The rise and rise of ODM handset manufacturing

As handsets continue to evolve into new form with new features, it appears as if the wireless handset is to the 2000s as the PC was to the 1990s—a ubiquitous piece of equipment representing technical savvy and individual style. In short, mobile connectivity is fashionable, and the utility of these devices is highly valued in the marketplace.

Given the widespread use of contract manufacturers by handset OEMs, one cannot overlook the importance of this node of the supply chain during a manufacturing surge. During technology ramps of the past, large EMS providers like Celestica and Solectron supported segment expansions for product categories, including data communications and networking. However, during the latest handset ramp, Taiwanese ODMs have taken the primary lead for servicing large OEM contracts.


ODM, OEM and handset market
Taiwanese ODMs not only manufacture but also design the products that are typically branded by l a rge OEMs. Traditionally ODMs made products in the motherboard and notebook segment. For example, Quanta Computer makes millions of notebooks for Dell and Hewlett- Packard. Select ODMs, however,envisaged tremendous increase in handsets, and allotted resources to R&D before handset market exploded. Such ODMs—BenQ, Arima, Compal—are reaping financial rewards, as OEMs continue to rely on ODMs for design and manufacturing.

Research shows that 12.8 percent of the global handset market is served by Taiwan-based ODMs. For 2004 it is estimated that handset output from Taiwan will reach 72.69 million units, an increase of 85 percent year-onyear. Figure 1 shows continuous rise in handset production during the next four years.

The OEM-ODM relationship is critical. iSuppli estimates 22 percent of Motorola’s handset revenues are contributed from ODM providers such as BenQ and Compal. Table 1 shows select ODMs and their OEMs. A great day in the handset OEMODM relationship was August 24, 2004, when Nokia engaged BenQ to produce mid-range handsets to complement Nokia’s low- and highrange handset portfolio. This was Nokia’s first departure from its traditional vertical manufacturing approach. The initial Nokia order to BenQ is for 1.5 million clamshell GPRS models.



The two top handset ODMs are BenQ and Arima. Both are shipping more than one million handsets per month. In 2004, BenQ is projected to sell 17-18 million units, while Arima, 12 million units. Not only are these ODMs winning large volume contracts, but they are also benefiting from higher margins compared to the ODM computing sector. Gross m a rgins for the handset space can reach up to 25 percent. Notebooks, on the other hand, have experienced significant margin erosion. In August last notebook specialist Inventec reported its lowest gross margin in the history of the company at 4.98 percent.



Additional margin leverage is available to those ODMs who extend their capabilities to include sales and marketing functions. BenQ has increased its own-brand manufacturing (OBM) shipments to select markets across the world. A la Michael Dell and his industry-altering implementation of the “direct model,” BenQ is successfully capturing more margin by eliminating the middleman—the OEM—some of the time. It should not be a surprise that as BenQ gobbled up market share in geographies like Taiwan (where it is the no. 2 handset provider), the direct, retail competition with its larg e s t customer, Motorola, could impact this relationship. It appears that Motorola is not too happy with BenQ. As a result, Motorola has yet to announce any new handset wins for BenQ in H2CY04 (at the time of this writing). On the other hand, Compal, Chi Mei and High Tech Computer have announced new Motorola wins for this period.



Furthermore, to defend its market share in Taiwan, Motorola recently announced that it will enhance its marketing and sales presence in the local distribution channels of Taiwan. While Motorola has relied on large domestic telecom carriers for sales, it will now aggressively market in the smaller niche markets in Taiwan, which are typically served by secondtier ODMs.

Though most handset R&D activities are done in Taiwan, 55 to 65 percent of ODM mobile devices are manufactured in China. To satisfy the growing demand for handsets, there is a need for OEMs, ODMs and component suppliers to work together to effectively plan and monitor the rapid demand shifts that are typical of any tech-based marketplace. The key handset ODM relationships in China are shown in Table 2



As ODM’s have benefited from the rise in handset shipments, so has the handset component supply-base that manufactures the parts that successfully made the AVLs (Approved Vendor Lists) at the ODM or OEM. Handset PCBs increased 40 percent in the first six months of 2004 compared to 2003 sales figures. Companies such as Compaq Manufacturing, Unimicron Technology, Unitech Printed Circuit Boards and Wus Printed Circuit Boards have all experienced significant growth in 2004. In particular, Unitech increased its forecast by 8 million units in 2004, with shipment projected at 68 million units.



Baseband, RF chips, and driver integrated circuits have also surged in 2004 as companies such as MediaTek, Ultrachip and Sitronix reached record shipments. Figure 2 shows mobile handset semiconductor market forecast by functions.

Considering that camera phones have slowly garnered mass acceptance due to usability and quality improvements, optical lens makers such as Asia Optical and Largan Precision saw heavy demand in 2004. Also, camera module makers such as Ability, Chicony and Premiere have experienced sales increases as well.

Innovation critical to ODM success
Over the last three years, ODM role within the electronics supply chain has radically changed. The “high volume, low mix” moniker typically associated with the ODM reference has been altered.


Today we are seeing innovative efforts by ODMs that create new possibilities in the technological world. Specifically, innovation within the handset space cannot be overlooked. Recently the marketplace has seen a flurry of innovative features including multi-megapixel camera phones and GPS functionality. For example, Inventec Appliances will offer six models of multimegapixel camera phones. The phones are smaller and lighter. CMCS recently began selling a new ultra-thin camera phone that is only 1.39cm thick.

The operating systems that govern the functions of these cameras also are experiencing innovation. For instance, Motorola is introducing new Linuxbased smartphones in the near future. These were designed by CMCS with support from Motorola’s R&D in Beijing.

With the right OEM relationships, a well-defined product roadmap, deep R&D resources, and eff i c i e n t manufacturing processes, ODM handset providers appear to be well positioned for future success. However, the following risks should be noted for the future of ODM handset providers:

• ODM supply chains have yet to be tested in times of allocation.
• Several ODM providers are highly dependent upon the revenues of one or two OEMs. (For example, more than 60 percent of Compal Communications’ revenue comes from Motorola.)
• Consolidation of manufacturing in Asia may result in potential supply chain disruptions if a health epidemic such as SARS hits Asia.