The Electronic Manufacturing Service Ericsson, routers for Cisco, and printers for HP. Cal- 1 (EMS) Industry in 2014 Comp Electronics (based in Thailand) produces components for HP printers and other products. Celestica (based in Canada, where it was spun off by IBM in 1994), meanwhile, produces sub-assemblies for Cisco’s internet and intranet devices, as well as products for customers such as HP, IBM, and NEC (until 2012, Celestica also was one of the producers of the Blackberry smartphone, for which Foxconn is now taking the lead in design and assembly). Each of these EMS providers has plants around the world, well beyond their home countries. EMS are similar to ODMs (Original Design Manufacturers), with a key difference that EMS providers traditionally did not take ownership of intellectual property, while ODM firms (many of EMS services at Celestica solar panel lab (Canada) which – such as Pegatron, Compal, Wistron, and Photo: Adrian Wyld/Canadian Press Quanta – originated in Taiwan) often retain at least partial IP ownership of the products they design for an OEM. Hence, ODMs historically were stronger at product design capabilities than most EMS providers. However, the line between the two types of service organizations is rapidly blurring and the same companies can act as both ODM and EMS providers. Pegatron, for instance, is one of the EMS producers of the iPhone, while Foxconn has taken on ODM- type responsibility for Blackberry. The boundaries of the EMS market are dynamic, so that measuring market size is ambiguous. However, an estimate by the “Research and Markets” industry analysts is that total electronics assembly exceeded $1 trillion in 2013 and will grow to about $1.5 trillion iPhone assembly at a Foxxcon facility in China in 2017. Within total electronics assembly, the Photo: HighlightPress analysts estimated the EMS market exceeded $400 in Electronic manufacturing services (EMS) firms 2013 with sales expected to top $600 billion in 2017. design, test, produce, distribute, and provide return/repair services for electronic components and SCI is often viewed as the first successful EMS assemblies for original equipment manufacturers provider. SCI was founded in 1961 (as Space Craft (OEMs). EMS is also referred to as electronic Inc.) in Alabama and grew into a billion-dollar contract manufacturing (ECM). In providing services, business by constructing aerospace components of EMS firms function as value chain partners with their customers such as Boeing, Sperry, IBM, end-product customers and, increasingly, are taking Commodore, Thiokol, and Northrop (SCI was on sophisticated roles as value chain integrators. acquired by Sanmina in 2001). EMS firms produce many well-known products. For The EMS industry took off during the late 1970s and example, the industry leader, Foxconn (based in early 1980s, with Solectron (California) becoming Taiwan), may assemble as much as 40% of all the leader as it served IT-sector customers in Silicon consumer electronics products sold, providing Valley (Solectron was acquired by Flextronics in components and assembly for products such as the 2007), while many other firms entering the sector. Apple iPad and iPhone, Amazon.com Kindle, Sony Prior to that time, most electronics manufacturing for Playstation, Microsoft Xbox, HP All-in-One PCs, and large-scale product runs was handled as in-house Nintendo Wii. Flextronics (based in Singapore) assembly by the end-market firms. makes Microsoft's Xbox, as well as cellphones for The EMS strategy offered flexibility and eased human resources issues for smaller companies, while also supporting larger firms’ smaller runs. This 1 Will Mitchell prepared this note from public sources (May 2014). 1 helped clients avoid the cost and risk of obsolescence facilities in lower cost environments in Central of large inventories. Because they serve multiple Europe, Asia, and Latin America but continued to clients, EMS firms typically can respond to spikes in emphasize facilities in high-cost locations in Western demand more effectively than individual clients. Europe, the U.S., and Japan. Many EMS players Their presence also frees their customers’ time and largely focused on printed circuit board fabrication, attention for higher value activities such as new leaving system design, assembly, and value added product design and market management. support to the OEMs. In parallel, EMS emphasized the information processing (computers) and Technological advances have facilitated the growth communications markets, with less interest in smaller of the EMS industry. Surface Mount Technology more specialized markets such as medical devices. (SMT) on printed circuit boards (PCBs) allows rapid assembly of electronic products. During the early During the past fifteen years, the industry has been 1990s, some end product firms initially used SMT transformed as a “new market” strategy has taken advances to reinforce internal component production hold, encompassing three key dimensions: locations, and assembly skills, especially for large volume customers, and skills. EMS firms have shifted much products, and early EMS leaders such as SCI of their production to lower cost geographies struggled as OEMs did not renew contracts. throughout the world. Much of the EMS activity now takes place in Central Europe, China, Southeast Asia, By the mid-1990s, the flexibility and cost advantages India, Mexico, and other emerging market settings. of the EMS model became compelling and OEMs began outsourcing PCB assembly and other assembly The customer base also has expanded substantially. activities in large scale. Some end-product firms spun EMS now embraces a wider range of industries such off assembly operations into specialized EMS firm. consumer electronics, industrial, motor vehicle, In 1996, for instance, IBM Canada created Celestica medical, environmental technology, and as a stand-alone EMS. instrumentation. In turn, the national identity of the customers has expanded from end-market firms The growth of the EMS sector led to active based in traditional developed markets to emerging competition. During the late 1990s and early 2000s market multinationals in the electronics and other many OEMs such as Hewlett-Packard, Motorola, and sectors from China, India, and elsewhere. Emerging Lucent sold their PCB and assembly facilities to market multinationals such as Lenovo, Huawei, ZTE, EMS firms that were vying for market share, Acer, LG, and many other are now important typically along with contracts to purchase goods from customers for EMS services. the acquiring EMS. A wave of consolidation occurred, as leaders bought up plants and smaller In parallel, the skills required of a successful EMS EMS companies. have become more complex, now requiring extensive value chain expertise including component and Consolidation accelerated following the 2001 software design, system assembly, test, delivery and dot.com collapse, as many EMS faced declining logistics, warranty and repair, network services, and demand. Several active acquirers found themselves customer service. Notably, this sophistication is just owning empty EMS factories as their OEM as stronger in emerging market facilities as in customers encountered market challenges and faced remaining facilities in traditional developed markets. declining sales or were acquired. Sophisticated EMS now offer services for conceptual Moreover, EMS firms based in Asia, such as product development, while also providing assistance Flextronics (which was founded in California in with mechanical, electrical, and software design. 1969, pioneered off-shoring of production to Testing services, meanwhile, perform in-circuit, Singapore and China during the 1980s, and moved to functional, environmental, analytical laboratory Singapore in 1990) and Foxconn (part of Hon Hai testing, and agency compliance in different Precision, founded in Taiwan in 1974), became regulatory environments. formidable competitors. Part of their advantage stemmed from access to lower cost work forces. In In 2013, for instance, Celestica, worked with a equal part, though, the emerging leaders actively medical device company in California to create increased the sophistication of the services they electronic sensors that can be attached to the skin in offered as they worked closely with end-market order to monitor how patients take medicine and then customers to manage their value chains. transmit the data to a smartphone. The customer generated the initial idea – which involves a circuit Through the late 1990s and early 2000s, the EMS board that uses small scale computing to replace industry largely took a “traditional market” strategy. mechanical technology – and Celestica then EMS players were beginning to build and lease 2 advanced the design and engineered and tested the have grown to dominate the industry and others such device in its own facilities. as Jabil Circuit (U.S.), Cal-Comp (Thailand), and Benchmark (U.S.) have joined the leaders. The As part of the growth in sophistication, EMS industry will almost certainly be equally dynamic “industrial parks” created in multiple countries by during the coming decade. industry leaders such as Foxconn and Flextronics. The parks provide a critical mass of basic and sophisticate services that generate quality, cost, and timeliness (QCT) advantages for their customers. The EMS industry is commonly divided into tiers based on revenue. One categorization is as follows: Tier 1 (>$10 billion): Industry leaders Foxconn (Taiwan; + $100