Japanese OEMs reluctant to employ contract manufacturers

Japanese OEMs have always been reluctant about taking advantage of the benefits of contract manufacturing. Given the enormous presence of Japanese OEMs in the electronics supply chain—from their dominance in consumer electronics, to their heavy penetration into the notebook PC market, to their influence in the LCD TV, wireless handset and gaming console segments—it's surprising that the global outsourcing trend is not catching on in Japan.

According to iSuppli Corp.'s research, Japanese OEMs believe that manufacturing is a national competency and that these companies are reluctant to relinquish control or to trust outside parties with their intellectual property as it relates to their products and operations. Also, Japanese OEMs prefer to maintain tight control over their supply chains. The unwillingness to employ contract manufacturers stems from fear of replicating the same mistakes made by some of the larger OEMs that have been outsourcing the longest.

"Why to outsource, what to outsource and what to watch out for when outsourcing has become as important as outsourcing itself," said Dan Hawtof, VP of professional services at iSuppli. "Finding the right outsourcing model and how to control various types of partners is equally important—and one major step toward embracing contract manufacturing for Japanese OEMs."

Despite this, a number of contract manufacturers are focusing on the Japanese market. Local provider, SIIX, has been providing manufacturing services for several Japanese OEMs for the communications, automotive, consumer and audio vertical markets. Other recent deals, such as the flat-panel TV agreement between Celestica and Panasonic and Toshiba's efforts to accelerate its mobile PC relationship with Compal, signal that many Japanese OEMs might be considering expanding their outsourcing budgets in the near future.

This may be the result of declining market shares for most Japanese OEMs during the past 36 months. In an effort to preserve what they have gained, these OEMs are turning to third-party manufacturers for help.

"If Japanese OEMs want to hold onto their dominance in certain markets, they will need to redefine their value proposition in the international market," said Adam Pick, principal analyst for EMS and ODM at iSuppli. "Focusing less on manufacturing and more on product design and marketing will free these companies from putting all their eggs in one basket and will open up a wide variety of new international markets. This also bodes well for both EMS providers and ODMs that stand to gain from such initiatives."