Automotive OEMs working direct with EMS, own the IP, more flexibility, saving fixcost for tools and manpower, costreduction components, no warehouses
Head of Automotive at Sanmina
07/2025
The trend towards outsourcing Around the world, special in automotive
Large companies try to become smaller in terms of employment (downsizing). Most companies now rely on others to look after their catering, cleaning, gardening and external security. Many have outsourced personnel management, IT services, logistics and transport. Everywhere, companies are focusing on their core activities. Manufacturing was long seen as such a core activity. In a number of industries it still is. But in sectors such as clothing, automobiles or aircraft, with highly standardized production processes and great differences in the labor-, capital-, and skill-intensiveness of the different stages that make up these processes it is now common to outsource many of these stages. The more labor intensive stages are often the first.
Introduction :
The reasons for outsourcing discussed (to spread risks and to lower costs) and the preconditions for doing so (the existence of clearly distinct stages in the value chain; global standardization of the manufacturing process) are valid for many parts of the electronics and automotive, telecommunications and industry. In addition, the pressure on margins is great, competition is fierce, and market conditions are highly volatile. From cell phones to Internet services to wireless applications, end users want more- but they are not necessarily willing to pay more for it. This forces brand-name companies to focus intensively on costs. Flexibility is at a premium. New products are being introduced at great speed. Delivery times have become much shorter. The prices are negotiated constantly. The intensely competitive nature of the electronics industry, the ever increasing complexity and sophistication of electronics products, the pressure on OEMs (or brand names) to reduce costs, and the shorter or longer product lifecycles have led to rapidly growing demand for advanced manufacturing capabilities and related services. In the past, brand name companies could do it all themselves and remain competitive. Now, it takes too much time, money and energy to be an expert at everything. So OEMs focus on what they do best: develop innovative products and services, reach key markets and build brand loyalty.
Subcontracting to EMS providers allows OEMs to take advantage of the design, manufacturing and supply chain management expertise of EMS providers and using “saved / not invested capital” – buying knowledge. An outsourced manufacturing model enables OEMs to access leading manufacturing technologies, leverage existing resources globally, lower costs, adjust quickly to market demand and decrease our investment in fixed capital or knowledge. At the same time OEMs retain in-house strategic management and overall control responsibilities associated with the supply chain including all customer interactions, customer service, order management, quality assurance, product-cost management, new product introduction and network solutions integration.
The benefits of outsourcing in electronics
The benefits to OEMs of subcontracting to EMS providers can be summarized as follows. Subcontracting enables them to: ! Reduce time-to-market and time to-volume production for their products; ! Lower operating costs, reduce capital investments and other fixed costs; ! Improve inventory management; ! Access world leading manufacturing technology, engineering and logistics capabilities; ! Produce the same product on a global scale by making use of parallel production facilities; ! Focus on core competencies; ! Optimize supply chain management; and! enhance purchasing power (EMS providers purchase large quantities of components and other raw materials and receive volume discounts and other more favorable terms from suppliers than their OEM customers would.
With the EMS business model adopts “supply chain management (SCM)” to increase the speed of operations and reduce inventories, while standardizing facilities and enacting real-time information sharing between one’s corporation, customer (brand manufacturer) and suppliers. Furthermore, the earnings structure in this model is based on low-cost operations and increased bargaining power in the procurement of materials and components.
Outsourcing is seen as “a partial agreement to participate in carrying out a larger agreement.” In the case of manufacturing, the contractor consigns one of the following three duties to a sub-contractor (supplier): (1) part development and production, (2) complete product development and production, and (3) provide supplemental technologies, labor, facilities and skills for specific manufacturing and design process, as well as various other services
Specifically, corporations in the U.S. and Europe have been specializing on their core competencies (core capabilities to provide unique value), while outsourcing processing and assembly. These processing and assembly services are often provided by Electronics Manufacturing Service providers, also known as EMS providers. EMS providers differ from conventional OEM (Original Equipment Manufacturing). Original Equipment Manufacturers are usually entrusted with just one specific aspect of the production process, and so generally procurement of materials and components is handled by the brand manufacturer. The EMS provider, on the other hand, is entrusted with everything from – could be - design, trial manufacturing and procurement to production and, in some cases, after sales services. The EMS provider is an independent corporation that does not have its own brand and is not dependent on a single client, but has a wide range of customers.
The EMS provider uses the Internet direct contact to supplier to exchange order and technical information with its client, the brand manufacturer, and uses supply chain management, to shorten the lead-time for everything from procurement of materials and components to production, and thus raise the quality and specialization of the service offered. At the same time, the EMS provider establishes production and distribution centers around the world to help lessen the client’s inventory risks. Another unique characteristic of EMS providers is that they openly spread their risk by not relying on only a few select clients, and they try to make ordering smoother and optimize production
Outsourcing is a means of for obtaining advanced technologies, low prices and lower risk. However, brand manufacturers and EMS providers are able to develop functional relationships through supply chain management.
The EMS market has been expanding at a rapid pace and further growth is expected in the future. In fact, the market is expected to expand further on, especially in automotive market.
Many factors can be cited for the rapid growth of the EMS market. Due to the progress of parts modulization, corporations are placing greater emphasis on procuring specialized parts as opposed to working to make a wide range of parts. Naturally, some of the value added during the processing and assembly stages is lost. Device and software technologies are changing at a rapid pace and product lifecycles are becoming shorter or need changes in the lifecycle. Therefore, TTM (Time To Market), TTC (Time To Customer) and other concepts regarding the time it takes to bring products to the markets and customers are very important. Inevitably, the inventories of products and procured parts have swelled. Even more effective management of resources is demanded due to greater emphasis on shareholder value. Against this changing business environment, the merits of the “full-set” philosophy that covers all value chains have been hotly debated. As a result, more corporations have decided on the outsourcing of manufacturing processes that cannot be considered as a part of their core competencies. Other decisive factors in using EMS providers are “the EMS provider will not only purchase the factory, but may also employ the existing workers” and “information can be used by the supply chain management as a tool for increasing speed”. Thus, it can be analyzed that EMS quickly started up as a business. The rapidly changing business environment has led to the aggressive use of outsourcing and has supported the emergence of EMS businesses.
PROCUREMENT OF MATERIALS AND COMPONENTS AS A SOURCE OF PROFITS
Looking at profit rates based on sales, each corporation had gross profit rates of 10% or higher. Half of all corporations have rates under 10%. The difference between gross profit rates and operating profit rates are on average 4.6% for these six corporations. In other words, gross profit rates are around 10%, but sales expenses and general operating expenses have been suppressed to a very low 4.6%. By comparison, one Brand manufacturer in Automotive, which has successfully reduced inventories by using supply chain management, had a gross profit rate of 21.4% and an operating profit rate of 9.4%. This means that sales and general operating expenses were around 12%. In the case of one example, which sold a production affiliate to an EMS provider, the gross profit rate was 26%, while the operating profit rate was 5.6%. This means that sales and general operating expenses were 20.4%. The difference was large sales. Looking at the sales breakdown, in the case of an EMS supplier, which uses a value chain, 80% of sales were attributed to procurement of materials and components. The remaining 20% was attributed to processing and assembly. This is one reason why the sales expense and general operating expense ratios are so low. Another EMS company procured more than 20.5 billion materials and components from some 17,500 different suppliers. Taking this all into consideration, it would seem that the source of profits for EMS providers comes more from its large volume purchases of all-purpose parts, as opposed to its mounting. The cost for procurement of materials and components is not determined solely on volume; rather information skills, logistics, and early participation in the design stage are all used to reduce these costs
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HIGH EFFICIENCY INDICATED BY FIXED ASSET TURNOVER
These EMS providers have maintained very high levels of operational efficiency with average ROE and ROI coming to 10% or more. These corporations place precedence on investment, putting money back into purchases and capital investment. Therefore, it takes time before returns in cash can be seen. These six corporations had an average accounts receivable turnover rate of 9.5, an average inventory turnover rate of 7.6, and an average fixed income turnover rate of 12.2. Furthermore, average asset turnover rates of 2 or greater have also been achieved.
BETTER COMPETITIVENESS THROUGH SUPPLY CHAIN MANAGEMENT
The major EMS providers can propose and make full use of advanced multi-layer board mounting techniques. Based on this foundation, the EMS provider can focus on products that are difficult to differentiate through the production process, and can make use of supply chain management (SCM) while standardizing equipment and sharing real-time information between itself, the customers and the suppliers. SCM uses this information sharing to increase overall speed and reduce inventories.
STANDARDIZATION OF FACILITIES, PROCUREMENT AND PARTS DISTRIBUTION
EMS provider that has actively standardized its facilities. Sanmina basically introduced the same equipment and assembly methods for everything from part mounting to inspection equipment at its 11 mass production trial bases (NPI centers) and its 75 mass production factories around the world. The location for the production of the consigned “Lease Accounting “products is determined based on the target region for sales of the product or the nearest factory to the target region. A global basic parts procurement team is organized to facilitate smooth procurement of materials and components. The members of this team are those responsible for procuring and managing materials and components used by the factories in the various regions. Furthermore, codes in agreement with standard manufacturing codes are attached to the materials and components, and customer parts codes are shared. Standardization is also important in the distribution of these parts.
ACTUAL SUPPLY CHAIN MANAGEMENT APPLICATIONS
The managerial foundation for EMS providers is based on the supply chain management that incorporates the brand manufacturers and the suppliers of materials and components. Part inventories are controlled and business efficiency is raised by timely and efficient production and purchasing plans. These plans take into consideration demand forecasts based on customer needs and make active use of Internet technologies. EMS providers can begin production within 24 hours of receiving the customer’s order if products are defined in advance.
Very flexible ,Ability to handle sudden increase in orders , Main parts supplier can handle 20% increase in the order , Can forecast demand , Can alter production processes to match product specifications , Shipping within days, Can reduce by half the period needed from trial manufacturing to actual production. Can contain in its production plan the brand manufacturer making the order, production contents, schedules, prices and other details in advance. Can obtain an unofficial notice of the production amount two to three months before the order is to be placed. Along with orders from the brand manufacturer, design data are also received over the Internet. This provides evidence of the rapid changes in demand that have huge impacts on the nature of the orders each month. Production plans are reorganized to meet these changing orders, but ERP (Enterprise Resource Planning) is also introduced as a basic business system for managing the related profits. Along with the real-time management of the progress of orders, production, inventories and earnings conditions, the major brand manufacturers are also provided with a browser covering the production and delivery of the ordered products.
SUPPLY CHAIN MANAGEMENT EFFECTS
The calculation of the cash conversion cycle time for the leading EMS providers The cash conversion cycle time is calculated by adding the number of days for receivable accounts and the number of days for inventory turnover and then subtracting the number of days for paying accounts payable. This serves as an indicator of how quickly products are converted into cash. The average cash conversion cycle time for Sanmina corporations that have introduced supply question, this means that they have achieved a very high level of performance compared to other businesses.
BUYING FACTORIES AND ACCUMULATING STRATEGIC ASSETS 1. PURCHASES TO ESTABLISH NETWORK EXTERNALITIES EMS
Providers have been purchasing factories from brand manufactures based on the notion of horizontal specialization. There are many cases in which the EMS provider will also enter into multi-year contracts to produce the products the brand manufacturer used to produce on their own at the factory they sold to the EMS provider. The scale of the EMS providers is also growing at a rapid pace.
Network externalities means that the utility values increase when there is use by a larger number of people. Therefore, greater importance is being placed on horizontal business development. Continuous purchases by EMS providers are seen as having a large impact on network externality. Furthermore, when the factory of a major brand manufacturer is purchased, the EMS provider can effectively convince the market that it can guarantee the same level of quality as the brand manufacturer.
FLEXIBLE PRODUCTION FACILITIES TO HANDLE LARGE ORDER FLUCTUATIONS
A unique characteristic of the EMS providers is that they do not use the purchased production faculties in the same manner as the previous owners. Instead they reorganize the production lines to accommodate greater standardization. Scale merits are also produced by adjusting the production methods so that the same product can be produced anywhere. The products entrusted to the EMS providers not only have wildly fluctuating demand, but also have short lifecycles and provide low gross profit rates when produced using conventional methods. There are even some products that can only be produced for a few weeks. Therefore, the production lines use a movable wheel and carriage method.
PERSPECTIVES OF INTERCORPORATE RELATIONSHIPS 1. BUILDING LONG-TERM PARTNERSHIPS WITH SELECTED SUPPLIERS
Sanmina EMS providers establish long-term partnerships with their customers and suppliers. In the future these relationships will likely be maintain, while developing new relationships with suppliers focusing on the performance of the overall supply chain, going beyond the simple ties between customer and supplier
OUTSOURCING PROBLEMS
The following problems are being examined from the points of view of outsourcing and the reformation of factories. Outsourcing is seen as a strategic consideration for business resources. “Instead of total perpendicular internal unification, the use of superior external services can make the business economically larger, more flexible and provide more specialized techniques. In terms of business strategy, only the essential elements need specialization. All other elements should be handled externally to the greatest extent possible”. In other words, the focus for production has shifted from “how can we make things” to ‘’how can we entrust production to capable suppliers. Clearly outsourcing had become the big trend. One limit to outsourcing is that over the long-term expertise does not remain within the organization and the effectiveness in managing that area is lost. Accordingly, from the point of view of creating the organization, there is the problem of how to generate new values and in what form the outsourced information will take for the corporation. Effort is needed in sharing external resources with EMS providers and in collaboration to create added value.
PROBLEMS REFORMING FACTORIES One problem with reforming factories is that profit levels for processing and assembly in the brand manufacturer’s value chain decreases, and personnel, facilities and other fixed expenses involved with production are increased. Therefore, there has been the effort to take on production from corporations outside of the group in order to maintain operating ratios and improve productivity. However, how this is achieved is probably different from the methods used by the EMS provider business. This is because the EMS provider profit structure mentioned earlier [sales expenses and general operating expenses rate: average of around 4.6% for top EMS providers] is an extremely low-cost operation that cannot be imagined . Moreover, in the value chain 80% of sales are from procurement of materials and components, while only 20% of sales are from processing and assembly. In other words, this type of earnings structure is a huge change for How the EMS (Electronics Manufacturing Service) Business Model Can Help Corporations Revolutionize their Factories? Despite the different aims, much can still be learned from the EMS business model. One important point is to establish functional relationships between the party making the order and the party filling the order. Roughly the same problems are seen when using outsourcing. The factories of corporations must consider two points when creating a functional relationship from the point of view of an open sub-contractor. The first consideration is contextual skills, which require a great deal of transactional costs. Another problem to consider is the switch to a service-type industry.
CONCLUSION
We are now in an age in which the business management environment is rapidly changing. Inevitably, corporations will need to change from the conventional strategy of keeping personnel, physical, monetary and information resources focused within one organization, while trying to pursue scale of profit. This is especially true for the manufacturers of long term lifetime equipment/ electronic. With the fast pace of technical innovations and product lifecycles, corporations must now carefully consider the merits and demerits of keeping production facilities within the organizations. Along with the greater modulization of electronic components, EMS providers have been able to exercise strong bargaining power in procuring components, while remaining sensitive to lead times for customers and markets. In this manner the EMS providers are able to help the brand manufactures to improve speed and reduce inventories. The spread of the Internet has produced a digital society and increased demands for greater speed and flexibility. EMS providers, based on horizontal specialization, aim to be a network-based service industry that builds mutual relationships between businesses in a virtual structure. Business value is based on improving free cash flow. How will these factories maintain a competitive edge over EMS providers that have been promoting standardization (for example, cost advantages, time advantages and individual advantages in areas such as diversification, miniaturization, device development, and variable production skills)? Problems still exist in terms of incorporating the technical skills and individuality of the suppliers – standardization – and in terms of cost and speed demerits – contextual skills.
Klaus Fasel
Head of Automotive Sanmina 07/2025