The price is right.

The prices that electronics manufacturing services (EMS) providers are quoting you these days are the best prices you'll ever see in this industry. They're not going to get much lower.

This idea was touted by industry veteran Charlie Barnhart, a consultant with Technology Forecasters, Inc., at the company's most recent Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain. Charlie was discussing the global pricing struggles between EMS providers and their original equipment manufacturer (OEM) customers--struggles that, more often than not, leave the contract manufacturer unarmed on an exposed ridge. Bad position.

According to Charlie, pricing has been listed as the number-one concern of OEMs in surveys that TFI has performed for the past five to 10 years. And, during this tinge period in which OEMs have demanded better pricing, EMS companies have actually increased their services while reducing their operating margins. As you may be wondering right about now--and as Charlie questioned--how can that be?

The answer lies, of course, in the substantial economies of scale that EMS companies have gained throughout the years, as increasing numbers of OEMs have embraced the idea of outsourcing over the past decade. As they've embraced outsourcing, though, OEMs have also perfected the art of dickering.

According to Charlie, OEMs constantly "granulize" every item involved in the pricing of products built by their EMS partners. This practice could be referred to as nitpicking, a technique performed with much finesse by our less advanced primate friends such as apes and one that more advanced primates such as humans have vigorously picked up. Monkey see, monkey do.

Seems, though, that this nitpicking is justified--it's the only way OEMs can get the best possible deal from their EMS providers on the product as a whole. On the other hand, EMS providers have survival in mind and are worried about retaining even the extremely thin margins on which they operate. From this perspective, contract manufacturers see disclosing the price of every line item in a contract as "death by a thousand nicks," as Charlie so colorfully described.

The situation is tense--OEM customers demanding better pricing and line itemizing on one hand, and EMS providers being dangerously backed into the corner of dissipating margins on the other. Not surprisingly, then, the level of contention over pricing has started to escalate. To continue with our primate parallel, know how adult gorillas behave when seriously threatened? Typical reactions are roaring, screaming, chest beating and eventually charging. One wonders if EMS providers are approaching that threat level.

Sure, you could argue that OEMs have the upper hand--and most likely always will--most contracts devised. They are the customers, after all, and, as such, enjoy all the privileges associated with that moniker. However, as EMS providers are increasingly plugged into OEMs' products from design work to field returns, OEMs should remember that being dumped by an unhappy partner is always a hard experience from which to recover, especially when that partner is joined to you at the product development and manufacturing hip.

So, how can the situation be helped? Charlie suggests a few ideas for OEMs: pursue information from all available sources for reliable EMS price comparisons; educate yourselves about the financial goings-on inside EMS providers; and finally, constantly compare this knowledge base you've developed against what you're being quoted, what you're paying and where you're setting your expectations. Chances are, you'll need to make some adjustments on all fronts.

Is Charlie right? Have we seen EMS prices at their lowest? I tend to agree. How much more blood can you squeeze from a turnip?

Lisa Hamburg, Editor-in-Chief

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