Smaller manufacturers: Dying breed or Here to stay?

Three factors will ensure a continuous role for smaller electronics contract manufacturers: (1) prototypes, (2) risk reduction, and (3) human nature. Don't get us wrong - Tier III and IV EMS companies (defined as electronics manufacturing services companies generating US$51M-250M and $50M or smaller annual revenues, respectively) have plenty of challenges in today's global, want-it-now, want-it-cheap market. But these three "here to stay" factors are not going away.

We're taking a fresh look at Tier III-IV companies based on new interviews with executives at the EMS companies, their OEM customers, and material suppliers - and are also leveraging numerous recent TFI supply-chain studies and our contextual understanding of the industry for the past 25 years. (In fact, if you'd like to contribute your current thoughts, have us interview you.)

First, so long as there are "hardware" products, there is the need for prototypes. Engineers want prototypes quickly and they want to be close enough to "play" with the nascent product until it's right. For a typical Tier IV EMS company, more than half of the customer projects they take on are for products in the prototype phase. With immediate attention, personal service, and hopefully testing acumen for trouble shooting, the Tier III-IV EMS is an excellent choice.

The next factor is "right sizing" the EMS to the OEM to reduce the business risk of choosing a too-large manufacturer. Often within the first couple of years, the smaller OEM realizes they fall under the larger EMS company's attention radar, or the EMS suddenly increases its minimum order requirement, or it becomes evident that the EMS just can't be as agile (e.g., handling engineering change orders in hours to days, instead of a week or more) owing to large-OEM customers' demands. We've felt the pain of several OEMs who have been "fired" by EMS or ODM companies that - when times were good - raised the floor on minimum customer size. Having to suddenly switch manufacturing suppliers is expensive, stressful, and increases the risk of supply interruptions.

Finally - and perhaps most tenuous - is the factor of human nature. It's easier to trust the person you've been with "in the trenches" and come out alive. Affinity with the CEO or VP at a Tier III-IV EMS company breeds loyalty. And when a short-sighted decision causes an OEM to leave a right-sized manufacturing supplier in favor of a too-large one - perhaps being lured away by what seems on the surface as being a lower "price," or by the mystique of a prominent company name - that CEO or VP is happy to take the business back. And the business does tend to come back.

Crystal-ball projections that could challenge the above "sticky" factors for the continuance of smaller manufacturers include 3D printing (weakening the "prototype" factor), extreme consolidation of hardware designs enabled by smart software, and the unlikely possibility that a giant EMS can effectively manage thousands of "the plant next door" all over the world. On the balance, however, we go with the "here to stay" prediction.

We especially want to hear from you if you disagree with our views. Or perhaps you have stories that support or contradict these three "sticky" factors. In either case, please comment or request an interview.