The electronics manufacturing industry is awash with acronyms. At times differentiating between individual service offerings and supply chain partners can be confusing. This blog looks at the key differences between an ODM and an EMS, exploring the design services both can offer an original electronics manufacturer (OEM).
The distinction between ODM (Original Design Manufacturers) and EMS (Electronic Manufacturing Service providers) has become blurred over the years, with EMS more and more offering a range of design services to their clients. But what’s the difference between the design services typically offered within these two models - and how can you choose between them?
What is an ODM?
ODM stands for Original Design Manufacturer. An ODM is a company that designs and manufactures products that are eventually marketed and sold under the name of an OEM (Original Equipment manufacturer). OEMs buy products from ODMs, who adapt their reference design to the OEM’s requirements. This white labelling system works well for many businesses who may not have the design resource, time or inclination to develop their own offerings from scratch. These businesses may prefer to focus on R&D, marketing and brand building, rather than think much about the specifics of design and manufacture.
What’s an EMS
An EMS stands for Electronics Manufacturing Service (provider). These businesses have historically taken OEM’s designs, BOMs and then assembled and shipped product as required. In recent years they’ve also been offering assistance with a wider array of value-added services, including: support with design, design for manufacture, supply chain management, value engineering, configure-to-order, and repair elements. Like an ODM, the services offered by an EMS supplier, allow their clients to lever economies of scale in procurement, manufacture and logistics. However, they typically give OEMs more control over their IP and decision making than an ODM would. Instead, OEMs use the skills and resources of an EMS to accelerate and optimise their products’ route to market in more collaborative partnerships.
Who needs an ODM?
The ODM business model works well in the fast-moving consumer electronics industry (PCs, laptops, and peripherals), with its short product life-cycles and quickly outdated IP and patents.
Famously, large and powerful electronics manufacturers use ODMs to deliver efficiencies and economies of scale in their global power plays. They’ve used ODMs to iterate and improve on their existing products, while helping them bring new offerings to markets where they didn’t have specific expertise. By freeing this resource they’ve been able to focus on innovation and long term strategy.
Among the most famous ODMs is the Taiwaense company Compai Electronics, who make notebook computers, monitors, tablets and televisions for clients around the world including Acer, Lenovo, Dell, Toshiba, Hewlett-Packard and Fujitsu.
But ODMs are now ubiquitous across the electronics consumer sector, with different firms providing D&M services for companies of different sizes and disciplines. In the age of digital, ordering and selection processes have become quicker and easier. ODMs can sell their services to all comers wherever they are in the world. As long as they have the cash.
ODMs are now supplying everything from small items like e-cigarette and phone charges, to higher-end, luxury consumer electronics. They’re offering agile companies without lots of design and engineering capabilities (and without the manufacturing resource) the opportunity to transform their ideas into products that can be manufactured and monentised almost instantly.
What are the advantages of working with an ODM?
If you’ve got an idea for an electronics product, you can work with an ODM to choose from a range of existing designs owned by the ODM while specifying elements of customisation, from colour, branding and packaging to more unique design features.
The benefits an OEM can derive from this include:
Cost and time effective
Working with an ODM means you do not have to carry the overheads associated with design or manufacturing. The result is a cost-effective solution without the hassle of having to employ and train staff or set up dedicated production lines later down the line.
Reduced time to market
With a reference design already in place, a huge amount of the overall product design and development process has already been completed. Apart from small ‘tweaks’ regarding features, branding and packaging, it’s possible to get the product out to market far quicker than starting from scratch.
When it comes to product testing and certifications, the process can be time-consuming and fraught with regulatory hurdles and administrative challenges. ODMs will have already gone through this pain, which means you don’t have to, safe in the knowledge your products will work and conform as expected.
3 drawbacks of working with an ODM:
While there are shades of grey in terms of the ownership of IP and the level of customisation you can achieve, in general - according to Qi Feng, an outsourcing expert at Purdue University:
“The ODM model, shifts both the control of product design and the associated intellectual property to the suppliers”
This fact could have knock on effects on your ability to grow and develop your product suite profitably and sustainably.
Here are three ways you may be held back by choosing an ODM:
1. ODMs may have a ‘ready-to-go’ reference design that will shorten time to market and save design costs. But any update, change, or new product variant will potentially cost you a lot more because you don’t own the IP. The supplier will be willing to make the changes you need but - at a cost.
2. As the ODM owns the IP reference designs and can sell them to other OEMs it is hard for OEMs to differentiate with their product in the marketplace. In the end, it can mean you’re competing with products in the market practically identical to yours. Over the years many ODMs have become so adept in their chosen field they’ve swallowed up the businesses they’ve previously been serving.
3. ODMs are located around the world, but China and Taiwan have become the centre for this sort of service. But what happens if global supply lines are cut off or disrupted in the way we’ve experienced in recent years? If the ODM does not have manufacturing capabilities close to your intended market, you may want to move production to a more local supplier. But since the ODM owns the IP and all technical documentation, a transfer to an EMS can be either impossible or at least painful to achieve.
Why choose an EMS to be your design partner?
You may already be using an EMS as your contract manufacturer, but be thinking about shifting to an ODM for a more end to end service.
Whether you choose an ODM will depend on how much you want (and need) to ‘own’ and control the design and long term destiny of your product.
What’s the advantage of using an EMS?
The right EMS provider will offer a more collaborative approach to design and manufacturer than an ODM. They should bring their expertise in procurement, supply chain management, logistics and value engineering to bear in everything they do - and bring you with them on that process. If your product really is an original device, something that doesn’t exist already and requires research and development, then you need all these kinds of services to work out assembly methods, refine production techniques, impose testing requirements and ensure you get the best possible product to market.
An EMS provider won't become a competitor!
An EMS is unlikely to be (or turn into) a direct competitor. As we’ve seen, many ODMs are selling, or already have ambitions to sell their products direct to consumers. This can cause more than a wrinkle in future commercial relationships (check out this classic HBR article about those risks).
Control over BOMs (Bill of materials)
In his blog on the key differences between the EMS and ODMs, written for ventureoutsource.com, Steve Linehan points out another problem with the ownership of product IP that comes with the ODM territory:
“EMS providers typically will provide a full, costed bill of materials (BOM). ODM providers may provide this BOM but if this is shared, they usually won’t, and even if it is unique you probably won’t get a full BOM.”
Without access to the exact BOM for your product your ability to scrutinise costs and shift suppliers if you need to can be severely hampered.
But can EMS providers supply the design services you need?
Some EMS providers may not have the design credentials you’re entitled to expect if you’re going to work with them. If you’re engaging an EMS to support your design and manufacturing process, you need to satisfy yourself they have the experience in place to add value for you:
- Many providers claim to have in-house design resources and capabilities, but this needs stress testing. Often, due to the associated overhead costs, EMS providers subcontract this work out and have ‘partnership agreements' in place. Establishing from a website or corporate presentation whether this capability is actually contained in-house or not can be tricky so something for you to be mindful of and establish a process to verify the facts.
- Will your EMS provider design to suit your specifications, or will they design to suit their own manufacturing process? And, should you decide to move to a new EMS partner at a later stage, how easy will it be to transfer the design to a different manufacturer?
- Combining design and manufacturing could create a potentially greyer cost model, so it’s important you have clarity about exactly how and where your money is being spent. How will your EMS separate design from Non-Recurring Engineering (NRE) costs? And are there additional upfront charges you need to know about?
In the modern electronics marketplace, competition can be intense. In the consumer electronics sector, the race is on to get your product to customers before trends become obsolete and new ideas are cannibalised.
ODMs fulfil a market need for fast iteration and fulfilment, but without offering OEMs much control over IP and process as part of the deal. Using an ODM, an OEM might end up without access to their own designs and BOM. They might have little visibility or say over procurement and supply chains in ways that limit their ability to address costs or refine requirements.
For OEMs who are creating original, high complexity offerings, the design and manufacturing services of an ODM can demand too many compromises to make commercial sense.