Circuits Assembly Online Magazine - Meeting in the Middle

Can mid-market EMS providers play in the global market?

Certainly not all mid-tier, much less very small, electronics manufacturing services providers want to go global. They happily serve regional, niche markets, and may continue doing so profitably. But for those in the middle with ambitions to grow, the time may have come to adopt a different strategy.

If history is guide, many players in the middle will either be acquired, fizzle out or remain in slow-growth mode. It is a given that the market leaders in any industry will constantly compete head-on for the top. But for mid-tier EMS (MTEMS) players, this strategy cannot work. The key is to outflank larger competitors or to play in a different league. Niche strategies can work – provided they are carefully thought out and consistently executed. If growth is the objective, U.S.-based MTEMS firms should consider expanding their customer base overseas. Some players have adopted a model that combines the strengths of the individual firm as a niche solutions provider with strengths that come from an alliance of complementary providers.

Where such alliances can provide value is by creating greater buying power on behalf of its members through consolidated procurement; global reach through a dispersed network of providers; and shared best practices around common, noncompetitive areas such as procurement, IT infrastructure, HR policies, etc. Alliance members may also completely outsource certain back-office functions that neither the alliance nor the individual members wish to manage day-to-day. (Outsourcing these functions is likely to be a latter stage of evolution for MTEMS: walk before you run.)

Through an alliance, the EMS provider is free to focus on its unique competitive advantages, which generally fall into three basic categories: the specific manufacturing niche it has carved out, in terms of verticals served, specific manufacturing capabilities, etc.; collaborative program management; and high responsiveness (Figure 1).

FIGURE 1: Alliances capture the advantages of scale afforded to bigger firms while retaining the flexibility of smaller ones.

Consolidated procurement is the most straightforward of the three alliance capabilities in this model. Though it would take a large alliance of MTEMS players to equal the equivalent purchasing volume of even one Tier 1 firm, it is possible to achieve near Tier 1 purchasing power with a relatively small cadre of players. The key is not to compete against the top players but against other mid-tier firms. Consider the tale of the two hikers confronted by a grizzly bear. One of the hikers quickly puts on his running shoes; his bewildered friend says, “You can’t outrun that bear.” The reply: “I don’t have to outrun the bear; I just have to outrun you.”

On the other hand, the alliance should not be open to all comers. This was the mistake of many eMarketplaces. The problem with open arrangements is precisely the problem big EMS players face with some OEM customers. If everyone jumps on the same bandwagon, no one wins. In fact, everyone may be worse off, as overall industry margins decline further. This has to be a strategic move, with carefully chosen alliance partners – ones that do not compete in your precise markets but who share some common base of components against which participants can leverage purchasing power.

To make this work effectively requires three basic elements:

Due diligence: know your partners, and the market you intend to pursue.
A clear picture of how alliance members – and suppliers – will benefit financially from active participation.
An operating model for the alliance that emphasizes ease of use, clear procedures and guidelines, and roles and responsibilities.

Of these elements, defining roles and responsibilities within the alliance deserves a little more attention. This is where the seriousness of the alliance gets its first real test. Will each participant commit to perform the day-to-day tasks of the alliance? Does the alliance require full-time participants? What skills and capabilities are required to fulfill the roles? Who is responsible for overall oversight to ensure that progress is being made and that the alliance’s objectives are being fulfilled? At this juncture it becomes clear whether the alliance is going to be a fully functioning organization, or simply a forum for occasional “planning” meetings of the alliance principals.

The alliance model may also allow MTEMS firms to successfully enter global markets, while mitigating the associated risks. The benefits of employing this model are:

Contingency (“swing”) manufacturing capacity.
Avoidance or simplification of global tax issues.
Production close to point of use (customer location).
Reduced logistics costs.
Reduced inventories.
Shorter delivery times.
Personal service in the market.
Entry to new markets.
After-sales support.
Local currency management.
Lower tariffs/duties.
Option to have home country alliance member be global account manager.
Management of startups / prototypes / volume production.

Clearly, any benefits would depend on how geographically dispersed members are and where their respective customer bases operate. This, too, must be considered as part of the initial due diligence, along with defining entrance criteria for other companies that wish to come on board after the alliance is in full swing.

Finally, an alliance of EMS providers can provide a forum for sharing (nonstrategic) best practices. These could include standard approaches for procurement, solutions and lessons learned, quoting and so on. Alliance members may hold periodic knowledge-sharing sessions, either virtually or in person. Effective alliances make this a standing item on the agenda of regularly scheduled alliance management meetings. The alliance may also wish to create a simple database for capturing and sharing ideas and best practices.

Alliance members must be clear on what is considered “confidential” individual member intellectual property versus knowledge that is open to all within the group. Even so, nondisclosure agreements should be used to ensure best practices are not shared outside the alliance.

Effective, responsive program management is essential to an EMS provider’s success. But, for many, there is ample room to strengthen such capabilities and turn it into a differentiated service. MTEMS providers need to provide seamless, personalized customer care from the moment a quote is requested until the contract is over. Software tools can help, but more emphasis needs to be given to program management team development, collaborative work processes and clear performance criteria.

Alliances are not the only model for effective niche competition. They require a high degree of collaboration and accountability from potential competitors. But, for those wishing to be stronger global players, this could be a potent option to consider.

Richard Douglass is managing partner and principal consultant at Manufacturing Associates (mfga.com); richard.douglass@mfga.com. He has an MBA from Northwestern University and is a Six Sigma Green Belt.