With everyone in the industry doing more with less, i.e., cutting costs, finding the ideal manufacturing and design partner has become one of the biggest challenges for OEMs.
Price/performance curves, time-to-market, and design cycles are now more critical than ever. The technology is becoming increasingly complex, often delaying programs because companies are attempting to do them (usually wireless) in-house when they don't have the technical expertise. Testing is also up for grabs as the industry looks for new ways to get products to market faster, while constantly flexing and changing the way it does business.
"Trying to maintain a full engineering staff is just not an economical way to do business today, especially with so much convergence of technologies," says Jim Caraccio, manager of Arrow Electronics' Arrow Consulting Engineering Services (ACES). Formed in March 2002, ACES seems to have found a niche by providing what amounts to a referral service for OEMs. ACES tries to locate the design talent and other engineering resources companies need to get products to market faster. "We're seeing customers who have a lot of their own competencies but may need help with a single element of their total design, and that's what they're looking to outsource," says Caraccio.
Essentially, ACES is doing the kind of due diligence that any OEM might perform when looking for a design or manufacturing partner, but in more depth. In the process, it has put what amounts to a "Good Housekeeping" seal of approval on selected design and manufacturing sources.
The apparent need for this service has enabled ACES to ramp up business quickly. Caraccio and Tom Swist, another ACES manager, started by developing a list of 250 companies that offer a variety of design services and narrowing it down to 30 they considered to be Best In Class. They next spent about three months on the road, putting these companies through an audit as if they were going to contract them on their own. Then they cut the list to eight third-party companies, which formed the nucleus of a Phase I ACES program.
"We looked at their unique set of expertise in areas we thought were emerging and growing. But we didn't want clones. Some focus on wireless, some on ASIC design," Caraccio says. The list also includes embedded hardware designers and software developers.
FINDING A PARTNER
In the past, OEMs worked directly with their component suppliers and assembled subsystems and boxes in-house. Today, the process is much more intricate as electronic-manufacturing-service (EMS) firms, as outsource manufacturers are known, have taken on entire design, manufacturing, packaging, test, distribution, and even servicing programs for their customers.
The big trick for most OEMs is to determine what to look for in a manufacturing or design partner, and what to expect once you're on board. Gartner Inc., a business research and consulting firm that has studied outsourcing in the electronic industry for a long time, says that when things go wrong, the customer is frequently as much at fault as the provider of outsourcing services.
One of the most common mistakes, according to Gartner, is short-term focus. Executive management sees outsourcing primarily as a way to cut costs in the short term without considering the long-term implications. Poor communications is another issue. Staff members are often not informed about outsourcing plans.
Also, it's not unusual for there to be no benchmarks for analyzing the service provider's performance. That's almost always an issue, says Gartner, because most outsourcing contracts aren't designed to cope with changes in business requirements. Insufficient resources and poor budget planning can become a problem as well. Then there's the failure to recognize risk—that is, customers entering into manufacturing partnerships without considering their own risk and how those risks can be mitigated.
Wipro, an India-based information-technology (IT) services company, has grown into a $900 million-a-year operation by diversifying into other areas, including custom chip design. It has come up with a set of guidelines, a sort of Outsourcing 101, to help its prospects work through the finer points of determining what's important in selecting an outside service provider.
The company's first rule is: "Identify what to outsource." It's supported by a "diagnostics" framework, which helps identify applications that are particularly suitable for offshore development. Another rule is: "If you're going to trust someone with a critical part of your business, make sure they understand it very well." Among other points to consider is a partner who can scale up quickly, which can mean anything from changing specifications to adjusting the size of the design team. Also, are there contingency plans for systems, data, people, communications, and locations?
Natel Engineering, whose specialty is high-frequency manufacturing, has developed its own checklist of what's important in choosing "the right" manufacturer, and it jibes well with Wipro's guidelines. But Natel added a discrete short list of points in selecting a domestic versus an offshore manufacturer. According to Natel, the most important issue in this process is defining the complexity of your design.
Offshore manufacturing, notes Natel, often presents challenges in communications, scheduling, and design revisions. Natel suggests that you calculate your expected volume needs. If your volume is exceptionally high, an offshore vendor may be the most affordable solution. Natel also recommends identifying the aspects of manufacturing that are most important to you.
OEMs should keep in mind that high volume requirements with a very low-cost bill of materials (BOMs) suggest that offshore manufacturing might be the best solution. However, issues like direct design assistance and dealing with proprietary issues may call for a domestic manufacturer.
OEMs are outsourcing almost everything, and it seems to be working, both for them and the EMS companies, particularly those that handle most of the business. According to iSuppli Corp., a parts-flow management specialist that tracks the top outsourcing organizations, the top EMS companies in terms of revenue (in order) are Solectron, Flextronics International, Sanmina-SCI, Celestica, and Jabil Circuit. As a group, they represent 57% of the total worldwide EMS market. After a few weak years, they're growing. Revenues for this industry segment will climb from $116 billion this year (a 20% jump over 2002) to $188 billion in 2006, says iSuppli.
But OEMs now have another option. Original design manufacturers (ODMs) perform all functions typically associated with EMS firms, including design, but they also produce complete products based on their own intellectual property (IP). Located almost entirely in Taiwan, the ODM industry includes Quanta, FIC, and other companies. They have focused mainly on PC and PC peripheral markets. But that's changing as they attempt to grow their service and customer base.
"ODMs are encroaching on traditional EMS companies," says Robert Ragusano, vice president and general manager of the Communications Product Division of SMART Modular Technologies, a business unit of Solectron. "All the EMS guys are feeling pressure from ODMs."
ISuppli agrees, noting in a report published last year: "As ODMs improve and expand their manufacturing capability, OEMs will shift business away from EMS companies."
Flextronics seems to have gotten the message, announcing in August that it was acquiring the Microcell Group, a leading ODM of wireless systems, with operations in Finland, Denmark, and China. Microcell employs more than 300 product design engineers. The acquisition is expected to close in October.
What makes ODMs shine, to many OEMs, is their fast design process and their ability to deliver ready-made products in unlimited quantities. Also, ODMs are quick to market, and they're in-house IP (Table 1).
Perception is another story and, according to iSuppli, ODMs may be winning this game. Based on its research, iSuppli says OEMs don't believe that EMS firms pass on price decreases as well as they pass along price increases. Another potential distraction is that OEMs and their EMS organizations differ on how they view their design functions (Table 2).
The face-off is already forcing EMS firms to try new things, including targeting new market segments like medical and automotive. Solectron even acquired a company with help-line expertise.
Another clear trend, says iSuppli, is the movement of large-volume production to low-cost centers. In Europe, the movement is to Eastern Europe; in North America, it's to Latin America; and in Asia, it's to China. In fact, China, with local firms like Legend and Qiao Xing Universal Telephone Manufacturing, has already taken over manufacturing for a big chunk of its own cell-phone market. It's done that with the help of U.S. firms such as Cellon Inc., an independent wireless design house, which has also done work for Samsung. Cellon has another strong manufacturing partner in China in Haier.
The Aberdeen Group, a market analysis and positioning service for IT vendors, says Mainland China already has around 240 IC design companies that traditionally deal with older technologies. But U.S. firms are bringing their newer technologies to the area. National Semiconductor has opened a local assembly and test operation for wafers fabbed offshore, and Cirrus Logic has established a Consumer Electronics Design and Applications Center in Shenzen.
China's competitive advantage comes from three main factors, says Aberdeen: labor rates, tax preferences, and less expensive local components. Skilled-labor salaries are U.S. $1200 a year. Trained software engineers get $5400. Four-year-old Apex Digital, notes Aberdeen, is taking advantage of a Chinese design/manufacturing partnership. It has managed to underprice most of its competitors in the DVD player and other markets while slashing its design cycles to three to six months. One- and more likely two-year cycles are the norm for most consumer electronics hardware producers.
A DIFFERENT TAKE
On a totally different design/manufacturing partnership level, chip manufacturers are now pressing for tighter arrangements with their customers, particularly where the technology is concerned. Phillip LoPresti, associate vice president and general manager of NEC Electronics America, which produces standard and custom products for manufacturers' next-generation designs in the U.S. as well as globally, says customers' priorities depend on the customer, the project, and the market space. However, IP is always the big factor. The current trend is pushing NEC to do more of the work and provide more of the IP.
"This makes project management easier and ultimately should reduce the cost and risk," says LoPresti. "From a customer perspective, the key issues might be predictability of performance and delivery commitment."
Texas Instruments says its role is also growing as a design and manufacturing partner. "We're seeing more actual co-development than throw-it-over-the-wall engineering," says Steven Sutton, vice president of TI's ASIC business. "We used to take the customer's netlist and put it through the physical design process to create an ASIC. That doesn't work anymore. The level of complexity that we're working on requires that we be heavily involved in some of the IP, the high-speed diodes, the signal-integrity analysis. All of those are tied together to make these things work." Sutton adds that more people are involved in the process, with different skills than previously required.
COST, COST, COST
Cost continues to be the big issue for OEMs. "In the past," says ACES's Caraccio, "an OEM would just say, here's your P.O. \[purchase order\] and here's a check for a quarter-million or a half-million dollars. Go build me a new product. Now, before they hand over that kind of money, they might cut loose $10,000 to $20,000 to do an initial research phase. They'll develop a true timeline cost, do a technical evaluation, look at all the tradeoffs, and flesh out all the details of the project."
Overall cost targets are not only being met, but reduced, LoPresti says, because much of the overhead for IP and EDA tools is now deferred by the silicon and/or third-party design house.
Time-to-market is another sticking point, usually ranking right behind cost in importance to most OEMs. But it's also creating new opportunities. Cadence Design Systems is developing design kits that enable system companies to produce platform-based semiconductor designs more quickly, as well as design new process technologies under development by their foundry partners. TI is working with Sharp Electronics to provide a reference design for GSM/GPRS camera phones to help its customers significantly reduce their design times and the resources required by manufacturers to introduce new camera handsets.
TriQuint Semiconductor and Agilent Technologies recently introduced a jointly designed, next-generation design kit to help accelerate TriQuint's gallium-arsenide IC fabrication processes. The IT company Wipro, which gained considerable design experience from working with TI and Analog Devices, signed a strategic agreement with Cypress Semiconductor in April to create a global development center in India dedicated to Cypress' new silicon design requirements. Wipro claims a 35% cost savings on most of its projects, with an up to 75% gain in time-to-market.
"You can never be quick enough," particularly in the fast-changing wireless market," says SMART's Ragusano. "It is clearly the reason why people are outsourcing. A lot of programs have been delayed because people are attempting to do it \[wireless\] in-house and don't have the technical expertise."
Testing has become another attractive revenue stream for EMS firms, particularly with consumer electronic products. OEMs ask if manufacturers who have a demonstrated ability to engineer products also have a parallel effort to test those products.
Design-cycle times are also critical, and they're being pushed. Silicon houses have been preselling their products a half to three quarters of a year prior to them ever having engineering samples. "So, the hype is in," says Ragusano. "When the silicon is first out, everyone wants the product done. That's when there has to be a reality check somewhere between the promise and the product actually hitting the road."
For both OEMs and outsourcers, hitting the road is the bottom line.
|Need More Information?|
Analog Devices Inc.
Apex Digital Inc.
Engineering Services www.arrow.com/aces
Cadence Design Systems
Cypress Semiconductor Corp.
Natel Engineering Co.
National Semiconductor Corp.
NEC Electronics America
SMART Modular Technologies