Wednesday, June 13, 2007

Industry Co-Evolution: A Comparison of Taiwan and North American Electronics Contract Manufacturers

Industry Co-Evolution
A Comparison of Taiwan and North American Electronics Contract Manufacturers

The chapter begins with a brief explanation of the history of global economic integration. It divides it into two levels: deep and shallow. Shallow integration has to do with marketing integration, in which firms sell to customers and compete with firms in distant locations. The deep level has to do with operations, in which firms spread their activities over a wide geographic area. One aspect of this which is the focus of the chapter is global outsourcing.

Another focus of the chapter is co-evolution. This is a process in which firms in the same value chain gain from interaction with other firms, their suppliers, and their customers. The interaction is complex, as firms both influence and are influenced by the other organizations and institutions. The particular model the chapter examines is the growth of strategic outsourcing and how that has led to the rise of a shared supplier network. As the text states, “The emergence of shared supply networks can be understood as a co-evolutionary process encompassing series of strategic choices and interactions between lead firms and their suppliers that occur in the context of a dynamic environment.”

Basically, lead firms, in order to reduce their costs, contract with suppliers whose competencies complement the needs of the lead firm. As the relationship between the lead firms and the suppliers develops, the suppliers often increase the quality and scope of their competencies. This makes it possible to develop relationships with other lead firms, as well as to develop new relationships with the original lead firm. As the lead firms needs grow and change, so do the suppliers competencies, which in turn can lead to new requests from lead firms.

Suppliers can be of several types. There are those that invest in specific assets (captive supplier) and those that don’t (commodity supplier). There is also what the text refers to as a turnkey supplier, which is a supplier with a strong multiple-customer and/or multiple-business profile. Lead firms that deal with captive suppliers can become locked into only using those suppliers, which creates a risk of opportunism on the part of the supplier, as well as high transaction costs. In order to avoid these and other risks, modular value chains have developed in which suppliers’ processes depend on generic assets that can be applied to fulfilling the needs of a wide range of customers.

The term “turnkey” is used to describe suppliers that have high competency levels, independence from lead firms, there use of generic assets, and who require relatively limited interaction with and instruction from their customers prior to collaboration. This allows the supplier to minimize risk and underutilization, as well as provides it with industry-wide learning opportunities. These learning opportunities work for the lead firms as well, as they can acquire knowledge from their suppliers.

This two-way learning can cause problems with leakage of intellectual property, but due to short product life cycles, and given the overall increase in efficiency in the industry, the learning tends to be a positive result of the linkage between supplier and lead firms.

At different levels, there are different requirements for turnkey suppliers to be accessible to a wide number of lead firms. At the micro level, highly codified transactions and generic products are necessary. At the macro level, widely accepted standards in product features and components is require. At the meso level, the creation of large pools of customers and low exit barriers are characteristic of turnkey suppliers. This large pool creates a condition in which greater learning exchanges take place, which in turn encourages lead firms to become more involved in outsourcing. Outsourcing has the effect of encouraging more outsourcing.

At this point in the chapter, ODM and EMS firms are introduced. ODM is highly characteristic of Taiwanese firms. It stands for original design manufacturers and it is a model in which a firm receives contract orders from a lead firm to design and manufacture components for the lead firm’s finished product. EMS firms are more characteristic of North American firms. The model is similar to ODM, with the distinction that EMS firms tend to do less design. Both models are suppliers of outsourced components for lead firms. There are three dimensions in which the text analyzes the two different models: value chain scope (basically what services the firm provides), product/customer scope (what the firm makes and for whom), and geographic scope (where the firms are located).

ODM is further defined as being distinct from another common model of Taiwanese firms: OEM. Whereas original equipment manufacturers are essentially manufacturers of outsourced goods, ODM firms, due to the standardization of PC products and peripherals, also are able to offer design services. After the definition, the text goes on to elaborate on the development of ODM firms, the forces that encouraged that development, and the extent of the business they do. ODM firms have catapulted Taiwan into the lead in production of PC products and peripherals. The focus of ODM firms on a limited number of products and customers creates certain risks. For example, they are susceptible to ups and downs in the IT industry, as well as being subject to low profits due to the pressures to decrease costs for IT products.

In order to counter these risks, ODM firms have followed several strategies, including broadening their product scope and developing their own brands. For the most part, brand creation has not been an especially successful strategy for Taiwanese firms.

The EMS model is dominated by North American firms. A driving force in the development of this model was the reluctance of electronics firms to invest in production assets, preferring to sell off their production facilities and focus on innovation and marketing. Firms that specialized in producing outsourced goods took over this production, sometimes purchasing the production units from the electronics firms. The text goes on in great detail to describe the development of EMS firms.

The next section of the text describes the differences and similarities between ODM and EMS firms. ODM firms produce a wider range of value chain activities than EMS firms do, as they provide design and development services for PC products—which is enabled by the standardization of PC systems and peripherals—whereas EMS firms do not, focusing instead on base manufacturing of electronic products and subsystems.

This difference in value chain scope is related to differences in customer/product scope. Where ODM firms focus on PC products, EMS firms produce a broader variety of electronic products.

The two models also differ in geographic scope, with ODM firms being concentrated in East Asia, while EMS firms are much more widely distributed.

Despite the differences, the two models share a number of similarities, some of which are a high level of product and component standardization and codified processes, overlapping sets of customers, a quasi-merchant, noncaptive, multiple customer/multiple product stance toward customers and markets, reliance on generic, easily transferable, widely applicable core of fixed assets, and a reliance on mechanisms to support a thick customer interface.

Recent trends in the electronics industry have been causing increasing competition and convergence between the two models. EMS firms are attempting to take on a greater role in providing design and development services. Lead firms have been pushing suppliers for greater design services, which has led to more direct competition between ODM and EMS firms as EMS firms attempt to take on more design activities.


1. Given the increased competitive pressure from EMS firms entering the design aspect of outsourcing, as well as the pressure to continue to reduce costs, what can Taiwanese ODM firms do to remain competitive and relative in the global economy? Will any strategies they pursue have a negative effect on Taiwan’s economy in terms of employment (for example, shifting more production overseas) or in other areas?

2. Should Taiwanese firms remain content with providing outsourcing services, or should they pursue the development of their own brands? Why have they been relatively unsuccessful in doing so thus far?

3. Are there ways in which the Taiwan government can encourage a shift from the “manufacturing first” mindset of Taiwanese firms to an “ideas first” mindset? Should this be the role of public policy makers, or should industry leaders be the ones to create the impetus for such a move?

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