Defense electronics outsourcing: EMS companies should think twice before entering the defense market.

Given recent global events in which electronics intensive weaponry has been deployed, electronics manufacturing services (EMS) executives are wondering if now is the time to add the defense sector to their cadre of industry specialties. EMS market penetration of aerospace/defense is predicted to increase globally from 11% in 2001 to 16% in 2006. (1)

Selection Criteria & Outsourcing Hurdles

EMS companies serving the defense sector know that hurdles abound when serving this market, including additional paperwork, capital equipment and verification processes. Are these hurdles--and the time required to market and sell to another industry--worth the revenues coming out of it?

For the majority of EMS companies, the answer is no. The attributes defense contractors look for in EMS partners include: exceptional quality, technical capability, certified processes appropriate to military equipment, financial stability, effective cost management, component engineering, delivery performance, defense experience and component traceability. Defense contractors want EMS companies to identify which component may have led to the failure of a system in the field--even if that system is deployed more than a decade from now.

Convincing defense contractors to outsource manufacturing in the first place is tougher than most EMS companies believe. Although defense contractors are becoming more open to using commercial manufacturing resources, the overall defense electronics sector is less comfortable with outsourcing than most commercial sectors. Defense contractors' main reasons for not outsourcing are quality concerns and loss of control. Other reservations include: security issues, product complexity, doubts about EMS companies' technical ability, fear of paying higher prices, arduous documentation transfer and available in-house capacity.

The largest EMS companies in the world do little business in the defense sector because a mismatch exists between large EMS companies' successful product profiles and the profile of the typical defense electronics system. A contract for defense electronics may stipulate building 12 units this month and nothing else for six months. Large EMS companies employing long-term wisdom resist taking on low-quantity, high-mix builds, even during challenging economic cycles.

If a defense contractor's business does match an EMS company's strengths, the defense sector makes business sense currently because of market growth stemming from replacement weaponry and homeland security; larger margin for profit compared to the more competitive commercial markets; financially stable customers; and relatively stable schedules.

Requirements and Traceability

If the EMS company is well suited to defense electronics programs, serving the market is a panacea, right? Well, not exactly. Defense-specialty EMS executives complain about the drudgery of certifying processes to government specifications and administrative support for regulatory paperwork. Also, prime contractors are legally required to distribute comprehensive contracts to all suppliers; EMS companies must pour through them to find requirements that pertain to them.

Also, most defense work requires capital investment beyond what the EMS company already has on the facility floor. If the government requires conformal coating on assemblies, the EMS provider has to subcontract the process or put in special processing and test equipment. Material obsolescence and parts traceability are other major issues when the EMS company builds the product over a five-year period and is responsible for replacement parts through the end of the product's life.

Price has become a bigger issue in this market during the last 18 months as more EMS companies get their feet in the door. Also, prime contractors are starting to source electronics from international locations.

Final Thoughts

Minority-owned EMS companies should remember that about 5% of government contracts are set aside for minority business enterprises. With the growing impact of corporate accountability on business health, executives also need to consider their constituents' views on building weaponry at this time.

A final caveat to EMS executives considering entering the defense market comes from an executive at a prime contractor, who underscored the defense sector's flexible-as-ceramic business model: "We go according to our schedule, and this is the way it's going to be--not when your CEO wants the business in."

Reference

(1.) Technology Forecasters Inc.'s (TFI) June 2003 study, "The Military/Aerospace Electronics Market: Unique Hurdles and Timely Opportunities.

Pamela J. Gordon is president of Technology Forecasters, Inc., Alameda, CA; www. techforcasters.com