TECH TALK: Tech’s 10X Tsunamis: Outsourcing: Partnering for Profit

As companies worldwide focus on cutting costs in the face of slowing growth, one 10X force which is coming to the fore is Outsourcing. Manufacturing, Software Development, Web Hosting, Customer Support, RD all are being outsourced as companies focus on their core competencies. Technology has played a crucial part in enabling this transition to outsourcing by making it easier for enterprises to connect up their computer systems to create a real-time, extended enterprise.

The Economist (July 11, 2002) gives an example of Quanta, the worlds largest contract manufacturer of laptops, and puts contract manufacturing in perspective:

If you own a Dell laptop, there is a better-than-evens chance that it was made in Quanta’s factory near Taipei’s airport. If you have an IBM, Apple, Compaqin fact, any big brand except Toshibathere’s a fighting chance that it was made only metres away under the same roof. Quanta, in other words, is a contract manufacturera company that designs and makes gadgets but leaves the marketing (and increasingly only that) to companies with famous brands.

Contract manufacturers tend to be either providers of so-called electronic manufacturing services (EMS) or original design manufacturers (ODMs). The former simply build machines designed by other companies. This makes economic sense, because aggregating several companies’ orders allows EMS firms to achieve greater economies of scale and lower risk than their customers could ever do.

Outsourcing is what enabled Microsoft to build the Xbox in record-time, and take aim at Sony for the gaming consoles business (and perhaps, later, for the home media server market). Wired wrote about The Making of the Xbox in a cover story (November 2001):

Without Flextronics, there would be no Xbox – only the idea of it. “Microsoft has a ton of money, but if they had to build factories, they wouldn’t have done this project,” says Flextronics chair and CEO Michael Marks. “If guys like us didn’t exist, guys like Microsoft wouldn’t do a hardware product. The risk would be too high.”

Wired provides the wide-angle view on outsourced manufacturing:

The move toward outsourced manufacturing represents an obvious opportunity for contract manufacturers, but it’s also a potential boon to product innovation. The future of gadget-making is not about making gadgets; it’s about imagining them. Someone else makes the imaginary real.

“All that money that used to go to fund infrastructure is going into design and innovation,” says Marks. “The companies that thought they were being competitive by having manufacturing, well, now all their factories are half full, and they’re just getting cranky.”

The result will be a hollowing out of the consumer electronics industry reminiscent of the forces that shaped the computer industry. Consumer electronics now is dominated by huge, vertically integrated conglomerates such as Matsushita (Panasonic), Sony, and Philips. The demands of component sourcing, manufacturing, distribution, and winning retail shelf space, all on the huge scale necessary to make money on slim margins, keep such unwieldy corporate giants on top. But take away the sourcing, manufacturing, and distribution, and suddenly the picture looks very different. All the value heads to innovation and marketing, allowing smaller companies, entrepreneurial firms, and those from outside the electronics industry to compete head-on with the incumbent titans. Microsoft is now taking on Sony, but tomorrow it could be Virgin. Or Nike. Such is the power of an enabling technology like contract manufacturing.

Monday: Outsourcing (continued)

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.