Using A Contract Electronics Manufacturer To Cut Production Costs.

Electronics manufacturers have been operating in an increasingly competitive environment for the past couple of decades. The only thing that ensures survival in such an environment is innovative thinking. One of the innovate concepts the leading companies came up with was to subcontract non-core activities to a Contract Electronics Manufacturer (CEM).

What in essence happens is that the original manufacturer subcontract large parts of the work to the CEM. The trend started during the 1970s when manufacturers began to outsource printed circuit board assembly jobs. This trend is becoming even stronger in the twenty first century. Electronics manufacturers have often even sold large chunks of their production plants to CEMs.

This has gradually led to an erosion of the power and influence of original manufacturers. Nowhere is it more pronounced than in the fact that many large retail groups no longer even use original manufacturers when they want to introduce a new product on the market: they simply go to a CEM who is willing to manufacture the product for them under the brand name of the retailer, cutting out the original manufacturer totally. This works for both the CEM, who is used to manufacture products under somebody else’s name and the retailer who wants to built a strong brand.

The main advantage of using a CEM for any manufacturer is cost savings. Very often a specific subsection of a production plant is not utilized to its full extent. By subcontracting that particular function, better economies of scale can be achieved. Many manufacturers have reported substantial cost savings after subcontracting large parts of their production facilities. Some manufacturers have actually sold off all their production facilities, because they found they could produce the same products cheaper by outsourcing all the different stages of production.

The origin of this trend can be followed back to the USA, but the logic of it made it quickly spread to companies in Europe and the Far East. The first Eastern country where the concept caught on was Taiwan, but Japan didn’t take too long to get on the bandwagon. Manufacturers of auto parts and other consumer products are getting more and more interested in the benefits offered by outsourcing.

A new and somewhat worrying trend for CEMs in the developed world, is that many large corporations are nowadays outsourcing production to CEMs in developing countries such as India and China. All this is driven by cost saving and since labor costs in these countries are very low, CEMs in the rich countries find it very hard to compete.

What does the future look like for the average Contract Electronics Manufacturer world wide? In one word: rosy. A recent scientific survey conducted by a well-known New York company among manufacturers of electronic equipment, telecom equipment and consumer and auto parts, more than eighty seven percent indicated that they will be subcontracting parts of their production in the near future.

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Published by: Evan Guise on April 30th, 2010 | Filed under Legal



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