OEM innovations used to benefit the entire supply chain. Not anymore. Today, many enterprises in the electronics industry are being locked out of procurement and other supply services contracts at major OEMs as customers whittle down approved vendors to only a handful of companies in the race to maximize profit and efficiencies.
The types of products OEMs are introducing nowadays leave little room for greater involvement by the entire supply chain. Manufacturers, especially in the consumer electronics sector, now differentiate themselves on the basis of product “ecosystem”, which implies a focus on software applications at the expense of components supplied by chipmakers and suppliers of passives, interconnects and electromechanical parts.
In this situation, companies put limited emphasis on hardware development, the key area of product innovation that typically involves many more stakeholders in the supply chain. With software as the main differentiator, only a handful of hardware suppliers get called upon for parts even in sectors characterized by high volume and rapid product turnover such as mobile phone, according to industry sources.
The ripple effect across the industry is showing up in margin squeeze at suppliers serving big OEMs. Component distributors, too, have been compelled to offer a widening range of value-added services, including design and supply chain management offerings, in a bid to improve sales, they said.
A few companies are looking outside the traditional electronics industry for opportunities, potentially expanding the total available market (TAM) that suppliers can serve but also veering into territories that some observers say merely “dumb” down the economic sector, as a senior distribution executive noted in an interview. Perhaps the more glaring example of this is the smartwatch from Apple Inc., according to this executive who didn’t want to be identified by name.
“The Apple watch may become very successful as a product but it offers very little opportunities for a wide range of suppliers,” he said. “As an innovation it is unlikely to stand out as one of the defining products of this industry. It doesn’t quite rise to the level of some of Apple’s other great inventions not to mention others from the entire industry.”
Even some analysts that are typically gung ho about Apple's products are sounding alarm bells. One of them lowered his rating on the company's stock recently on concerns its smart watch would underperform the highly successful iPhone.
“We remain concerned that Apple will struggle to replicate the huge success of the iPhone 6 launch when it upgrades its handset portfolio in September,” said Andy Perkins of Societe Generale in a report.
He may have a point. Historically, most high-tech innovations start deep within the design chain, sometimes at deep-pocketed companies but oftentimes only as the kernel of a solitary engineer’s idea for a product that would energize the economy and maybe change society. Some merely solve a problem facing a segment of the economy and are therefore limited in market size and value. However, most traditional high volume innovative products deliver huge sales and profits to all stakeholders across the value chain.
Whatever segments of the economy these innovations were aimed at, they generally sparked sales growth and other advancements in products, systems and processes across the entire supply chain; component suppliers, contract manufacturers, distributors, product lifecycle management and other software providers race to support the devices, creating ripple innovation that have in the last five decades laid the foundations of what is now a global trillion dollar electronics and high-tech industry.
The trailblazing OEMs and component suppliers that brought numerous products we still value today to market are numerous. A few come to mind now. They include (in no particular order) IBM, Compaq, Fujitsu, Hewlett-Packard, Lucent Technologies, Panasonic, Nokia, Ericsson, NCR, Alcatel, Motorola, Intel, STMicroelectronics, Samsung, Texas Instruments, Microsoft, Fairchild Semiconductor, Philips Electronics, Infineon Technologies, Hitachi, Nortel Networks, Cisco Systems and Apple.
The list could be much longer, of course. These companies combined with many others in the supply chain to create a vibrant system that benefitted all, including distributors (many since acquired by survivors like Arrow and Avnet), contract manufacturers (anyone remember Solectron?), interconnect, passives and electromechanical component suppliers, software vendors (especially enterprise resource management and product lifecycle management vendors), logistics services providers and countless others. The innovations they brought to the market were diverse and far-reaching.
Are those glory days of the electronics industry behind us? The convulsive outpour of adulations over Apple’s smartwatch in the last week is indicative of what the future holds for the industry. One report said the Apple watch will “Launch a Wearable Revolution” while a New York Times columnist gushed about how the Apple smartwatch “will change your world” and open up “new tech vistas”. I hope he is right but I strongly doubt it. In the annals of electronics innovation, the Apple watch would not normally be counted amongst the industry’s greatest inventions that also created massive opportunities for others in the supply chain. This is not Vintage Apple. Perhaps one day, the world’s biggest consumer electronic company by market value will unveil "Vintage Apple". Right now, it is still out there somewhere.
The electronics industry helped put man on the moon, it revolutionized manufacturing and has made huge advancements in medical diagnosis and treatment possible. In recent years, the high-tech market has contributed to the transformation of interpersonal and corporate communication, savaging some traditional markets along the way but creating new ones that have opened up wonderland for many enterprises and consumers across all economic sectors.
In the automotive industry, semiconductors are contributing to the deployment of life-saving front and side airbags, providing real-time monitoring and information on critical systems and vehicular performance and opening up the possibility of driverless transportation with direct impact on safety, road congestion and other social benefits.
Companies like Google, chip vendors and software developers are in the vanguard of these advances. The money many of them are investing may not produce instant, huge or even any returns but over time the accumulation of knowledge from the processes involved will echo throughout the industry and the economy.
Other parts of our lives are being impacted also by innovations many OEMs and their suppliers worked on several decades ago. Dramatic advancements in nano-technology fostered the creation of smaller, portable and more powerful products now used in medical, financial, household and other consumer services. We can remotely monitor and control thermostats, lighting, security cameras and even information on computers.
All these products and services do more than just benefit a handful of companies, however. They directly lead to other innovations at support companies, created new jobs and streamlined production systems, adding to productivity and sales growth. They forced component distributors to think of new ways to service OEMs and electronics manufacturing services providers while pushing semiconductor suppliers to invest more in research and development. In other words, OEM innovations of the past always had a transformative and exponential effect on the entire design and supply chain; the impacts were never limited to a handful of companies and their suppliers.
A negative trend in the industry over the last decade has resulted in the retrenchment of design engineers, the consolidation of product R&D and a growing focus on transient consumer electronics devices aimed at boosting short-term sales. These developments have created an inward looking supply chain that is less dynamic because companies now market themselves only to the handful of “core customers” with which they have a “good” business relationship.
Outside the consumer electronics sector, the creativity of the industry is being stunted and left to the few OEMs that still believe in spending money on new product research rather than on merely finessing an already existing device and packaging it to create the illusion of innovation.
The electronics industry has given the global market a lot and is capable of giving a lot more. In order for this to happen, though, it must look beyond “transformative” fluff. Simply attaching the word “smart” to a watch or any other device will not elevate it to the ranks of groundbreaking products we have seen in this industry. Real innovators do more than this.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.