacturer (OEM). All three types exist in the countries of this WTEC study, and, in fact, are in a dynamic state of flux, some evolving rapidly from CM to ODM to OEM even as new contract manufacturers enter the market.
Contract Manufacturers (CMs)
Contract manufacturers produce proprietary products for OEM customers. Many contract manufacturers began as suppliers of standard parts and components. By adding assembly equipment and test capabilities, these vendors can produce more advanced components, like motherboards, or completed products to meet OEM customers' specifications. As contract manufacturers increase their design capabilities, they seek to add additional value to their customer's products. Design for PCB assembly is a major step in developing overall product design capability. Japanese and U.S. firms are using experienced high-volume, low-cost contract manufacturers to redesign existing products for cost reduction. PCB design and decisions to outsource plastic and metal parts and other electronic components are being given to contract manufacturers, as shown in the Japanese flow chart below (Fig. 2.1). U.S. and Japanese firms still reserve the right to evaluate the end products and processes for quality and reliability. ISO 9000 certification of contract manufacturers helps to ensure consistency of results.
Fig. 2.1. Changing role of Japanese computer makers in component evaluation (Nikkei Electronics 1995, 88).
Original Design Manufacturers (ODMs)
ODMs are contract manufacturers with product design capabilities. ODM firms provide "ready to go" products for their OEM customers. Many Japanese firms, like Sharp, Hitachi, Canon, and NEC, and U.S. firms, like Xerox, Compaq, and Apple, began outsourcing production to contract manufacturers in order to reduce product costs. ODM firms can then reduce development time for new product models by creating "ready-to-go" products for their customers. The most advanced contract manufacturers get early signals about market shifts and technology development that they can integrate into advanced products. By the time OEM customers recognize the need for new product concepts, ODM firms already have products ready to market. ODM producers only need to add the customer's brand name and then proceed to manufacture in volume.
ODM competitors must be able to produce leading-edge products. In information products, leading-edge products require advanced component technologies like LCDs; TCP and PCMCIA cards for use in notebooks; high-density assembly using direct chip attach for personal computers and organizers; and high-density storage and memory devices. Multimedia products that combine scanners, printers, copiers, and facsimiles, for example, increase product complexity. With the growth in communications, products must be compatible across a broad range of software and hardware networks. Compatibility testing has become a critical requirement for firms supplying ODM products. The most aggressive ODM firms are developing products that incorporate the latest available technologies so that customers can cut development time for new product designs and production by three to six months. The availability of ready-to-go products gives the ODM competitor a definite advantage over the low-cost contract manufacturer in building close relationships with global customers. By also establishing low-cost facilities in China and the Philippines, ODM firms in Taiwan, for example, can further cut production costs for their customers.
Evolution from Contract Manufacturer to ODM
Growth of low-cost contract manufacturing in countries like China and the Philippines is forcing Korean, Taiwanese, and Singaporean vendors to increase their ability to add value through manufacturing of leading-edge products or advanced product design capabilities; that is, to assume the role of ODMs. Taiwan's Inventec, an ODM producer, makes Apple's Newton (PDA) and provides Compaq with its high-end LTE 5000 series notebook computers, both as ready-to-go products. GVC, another ODM vendor in Taiwan, grew from sales of $110 million in 1992 to $800 million in 1995, and, at the time of the WTEC visit, had plans to double sales in 1996. Design capabilities have allowed ODMs to produce higher-value-added products. Design is dependent upon highly trained and experienced design engineers who are fluent in the latest technologies and able to integrate a full range of electronic components and technologies.
Original Equipment Manufacturers (OEMs)
Fully integrated firms that design, manufacture, and sell their own "brands" under registered trademarks are referred to as original equipment manufacturers (OEMs). While such companies are well known in the United States, Europe, and Japan, OEMs are now growing in the rest of Asia. For example, VTech, the largest manufacturing firm based in Hong Kong, holds over 50% of the world's market in electronic learning aids and toys. Legend Holding's QDI subsidiary holds a 15% share of the Chinese personal computer market. QDI creates its own designs, test procedures, and process layouts for both computer add-on cards and motherboards. Acer, the largest and most well-known OEM producer of desktop and notebook computers in Taiwan, ranks eighth in the U.S. PC market. Samsung is the leading supplier of personal computers in Korea. Today, the vast infrastructure of Asian component and equipment makers has led to an increased number of new OEM companies throughout Asia.
Brand Names. Marketing and design skills are the primary domain of global firms whose brands are recognized throughout the world. Outsourcing to CM and ODM vendors still requires market research and channel management by global brand leaders. With growing costs of after-sales service, design for manufacture (DFM) requires tighter relationships between the OEM design teams and their vendors. The increasing success of ODM vendors reduces the need for tight customer-vendor communications and allows the brand leader to focus more attention on gaining market access and share. In fact, contract manufacturers, like Nam Tai and Wong's Electronics in Hong Kong, ship finished goods directly to their customers' designated destinations.
Marketing and Sales. Global leaders command markets around the world with marketing channel control, brand reputation, and customer brand loyalty. Names like IBM, TI, and Compaq are well known. Only companies with the most advanced technologies, able to gain first mover advantages, are likely to break into established markets in the future. The value of recognized brands makes it difficult for new entry into established markets. However, Korea's Samsung and Goldstar are developing globally recognized names, as are Acer in Taiwan, and VTech in Hong Kong. Market leaders are driven by customer satisfaction and the continued development of market and related distribution channels. Market intelligence keeps them close to their customers and helps in forecasting product demand, planning production ramp-up, and minimizing related stockouts. The majority of contract manufacturers and ODM suppliers do not have recognizable brand names or direct access to markets or end users. They only serve as product providers. However, as brand leaders increase their dependence on ODM suppliers, they risk creating future competitors. Acer, for example, began as a contract manufacturer and now has a globally recognized brand name.
Customer Service. Brand reputation is based on the relative life and dependability of a firm's products. Rapid response to customer problems is an important competitive requirement. Customer service centers are required for branded products like copiers, computers, and automobiles that need repairs, servicing, or upgrading. Most manufacturers provide warranties and product replacements through national service centers of the brand holder. Effective communication is required to correct the source of market failures. Companies like GVC in Taiwan get daily feedback from U.S.-based engineers who analyze product failures. This information is used to take corrective action. To prevent serious field failures, OEM and ODM firms attempt to identify potential problems with products before they get shipped into the field. As a result, quality assurance activities are central to firms' long-term success.