Electronics design – the last bastion of fat margins for electronics manufacturers – is the latest victim of the waves of commoditization that have eroded margins in the high-tech market for decades. Efforts to fight commoditization in recent years have focused industry resources on differentiation primarily in the design of proprietary products but even this wall is beginning to crumble.
Not a single sector has been spared. Component suppliers, OEMs, contract manufacturers, software providers and distributors have all been squeezed in the never-ending search for an edge over the competition. It’s a vicious cycle that now appears disturbingly self-defeating.
The design chain used to be the preserve of OEMs. Not any longer. Everyone has piled in. The global supply chain is chock full of companies that either aim to be or market themselves as design chain champions. Chipmakers market board designs that include not just their own parts but also those of rivals and suppliers of passives, interconnects and electromechanical devices; components distributors talk endlessly about their vast design chain offerings and resources; contract manufacturers tout their ability to take products from concept to production and all the way to end-of-life management; software vendors, too, hawk all kinds of design chain tools and applications; patent companies are becoming a dime a dozen, each one patrolling the industry either in search of “violators” of their intellectual properties or offering everything a virtual OEM needs to produce and market any device.
The factory-less OEM used to be a marvel. Today, you can be an OEM without having a single IP or even the slightest knowledge of the electronics segment you want to invade. Just search the web for an independent design services provider, EMS services company or even broadline distributors and you are on your merry way. In fact, you can do what an engineer does today without stepping into an engineering school.
The industry that famously likes to narrate the story of companies (and products) born in mom and pop garages has fewer such success stories today. OEMs are born in bedrooms and boardrooms alike, nowadays; Walmart is an OEM competing in the handset and tablet market with Chinese and Indian entrepreneurs with no offices. You don’t even need a design idea anymore; you can just buy it from a wide range of vendors.
That’s the scenario driving commoditization deep into the design chain. Originality of concepts is being pushed into the background as old, emerging and would-be OEMs target “successful” market segments with me-too products. While working on a recent research project I counted as many as 100 tablet PC vendors in North America and even many more in the European market. Many of them sold barely 3,000 devices before going out of business. When Apple Inc. announced its recent first quarter results and posted record earnings, it reported that the only weak part of its operations was the tablet PC segment. It can thank all the “OEMS” who plied into the market for that. They’ll soon be in the smartwatch market, too.
Designs that used to emerge from months and years of hard work by engineers now come out of cookie cutter boxes, packaged for sale like architectural drawings. They are called “reference designs” and everyone is offering them for sale. But it may be time for the industry to reconsider the current strategy of fighting creeping commoditization with ever faster roll out of new “proprietary” products because the current approach is only digging a deeper hole under everyone. While a handful of companies (Apple, again, is a good example) continues to make money, many of the industry’s leading players are getting hammered, rolling out successive waves of reorganizations and looking for the magical OEM product, service or component that would set their operations apart, even if only for a few quarters.
The industry sees such occasional respites but even this is beginning to look like an illusion. Apple is cleaning up in the market but even the world’s biggest consumer electronics company knows it has a fat target on its back and must continually search for a set of new products that can give it the hefty returns and huge production volume of the iPhone. Apple may find frothy margins in its recently introduced smart watch but it probably won’t see the same massive iPhone volume that drove up sales and profits.
The design chain is getting pawed over by everyone in the electronics industry nowadays. OEMs, which traditionally designed products, have found themselves competing not just against rivals in the same industry sectors but also against non-traditional competitors drawn by cheap and sometimes even free reference designs. As a result, the global roster of “electronics OEMs” has ballooned to include retailers, backplanes, sheets and metal enclosure suppliers, artistes, dreamers and anyone else with a concept or a twinkle in the eye for money.
These companies and individuals are able to enter the global electronics market because the design experts have thrown open their doors. When OEMs started trimming R&D budgets to improve profitability at the beginning of this century, they laid off thousands of experienced engineers who found ready homes at distributors, EMS providers, design firms and even software vendors. Many founded independent design houses in North America, Europe and Asia to supplement dwindling engineering resources at OEMs.
The top electronics component distributors, in particular, have embraced their new roles as power brokers to -- as well as incubators of the new generation of fabless OEMS – essentially manufacturers who don’t design, touch, manage production or even see devices that bear their names before these get to end customers.
The result has been the commoditization of design services. It’s good news for the consumer and enterprise buyers of electronic equipment who now enjoy cheaper and falling prices. In the design chain, though, a crater has been formed. It will be filled with the bodies of enterprises unable to sustain their free-design-for-all fantasies.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this article 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 email@example.com.