Brand-name personal-computer and telecommunications-equipment vendors should be thrilled by the recovering US economy. IT budgets are loosening, and many chief information officers and consumers are eager to replace aging equipment. But a stronger economy alone may not be enough to lift the fortunes of the companies that actually build the boxes—the electronics-manufacturing-services (EMS) contractors, which have fared less well than their customers have in recent years.
Although the names of these contractors are unfamiliar to most consumers and many businesses, they are increasingly responsible for the design, manufacture, testing, logistics, and even after-sales service of name-brand electronics products.1 The original-equipment manufacturers (OEMs) have embraced outsourcing because it removes capital from their balance sheets and delivers personal computers, servers, and other technology products more quickly and cheaply than they could themselves. Since contract manufacturers can exploit economies of scope and scale, their customers can focus on differentiators such as R&D, marketing, sales, and time to market.2
While the EMS companies have passed along tremendous benefits to their customers, in the recent past they have had less success in capturing value for themselves. From 1999 to 2003, the operations of the six leading companies lost nearly $7 billion of economic...