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ODM options A new variety of original design manufacturers is emerging in China. Does a partnership make sense for your company?
Yuan Shi She Ji Zhi Zao Shang translates loosely into original design manufacturer, or ODM, a business model that emerged first in Taiwan. But unlike such established Taiwanese ODMs as Benq, Compal and Quanta that focus on designing and manufacturing high-volume, low-mix consumer products, China's ODMs are looking to serve a wider customer base. They will gladly partner with--as well as compete against--midtier OEMs looking for low-cost, turnkey solutions. Indeed, China is evolving the ODM model along three lines: as subsidiaries of large OEM parents; as enhanced electronics manufacturing services providers offering system design services; and as a combination of system manufacturer/designer and semiconductor design house. Some of those ODMs are well-established OEMs looking to expand their customer base for design and manufacturing internationally. Others are small startups that want to break into the business. Many specialize in one or more market segments, such as wireless, handheld digital products or instrumentation. And virtually all are relative novices at international relationships. Determining whether a partnership with a Chinese ODM makes sense for your company will require considerable due diligence. To jump-start your investigation, Electronics Supply & Manufacturing surveyed the Chinese landscape and identified four companies that epitomize the new wave of established electronics OEMs that are now offering ODM services: China Electronics, Panda Electronics, Shinco Electronics and Skyworth Electronics Group. These four companies share a few fundamental characteristics that are shaping the ODM business model emerging in China: They are being spun out of an OEM parent. Their ODM business is handled either by an export-oriented division with foreign sales offices or through a joint venture. The ODM business unit varies in size from a few million dollars to hundreds of millions of dollars per year. They stress turnkey solutions to their customers, but offer varying degrees of design, from deep to cosmetic. Most have a portfolio of existing OEM products with a standard mix of features. Typical R&D investment hovers around 5 to 6 percent of revenue. 1. China Electronics (www.cec.com.cn) Like many companies of its generation, China Electronics Corp. came into being in the 1980s, when many state-run companies were transformed into commercial companies. In 1989, CEC assumed ownership of all of the Electronics Ministry's R&D and manufacturing facilities. During the 1990s, it operated as a hybrid OEM-ODM-EMS company. Today, CEC is an electronics powerhouse, reporting revenue last year of $3.7 billion. The company has a diversified portfolio of businesses with products in computer, communications and networking equipment as well as IC design and foundry services, software development, industrial automation and optical electronics. CEC owns 21 former state-run companies and research institutes. It also has interests in 18 other companies and has a number of international joint ventures, including CEC-Contec, a manufacturer of industrial PCs, and CEC-Philips, a wireless handset partnership with Philips Electronics (Amsterdam). Nowadays, CEC is branching out even more and is seeking foreign customers for its ODM and EMS businesses. The company is exploring joint ventures for a variety of technologies, including wireless, industrial automation, software, IC design and manufacturing, optical and consumer electronics, according to Ai Hua Pan, executive vice president of CEC's Technology Research Institute (Beijing). Pan believes that design will be a distinguishing factor for Chinese systems houses, including CEC. This will force Chinese ODMs to learn more about international law as they seek design ownership, he said. 2. Panda Electronics (www.chinapanda.com.cn) Headquartered in Nanjing, Jiangsu, Panda Electronics Co. Ltd. was established in 1936 as a state-run enterprise. The company is listed on the Hong Kong and Shanghai stock exchanges and had revenue last year of $2.8 billion. Panda's products include communications (shortwave, satellite, mobile phone, central office exchange and networking), consumer (TV, DVD and audio) and industrial equipment. The company has joint ventures with Ericsson, Hitachi, LG, Microcell, Sharp and others. Panda Communications, a subsidiary of Panda Electronics, is a top-10 Chinese handset maker with 2003 revenue of $725 million. It established an ODM services group in 2003, primarily targeting foreign customers. Twenty percent of the company's 2004 revenue is expected to come from the ODM business, growing to 40 percent in five years, said Wei Ming Deng, president of Panda Communications. Deng wants to expand the business to 5 million handsets this year, a 66 percent jump in combined OEM and ODM business over last year. To accomplish this, he has to double his ODM business. Besides handsets, Deng is looking to develop WLAN and other wireless products. "We have good in-house wireless development capacity, which can benefit niche OEM customers," he said. Panda has a long history of serving the Chinese defense industry and has the manufacturing know-how in RF and microwave technology. Panda Communications' ODM business model stresses what Deng described as a "total technical solution" for customers, primarily telecom operators and OEMs in Europe and Asia. "Cost is an issue, but we consider it equally important to improve time-to-market, technical support, quality consistency and the ratio of cost and functionality," he said. In general, Chinese ODMs can design hardware and application software to differentiate their products, mainly at the functionality level. "With design tools and system-level software, we are able to develop application software for the machine-human interface and new features, as well as new circuits that support these functions," said Deng. Designs that cater to local component sourcing are critical because of the low cost of local parts. Panda Communications buys about 40 percent of its materials and components from international markets, including DSPs; baseband and RF chips; and flash memory. The company uses Broadcom, Motorola and Texas Instruments handset platforms in its new products. The remaining 60 percent of Panda's components comes from loosely defined local suppliers. "If Toshiba's agent ships from its China warehouse to us, this is a local buy," explained Deng. "We enhance local sourcing because [it benefits] the supply chain." 3. Shinco Electronics (www.shinco.com) Ten-year-old Shinco Elec- tronics Group (Jiangsu) has three business units: an electronics division that produces DVDs, GPS systems, LCD TVs and other digital electronics; an air conditioning unit; and a washing machine unit. About half of the privately held company's 2003 revenue of $789 million is derived from the electronics business. Shinco has sales offices in Anaheim, Calif.; Montreuil, France; Hong Kong; and in 40 cities in China. About 60 percent of the company's 2003 ODM business was with foreign customers, including Philips, Thomson and Toshiba. "Technology leadership, large production capacity and cutting-edge quality systems are key factors to our business success," said Chuan Da Qin, Shinco's overseas business manager. In addition, design for manufacturability, an extensive design library and strategic sourcing partnerships are part of the company's ODM strategy, said Mingto Yu, finance director and company spokesman. "We give three to six months' advanced notice to our top customers about our new product road map," he said. Most customers select from Shinco's design library, with only about 10 percent requesting deeper design. In those cases, Shinco forms a special design team. "The deeper design may stretch the delivery time," said Qin. Shinco has a strategic relationship with Taiwan's MediaTek Corp., which controls about 50 percent of the DVD decoder market and supplies the top 10 DVD manufacturers worldwide, Yu said. "We are on a total solution-based supply strategy [with MediaTek], which enables our customers to focus on sales," he said. Shinco has been an enterprise resource planning (ERP), ISO 9001-certified company since 1997. The company's SMT equipment has a 5 million-unit assembly capacity annually and is able to deal with 200,000 units in an average order lot, Qin said. "We are able to design all hardware and software on printed-circuit boards that fulfill DVD player functions in our design lab, using imported decoder ICs, LCD panels and memory chips," said Qin. Shinco uses about 30 percent local components in terms of dollar value, but the unit volume is much higher, he said.
 (www.skyworth.com) Founded in 1989, this top-four TV manufacturer was listed on the Hong Kong stock exchange in 2000 and reported revenue of $1.27 billion in 2003. Skyworth Electron- ics Group, with headquarters in Hong Kong and in Shenzhen, Guandong province, shipped 9 million TVs in 2003. The company also makes PDP, LCD and projection TVs; DVD players; set-top-boxes; auto A/V products; and security and surveillance systems. The company has 7,000 employees worldwide with development and production centers in Shenzhen; Hong Kong; San Jose, Calif.; Mexico; and St. Petersburg, Russia. Its ODM TV business is handled by Skyworth Multimedia International Ltd. with a staff of 30. About 20 percent of Skyworth's customers are international OEMs, said Kai Ding, Skyworth executive vice president. To exploit its design and manufacturing know-how in video-processing and display technology, the company formed Skyworth Star Surveillance Technology Co. in July 2003. "We are serving Bosch and EL Surveillance today, but we expect to get [other] tier-one customers . . . in the future," said Ya Li Yan, deputy manager of the overseas business department at Skyworth Star. The company is ISO 9001-certified and runs a material resource-planning or MRPII system. Skyworth Star has modest revenue goals of $10 million in 2004, its first full year of operation, but like many Chinese electronics organizations, the company insists it has big plans for the future. Skyworth Star is building a Surveillance Electronics Industry Park near Shenzhen and expects a twelvefold increase in revenue within five years, Yan said. It's now seeking international technology companies as partners to build supporting facilities in the park. Today, ODM customers select from Skyworth's existing product line, then add or delete functions or features as needed, said Yan. "Customer requirements are mainly at the software level for the machine-to-human interface and features for image processing," she said. "We can manage 90 percent of the local supply for CRT-based monitors but for LCD monitors we have to import panels." Yan expects a local supplier of LCD panels to be available in 2005.
Michael Liu can be reached at mmliu@shaw.ca.
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