Next up for EMS providers: Expanding beyond manufacturing services

As the electronics industry transitions and competitions increases, electronics manufacturing service (EMS) providers are trying to identify what really drives value and growth. However, only a few companies have figured out how to implement growth strategies while maintaining stakeholders’ loyalty. Smart EMS providers are identifying the best practices gained through their experience to transfer it to other services. As OEMs come to understand the value their outsourcing partners bring to the table, they also are looking for better ways to leverage their EMS partners.  

Manufacturing has been and will continue to remain the driving force for EMS outsourcing. In 2010, manufacturing services accounted for 83 percent of revenue. Still, EMS providers are trying to brand themselves as a complete solutions partner and a true extension of their customers’ business.   

Design services

Radical innovations, increasing convergence, high functionality, communication and new features are driving OEMs to seek a more strategic approach to product design. OEMs are starting to make greater use of EMS providers in design services. EMS providers bring a range of benefits to OEMs in terms of ensuring smooth product design transitions from prototype, ramp-up to volume manufacturing to faster time-to-market and comprehensive cost solutions.

The primary advantage, however, is that EMS providers have amassed a wealth of knowledge and best practices through their participation with vertically integrated customers. This gives OEMs in other verticals a better understanding of the product design and the innovation needed to remain competitive. For example, connected homes are expected to merge home automation, security, smart appliances, set-top boxes, mobile phones and patient monitoring, among other technologies. As convergence occurs, EMS providers are expected to lead joint design efforts.

As product functionality becomes increasingly integrated, utilizing EMS design services will become critical to the success of OEMs. EMS providers are incorporating the latest designs into their products, giving clients a competitive edge. Design services for EMS providers are projected to increase from 5.5 percent in 2010 to 15 percent by 2020.

Supply chain services

Another category that is expected to see increased demand is supply chain services. In 2010, these services represented 8.5 percent of revenue for EMS providers. Revenues are projected to reach 20 percent in 2020. Several factors are driving demand for supply chain services: For starters, EMS providers have a vast network of suppliers and are able to negotiate more aggressively and source components and raw materials at lower prices.

Another factor that increases the market value of EMS providers is their ability to forecast potential disruptions or challenges that OEM clients may face in the supply chain. The impact of this advantage becomes more pronounced if the EMS provider is also a design partner. Hence, a critical new service can ensure continuous supply to prevent manufacturing disruptions caused by materials or component shortages.

EMS providers also are very adept at tracking counterfeit components that find their way into the supply chain. The can leverage current solutions to detect and track fake parts while providing the resources needed to keep pace with advancing technology and supply chain challenges. Moreover, OEMs derive a higher level of confidence by partnering with a reliable EMS provider that not only has quality tools in place but also possesses the “intangibles” that frequently help in spotting potential problems.

EMS providers are benefiting from increasing supply chain responsibilities in markets ranging from aerospace and defense to medical OEMs. This is due to the level of risk and liability associated with these mission-critical industries. Counterfeit components that make their way into the supply chain can cause failures in OEMs’ products. That’s a disaster scenario in markets like aerospace.

OEMs are also leveraging EMS providers for logistics. This trend is becoming more prominent among emerging Asian OEMs trying to penetrate western markets. EMS providers are expected to thrive in helping companies to expand their footprint in regions where they lack the infrastructure to deliver products. This in turn makes EMS providers critical to the success of OEMs since they act as an extension of their customers.

Aftermarket services are another growth area for EMS providers. It currently represents a small percentage of EMS revenues, only about 3 percent in 2010. Since EMS providers are proficient in manufacturing and logistics, they are well positioned to implement reverse logistics for rework and repair. Aftermarket services are expected to account for 10 percent of the EMS provider market revenue by 2020.

The provision of EMS services is expanding beyond manufacturing services. Smart OEMs view EMS providers as trusted partners and extensions of their companies. OEMs are increasingly utilizing their new partners to provide other services, and this trend is expected to continue beyond 2020.

Hence, EMS providers that excel at delivering services beyond manufacturing are expected to record significant growth over the next decade.

-Lavanya Rammohan is a research analyst at Frost & Sullivan focusing on electronics manufacturing equipment