Outside of corporate management, engineers are the most valued—and best-paid—members of the electronics supply chain. So why do so many customers expect to get engineering services for free from their business partners?
The distribution industry for decades has been struggling with this issue. “Giveaways” began with value-added services. Customers that bought components from distributors asked for certain modifications to their orders such as special barcoding; tape/reel services or cable assembly. Distributors accommodated OEMs to secure their business and differentiate themselves from their competitors. Pretty soon, all distributors were offering these services.
Over the years – as OEMs began reallocating their resources -- ASIC/FPGA programming, inventory management services and e-commerce capabilities were added to the channel’s value-added services list. Each of these offerings required investment from distributors, so the channel tried to recoup costs by trying a fee-for-service model. That didn’t go over so well with customers, and distributors remain reluctant to charge extra for services.
Design services have become the latest battleground for differentiation and a new competitor has entered the fray. At a panel discussion among U.S.-based EMS companies a few weeks ago, executives said OEM customers are increasingly turning to their EMS providers for component-related design support. “Customers assume we will take care of engineering support,” said Peter Ermisch, co-founder and general manager of Variosystems Inc. “EMS companies don’t get paid for it, but we are doing it because we have to compete.”
Distributors and EMS companies already overlap in some of the services they offer OEMs such as component procurement and supply chain management. Sometimes distributors and EMS compete; sometimes they are partners. Many EMS companies use distribution to offset fluctuations in their end-customers’ supply and demand forecasts.
Engineering support, however, comes with extra complications. Distributors are incentivized to get suppliers’ products designed into OEM end-products; EMS companies are not. In a battle over design services, EMS companies are at a disadvantage -- at least in terms of cost.
Providing engineering services isn’t exactly a bargain for distribution. Distributors are first and foremost sales-driven organizations; their compensation relies on high-volume component orders. Since engineers don’t directly generate sales, they are an expensive asset for distribution. But as the channel has shifted its focus from purchasing to engineering, design resources have been added. This, in turn, has negatively affected distribution profit margins.
Rather than raise prices for customers, distributors have turned to suppliers to offset engineering costs. Suppliers benefit when a distributor secures a component’s position in a design. These programs, called design-wins, compensate distributors for their engineering efforts.
EMS companies don’t participate in suppliers’ design-win programs and already operate on razor-thin profit margins. Absorbing engineering costs only adds to EMS margin pressure.
Thanks to downsizing, OEM engineers -- like everyone else in the electronics industry -- are doing more with less. Distributor and EMS design services help streamline time-to-market. But minus component price hikes – which are controlled by suppliers-- distributors and EMS companies have little maneuvering room to charge customers more. Customers have become accustomed to getting many services for free.
If an OEM were to go to a third-party design house for assistance, they’d expect to pay for those services. Why should distribution and EMS be any different?
Distribution and EMS providers could cooperate to prevent further margin erosion or begin to charge for services. It’s more likely that they will continue to compete for OEMs’ business. Eventually, margin pressure will force distributors and EMS companies to limit their engineering resources to a few key customers or a few key suppliers– the same way OEMs did.