Being something of a contrarian myself, I always enjoy talking with others who are willing to look at the industry with an unconventional eye.

Which is one reason I’m fond of Charlie Barnhart, the former EMS executive turned analyst/dialectic. I’d call him a gadfly, but that seems a little harsh for a fellow who is more apt to use words than stones to inch the supply chain toward greater enlightenment.

At IPC Apex Expo this year, we sat down to discuss the supply chain, how it’s changing – and how it isn’t, but perhaps should.

Barnhart, as always, had some interesting predictions, including that the industry is still in the throes of what he calls the “ODM reconciliation,” whereby ODMs are scaling back their services offerings, and that at least two very large OEMs are considering buying a very large EMS company.

It was enough to jolt even the most sleep-deprived journalist awake.

On the former, Barnhart’s learned take is that the list of the top 10 EMS firms includes six ODMs that are moving away from services in favor of branded products, which offer greater margins. History is on his side. As we and others have been saying for years, EMS companies never stay still, evolving from “board stuffers” in the 1980s to design and box build in the 1990s to repair depot, logistics, and RMA/out of warranty service providers in the 2000s. The most advanced have long since offered reference designs, motherboards and other private label products, often in the PC and handheld space, and many an OEM has contracted with a particular EMS/ODM precisely due to its understanding of component costs and supply chains within that OEM’s chosen industry.

Consider how many of these titans came to exist. Several were spinoffs from mega-players in the PC space. Pegatron came from Asus. Wistron was the manufacturing arm of Acer. They were born big. (This is true of some of the larger Tier 2 players as well: Benchmark came from Intermedics, BYD Electronic from BYD Co.)  

Will they all eventually return from whence they came?

Maybe. Some have already made the leap to their own lines. Inventec owns Kohjinsha, a Japanese notebook OEM. Cal-Comp owns a branded line of 3D printers, XYZ Printing. Compal has a laptop JV with Lenovo and in January acquired the rights to Toshiba TVs. FIC, parent to 3CEMS, has multiple tablet lines (Elija, Tycoon) and servers (Leosys). Foxconn, of course, is basically the Apple of China, opening retail stores and buying up 4G spectrum licenses.

But if what Barnhart also suggested comes about, a new era is about to unfold whereby OEMs start gobbling up their former manufacturing partners. According to Barnhart, at least two major OEMs are looking to buy a Tier 1 EMS because, if for no other reason, the valuations are so low the buyers could book their profit simply on the asset value.

There’s even a special term for this: “reverse OEM divestitures.” (As a writer, I truly appreciate his ability to coin a phrase. When I said as much to him, however, Barnhart insisted this is how the actual companies are spinning it.) Spying an opportunity, his firm is developing a predictive cost model for OEMs looking to bring manufacturing in-house, one that among other things projects labor costs through 2020.

Even if this potentially seismic shift comes about, for those that remain untethered, Barnhart is convinced that a new approach to targeting customers is needed, one in which EMS companies migrate from what he calls the “quoting” business to the “customer selection” business. Rather than simply adding service offerings, an MO that is all-too-easily emulated by competitors, contract assemblers should find appropriate partnerships with suppliers that offer a critical and specialized product or service.

Something will give. Since the dawn of the EMS industry, we’ve been told that growth for contract assemblers would be capped because they can’t compete with their customers. I would argue that they do so every day, and not just at the Foxconn level. If an EMS offers a product or service that an OEM could develop, use and sell more cheaply in-house, that’s competition. OEMs have spent a decade trying to shed their fixed costs, but many of them have found the going tough, as it’s difficult to sustain a regional or global standing on just a foundation of product design. ODMs are getting ever more aggressive in gobbling up every last bit of revenue opportunity they can mine. Are the economics – and, for some, desperation – in place for OEMs to return the favor?

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