Previous articles have discussed a segmentation of the electronics market called Long Life Cycle(LLC) Products. LLC products are those whose useful life is longer than five years. In a subsequent article, the current state of the electronics ecosystem, and the connection of the LLC market to the AI/IOT mega-trends were also discussed. Overall, LLC customers such as those from the aerospace and defense industry face the intense churn of their supply chain generated by the consumer dominated semiconductor marketplace. This leads to issues of reliability and supply chain disruption due to semiconductor obsolescence. In addition, in certain use-models such as smart cities, the cost of maintenance is high because of the distributed nature of the embedded electronics, so some methods for managing future requirements are desirable.
Today, these important issues for LLC customers escape through the cracks of the electronics supply chain ecosystem and are highly impacted by business risk. For semiconductor makers, distributors, and EMS companies, holding inventory for potential future usage by customers is highly risky. For any single LLC systems customer, making lifetime buys is very expensive, and potentially not viable. When risk management is an issue, the natural financial mechanism which becomes useful is the concept of insurance. Fundamentally, insurance allows an individual to transfer risk to a pool. The premium to enter the pool is governed by the insurer based on the forecast of risk. In addition, the insurer has the incentive to incentivize the reduction of risk through the pricing mechanism of the premium.
In the case of LLC and electronics, insurance can offer a mechanism for the LLC system customer to defuse the risk over the ecosystem and offers the ecosystem players to have a funding source for managing this risk. The buyer of the insurance is clear. It is the LLC system customer, and their desire for insurance is likely at the component, board, and system level. The value of this insurance to the LLC customer is a function of the cost of failure or the equivalent replacement cost. LLC customers want to insure the preservation of the validated function, and potentially even the actual physical asset embedded in an environment. This can be fulfilled with four methods:
- Embedded design: A reprogramming of the end physical device to handle reliability or new function issues. Examples might include a distributed smart transportation solution.
- Original bill of materials (BOM): The maintenance function is fulfilled with the original BOM where insurance has assured supply through strategic buy/hold strategies.
- Validated equivalent BOM: The maintenance function is fulfilled with an updated BOM and mechanisms exist to validate the design at a physical level.
- New BOM within system design constraints: The maintenance function is fulfilled with an update BOM which is validated to the original function.
Who should sell this insurance?
Any single semiconductor company can only control its parts and is not going to be too interested in alternative parts. Distributors are a potential, but are driven by the financial incentives of their clients (in this case semiconductor companies). The entity which may be the best fit are EMS companies. Why?
Currently, EMS companies offer value to LLC customers by:
- fulfilling OEMs’ desire to move fixed costs to variable costs with an entity focused on manufacturing excellence.
- aggregating demand across multiple markets to maximize utilization of factories and enable bulk purchases for components
- offering design services for customers without electronics design skills.
Historically, EMS companies do not control the design and associated bill of materials for products they produce. To the degree an EMS is allowed to make parts selection, they tend to be in commodity parts where the OEM is unconcerned about the part selection. Because of this fact, EMS companies tend to manage each customer interaction as a single stand-alone transaction. The consequence of this behavior is that each transaction is “safe” in terms of its relatively small margin, but this behavior does not allow for any real leverage across the enterprise.
How could EMS companies extend their value statement?
- Offer component and board level BOM insurance: Large EMS’s such as Jabil Circuit or Flextronics can gain incredible insight on the supply chain through the breadth of the supply chain they already manage. There would be few companies who would have better insight into the risk profile for obsolescence and with the funding from premiums in a better place to make shared strategic buys from semiconductor companies.
- Offer system level insurance: For the situations where the EMS is doing the design services, it is in a good position to maintain the design function over time. In a model not too dissimilar to RedHat for open source, this interface provides capability for the LLC customer, and a recurring ongoing revenue stream for the EMS company.
To make it all work, one certainly needs additional capabilities in EDA which enable techniques for obsolescence, reliability, and requirements volatility in the context of clear handoffs between the LLC customer and the EMS. Further, EDA capability would be in the center of the data mining, risk assessment, and insurance premium pricing functions. All of which is a deeper discussion in the next column.