If you can't beat 'em ...

Celestica's January display of its Intel Architecture 64-bit (IA-64) server at the Linux World Expo in New York sealed its jump into the tricky business of owning intellectual property (IP) rights on products. Problem: Celestica has to convince its OEM customers that it isn't trying to compete with them.

Celestica's bobbing around with the likes of other electronics manufacturing services (EMS) providers such as Flextronics and Pemstar who have also entered the nebulous waters of original design manufacturing. Last year, the two companies launched off-the-shelf cell phones and a development platform for the mobile computing market, respectively.

Why the recent move to incorporate original design manufacturer (ODM)-like practices into the regular EMS arsenal of offerings? The answer is probably not much more complicated than time and money.

Original equipment manufacturers (OEMs) have used mostly Taiwanese ODMs for two decades to produce fast, quality designs of highly commoditized products such as personal computers (PCs). ODMs own the IP rights, and OEMs are happy to use these quick "white box" products to meet time-to-market and cost demands.

With OEMs' increasing need for good engineering, the ODMs' design ability, quick turnaround times and cost efficiency are beginning to appeal to other markets besides PCs. Enter a worried EMS industry.

Taiwanese ODMs such as Arima Computer Corp, Compal Electronics Inc. and Quanta Computer Inc. have expanded into notebook computers, personal digital assistants (PDAs) and cell phones. And, increasingly, wireless communications OEMs of all types have been considering ODMs to build their more commoditized products because Taiwan is thought to be such a hub of low-cost, quality design services. (1)

In fact, the contract market has paid off for ODMs in spades. This year, ODM revenue will grow almost 15 percent to $41.8 billion from $36.4 billion in 2002, while EMS companies will see only a 7 percent growth this year at $98.4 billion from last year's $92 billion. (2)

To compete, some EMS companies have boosted their design offerings through acquisitions or OEM divestitures over the past couple of years. And, now, in a further attempt to capture more high-volume OEM business and reduce product cycle times, a few EMS companies have decided to punch up their offerings with actual brands of their own.

The risks are many: assuming product design, marketing and success responsibilities, while potentially annoying existing or future OEM customers who want a noncompetitive supplier. The success, however, may be grand as EMS providers could gain additional compensation on products beyond their regular manufacturing services. (3)

Let's find out where the rubber meets the road, though, and ask: Are OEMs buying into this EMS/ ODM model?

According to a Pemstar spokesman, the company has customers that are very interested in its hardware platform with a Windows-based application and the latest Intel chip. (3) Celestica concurs. The company first unveiled its IA-64 server at the Intel Developer Forum last year in San Jose, and a company representative has since stated Celestica's booth was filled with traffic that included every major OEM server maker who attended the show. (4)

Whether or not these OEMs were there to kick tires for a future purchase or to merely keep tabs on the engineering capabilities of a competitor, the Celestica spokesperson didn't say. I didn't hear any reports of fisticuffs breaking out, so perhaps OEMs are willing to consider brand-name products from their EMS partners. Indeed, this blurring of the EMS/ODM line will be something to watch. And may the best service provider win.

References

(1.) Serant, C. and Hung, F. 2001. Taiwan looks beyond saturated PC market for new conquests. EBN. Manhasset, NY: CMP Media. August 17.

(2.) Technology Forecasters, Inc. 2002. Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain. December 6.

(3) Serant, C. 2002. Pemstar becomes latest EMS provider to adopt ODM model. EBN. Manhasset, NY: CMP Media. November 20.

(4.) Serant, C. 2002. Celestica steps onto ODM turf with IA-64 server EBN. Manhasset, NY: CMP Media. December 9.

Lisa Hamburg, Editor-in-Chief

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