How the NPI sector can position itself to beat Tier 1 EMSs at their own game.
Most have heard the tale of David and Goliath. Young David confronts the giant warrior Goliath. A lucky slingshot is launched and extinguishes the behemoth. This parable is used to describe events in which the weak beats the strong. And it can be applied to the EMS industry, but not for the obvious reason. Read on.
NPIs (small EMS companies providing new product introduction services) are unceremoniously booted from high-volume/low-cost assembly projects. Typically, NPIs are used for proof-of-concept or low-volume production. Once the high-volume production phase approaches, OEMs jump to Asia, Mexico or to larger American EMSs. Understandably, this practice eliminates further revenue for the NPI companies. To this end, NPI companies are consigned to a small sphere of geographical reach which in turn limits the means of revenue growth.
Tier 1 EMSs are ubiquitous in operation, with facilities in every inhabitable region in the world. Tier 1s are set up to attack every OEM, from multinationals to small startups. Having a full set of attractive attributes, Tier 1s offer the latest in technologies, high standards of quality, unlimited capacity and logistic navigation. However, being so large and omnipresent, Tier 1s are also known for certain other attributes: slow reactions; inflexible policies; a myriad of executive decision chains; high costs for services; and dropping customers that fall short of demand forecasts. The Tier 1 EMSs’ weaknesses, in turn, represent opportunities to NPIs.
How do NPIs sink into the high-volume production business? Collaboration between NPIs and non-Tier 1 EMSs. This is the avenue to participate in high-volume production programs. The mechanics are simple. The NPI provides referrals and technical linkage to EMSs equipped for high-volume production. The EMS selected becomes part of the customer’s regional business strategy.
With a collaborative referral, the customer will evaluate if the recommended EMS is acceptable. If yes, the customer’s project will transition to the collaborating EMS. With this successful handoff from the NPI to the chosen EMS, the NPI will remain linked to the program, while being awarded an ongoing royalty for the life of the program.
Win, win, win. All three parties win in this collaboration model. For the NPI, instead of discontinuing revenue from said customer, there is newfound ongoing revenue in the form of a royalty payment (analogous to a commission). An obvious win for the Tier 3’s bottom line.
Asian, Mexican or American EMS providers gain a business introduction that most likely would have gone to a mainstream Tier 1 giant EMS.
The collaboration will give the OEM customer better value and performance compared to a Tier 1 EMS. The tandem of NPI and selected EMS will demonstrate easy transition, a continuum of product development, more flexibility in statements of work (SoW), higher velocity in program delivery, lower overall costs and an allegiance to maintain services to the customer regardless of production vs. forecast performance.
A matter of trust. In building a collaboration, the NPI and volume EMS must become familiar with each other’s operation from both a technical and operational viewpoint. This process of transferring programming from an NPI to an outside EMS is made more fluent via third-party converter programs that translate programming of SMT equipment regardless of machine brand. More important, an effective collaboration between the NPI and EMS depends on trust. In doing so, the relationship must have a comprehensive agreement to address the various customer interfaces and relationships possible. The agreement must also have safeguards to protect the interest of the (more vulnerable) NPI.
The company I manage has put together a document very similar to an Electronic Representative preferred agreement. Some of the clauses captured in our agreement are unique to the industry: non-cancellable (i.e., cannot be terminated for convenience); royalty remains in perpetuity for the specified customer; future products will remain under the NPI; royalty rates are at the same levels as in any sales representative agreement. Our agreements are written under US laws, with disputes subject to the decision by the American Arbitration Association.
Quantifying the NPI benefit. Typical NPI revenue can run from $10,000 to $100,000 per project. With a royalty payout for this same project, the revenue awarded to the NPI will have up to 1.5% of the total production. For example, an NPI customer may have a “proof of concept” build totaling $10,000. Should production run in the tens of millions of dollars, the payout to the NPI will exceed $100,000 minimum, with a possibility of greater revenue in perpetuity for future production releases.
With an effective agreement in place an NPI can gain access to global production opportunities that are traditionally surrendered.
Experts on ancient warfare have studied the Bible to further analyze the story of David and Goliath and the characteristics of each combatant. As it turns out, Goliath (analogous to Tier 1 EMSs) was a professional warrior, big, strong and loaded with heavy weaponry. However, it was also deduced Goliath was slow moving, clumsy on his feet, with less than sufficient sight, and slow to react to the assault by David. David (analogous to NPIs), on the other hand, was a shepherd, around 14 years of age, small in stature, carrying no armor yet nimble on his feet, and skilled as a slingshot marksman. David had a plan to attack Goliath by strategically delivering that one shot to slay the giant.
The conclusion: Giants are not as strong and powerful as they seem.1 Likewise, Tier 1 EMS giants are vulnerable to a strategic, mindful attack emanating from the small and unassuming.
1. Malcom Gladwell, “The Unheard Story of David and Goliath,” TED Talks, September 2013, https://www.ted.com/talks/malcolm_gladwell_the_unheard_story_of_david_and_goliath.