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Design outsourcing is changing the electronics and computer industries

11/12/2013

Lauren Lu, assistant professor of operations at UNC Kenan-Flagler, gave an overview of the changing electronics outsourcing industry in Asia, its growth, and the challenges facing both clients and suppliers during a webinar offered by the Global Business Center.

Where did the ODM outsourcing model come from?

In 1981, IBM decided to outsource the assembly of its computer products to contract manufacturers in Asia. That decision changed the landscape of electronics manufacturing forever. As demand for electronic products has grown throughout the past few decades, so has outsourcing, now a $350 billion industry. When the outsourcing model first began to gain traction, electronics companies hired manufacturers – often in the Asia Pacific region – to handle the production of a product they designed themselves. As manufacturers gained more experience and technological expertise, they began to take on the design and engineering responsibilities. Today, original design manufacturers (ODMs) have complete control over product design and manufacturing. They then sell their completed product to electronics companies like Apple, HP and Dell, which can realize huge cost savings.

What are the factors driving design outsourcing?

Contract manufacturers gained their own design and engineering capabilities: After years of manufacturing products designed by clients, ODMs began to amass the technological experience needed to design and engineer products themselves.

Competitive pressures to streamline product development processes: Product life cycles for electronics are significantly shorter today, and ODMs can deliver new products with speed and volume.

Original Equipment Manufacturers (OEMs) gradually shifted their strategic focus to core competencies: Facing an increasingly commoditized electronics and computer industry, electronics companies began to focus their R&D resources on high-end and cutting-edge products, while outsourcing low-end products to Asian manufacturers.

Concurrent engineering and design-for-manufacturability: ODMs allow for highly integrated design and manufacturing operations, which reduces the cost and time of product development for OEMs.

Demand from new market entrants with no product development capabilities: The increased design and manufacturing capabilities of ODMs have removed barriers to entry for the electronics and computer industry, further intensifying competitiveness and commoditization.

What are the challenges facing industry players?

Both OEMs (like Apple and HP) and ODMs face many challenges in today’s ever-changing economy.

OEMs often outsource to the same manufacturer, which has raised questions about conflicts of interest. Some manufacturers have set up separate divisions for their large clients to protect privacy, but the worry remains. OEMs are also facing new competitors – from new entrants because of lowered barriers to entry, and from suppliers themselves.

ODMs, on the other hand, are heavily dependent on their clients, and therefore are vulnerable to sudden changes in demand. Other challenges include increased competition from emerging markets and several high-profile incidents involving poor working conditions.

What will the future bring?

More than three decades after IBM contracted out the manufacturing of its products, the outsourcing model remains strong. As outsourcing continues to change the electronics and computer industry, OEMs and ODMs must also change to survive in an increasingly commoditized, highly competitive environment.  

To view “Outsourcing Design to Asia: ODM Practices,” and other Global Business Center webinar, visit http://www.kenan-flagler.unc.edu/en/Global-Business-Center/programs/webinar-series/webinar-archive.aspx#supplyChain.