Article at a glance:

Getting contract manufacturers back on track

Well-known PC and server companies often outsource their manufacturing to contractors in the electronics-manufacturing-services (EMS) industry, thereby freeing themselves to focus on sales, marketing, and R&D. Although these contract assemblers can leverage economies of scale and have generated tremendous value for their customers, they have proved less adept at capturing value for themselves. Fierce competition, the economic downturn, and an outdated pricing model have combined to produce razor-thin or nonexistent margins for most of the industry's top-tier players. They must now adopt better habits or plan for restructuring.

The take-away

EMS players must learn to stand up to their powerful OEM customers, just as suppliers in the automotive industry have done. They can no longer afford to offer generous terms simply to fill up their factories. A bright future awaits these companies only if they adopt a small-business mind-set by charging for every service they provide on the OEMs' behalf and by closely monitoring their pricing and collection processes.