Publicated in Proceedings of the IEEE EMS International

Engineering Management Conference, August 2000, pp.458-463.

ROLES AND STRATEGIES OF CONTRACT MANUFACTURERS

IN THE TELECOMMUNICATIONS INDUSTRY
Pierre Hadaya, lisabeth Lefebvre and Pierre-Majorique Lger
cole Polytechnique de Montral
Mathematics and Industrial Engineering
P.O. Box 6079, Centre-Ville Station
Montreal, Quebec, Canada, H3C 3A7

ABSTRACT

also other activities such as the distribution of their

products to the final customer.

This paper illustrates how contract manufacturing

is playing an increasingly important role in the
telecommunications
industry.
Traditional
telecommunications
manufacturers
need
to
concentrate on the activities which can bring the
highest value to their customers, while they tend to
subcontract other activities, especially if they do not
have the needed core competencies. In fact, most
telecommunications manufacturers are outsourcing
some of their manufacturing activities to CMs
(Contract Manufacturers), also called CEMS
(Contract Electronic Manufacturing Services). CEMS
manage a portfolio of plants located around the world
using flexible, modular and reconfigurable assembly
systems. Two case studies were undertaken in order
to demystify the new and diversified role of CEMS in
the telecommunications industry. Our findings have
enabled us to develop a typology of outsourcing
strategies for telecommunications manufacturers
which correspond to the different roles of CEMS.

This paper will therefore investigate the roles and

strategies of CMs, also known as CEMS (Contract
Electronic Manufacturing Services), in the
telecommunications industry. We will first present
some trends in the thriving CEMS industry. Second,
results from case studies with two leading
telecommunications manufacturers will illustrate the
major competitive imperatives and the differentiated
strategies of both parties. Finally, a five-stage
evolutionary model will illustrate how the
collaboration between OEMs and CEMS changes
over time.
II. CEMS: A THRIVING INDUSTRY
For many years, OEMs in various industries have
been outsourcing some of their assembly activities to
CEMS when demand was high (Tsay, 1999).
However, it was IBM that, in the early 1980s,
decided to outsource all of the manufacturing
activities for its Personal Computer to SCI, a leading
CEMS (The Economist, 2000). Today, the role of
CEMS has evolved so that they are more than simple
PCB (Printed Circuit Board) assemblers; they offer a
wide range of services to OEMs including design
collaboration, production engineering, system
manufacturing, testing, field support, logistics
services, after-sales services, etc (Electronics Buyers
News, 1999).

I. INTRODUCTION
For
many
years,
original
equipment
manufacturers (OEMs) manufactured their products
in-house. However, the advent of the trend towards
globalization, shortened product life cycles, just-intime manufacturing, load-leap chip manufacturing
timelines and increasing pressure to better respond to
their customers demands are only some of the
elements that are pushing OEMs to re-evaluate their
manufacturing strategy (Collins and Bechler, 1999).
The current trend is to collaborate with contract
manufacturers (CMs) in order to optimize their
business processes and become demand-supply chain
management leaders. Today, OEMs are starting to
outsource not only their manufacturing activities but

The CEMS industry continues to expand at a very

impressive rate; in fact more than twice as quickly
as the electronics industry as a whole (The
Economist, 2000). The CEMS market (Fig. 1) is
expected to grow tremendously, from close to $45
billion in 1998 to $130 billion by 2003 (The
WCEMSM, 1999).

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Although the CEMS industry today is largely

concentrated in the U.S. (60% of the market in 1998),
OEMs in Europe are starting to outsource more and
more of their activities to CEMS, while Asia is
expected to place an ever greater emphasis on
contract manufacturing. North America, especially
Mexico, where wages are low and the CEMS are
located close to the huge U.S. market, will continue
to experience strong growth.

140,000
109,643

140,000

90,730

100,000

Revenues ($M)

Revenues ($M)

The collaboration between CEMS and OEMs is

predicted to grow fastest in the telecommunications
industry (Fig. 2), where the strategies of the leading
OEMs, such as Ericsson, Cisco, Lucent, Motorola,
Nokia and Nortel Networks, depend greatly on
outsourcing (Electronic Buyers News, 1999).

129,692

120,000

73,602

80,000
60,000

years, only big and small CEMS will remain, since

the medium-sized ones will either merge with each
other to remain competitive or be assimilated by the
big players.

58,097
44,937

40,000

100,000
80,000
60,000
40,000

20,000

20,000

0
1998

1999

2000

2001

2002

2003

Computer

Total CEMS Market

2003

Source: WCEMSM, 1999

Fig. 1: Worldwide CEMS Market from 1998 to 2003

Fig. 2: CEMS in the Telecommunications Market,

1998 versus 2003

The ten leading CEMS, including Solectron,

Celestica, Flextronics, Jabil Circuit, Sanmina Corp
and SCI Systems, represent almost 50% of the
worldwide CEMS market and some of them display a
very impressive performance (Table 1). These top ten
CEMS have manufacturing facilities in America,
Europe and Asia, offer a wide range of outsourcing
services (design, quality testing, prototyping, mass
manufacturing, distribution and logistics, etc.) and
are all ISO 9000 and ISO 14000 certified (or on the
verge).

III. EMPIRICAL EVIDENCE: RESULTS AND

DISCUSSION
A. Methodology
In order to better understand how the relationship
between OEMs in the telecommunications industry
and their CEMS evolves over time, we have gathered
empirical evidence from two case studies: one on
Nokia, with a specific focus on two product lines
(switches and base stations), and one on Nortel, with
a focus on one product family, namely switches.

Table 1: Performance of Some CEMS

Growth (19971998)
Celestica
60%
Flextronics
74%
Solectron
43%
Source: Annual Reports

Telecommunications

1998

Source: WCEMSM, 1999

Company

120,000

The two case studies rely on different but

complementary evidence. Technology- and industryrelated literature allowed us to gather secondary data
while on-site interviews in Finland, Canada and the
U.S. were conducted with industry specialists, policymakers, Nokia and Nortel representatives, and their
business partners.

Growth (19981999)
66%
62%
59%

The CEMS industry is also rapidly consolidating.

In 1998, there were more than 100 mergers (The
Economist, 2000). Analysts expect that in a few

B. Three major competitive imperatives

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Based on the two case studies, three major

competitive imperatives seem to emerge: advances in
technologies, the overriding importance of velocity,
and cost reduction (Cimento, September 1999).
These imperatives are mutually reinforcing,
accelerating the collaboration between OEMs and
CEMS.

production line anywhere around the world, within a

couple of weeks. Being flexible and located close to
their markets, they allow OEMs to introduce new
products faster, a particularly acute issue for the
telecommunications industry. For instance, Nokia
introduces more than 30 mobile phones every year.
Furthermore, speedy customization is a must. As
Koichi Nishimura, president and CEO of Solectron,
once said Each day our customers change an
average of 2 out of 3 orders. They either want to
change the numbers, the manufacturing processes or
want something else altogether. Thats why its
critical that we can be responsive and flexible
(Contact, 1999). Moreover, Nokia and Nortel will not
sacrifice sales if demand suddenly exceeds supply,
since CEMS can quickly adjust their manufacturing
capabilities to fluctuating volume requirements.

1) Advances in technologies
Advances in manufacturing technologies (surfacemount technologies, fine-pitch, etc.) have pushed
large multinationals such as Nortel and Nokia to rely
more on CEMS. Consider the example of surfacemounting. Surface-mounting is a technology that
places miniaturized components directly on the
circuit board without the need of conventional wiring
and soldering (Brathwaite, 1999). This technology
offers a degree precision and compactness that
permits the assembly of small devices like cell
phones and video cameras. However, the equipment
necessary for surface-mount technology is very
expensive and its maintenance demanding and costly.
Consequently, the equipment needs to be used at full
capacity. Nokia and Nortel avoid large and
unnecessary capital investments by subcontracting
manufacturing activities, while their CEMS
concentrate on manufacturing efficiency since they
have the know-how to use the technology properly
and enough production volume to justify the expense.

3) Cost reduction
Outsourcing is known to be a simple and effective
strategy to improve the bottom line by reducing costs.
Through high volumes, CEMS can drastically cut
production costs. In fact, some CEMS have greater
purchasing power than Nokia or Nortel has
individually since they have several large
multinationals as customers. By buying basic parts in
large quantities, CEMS pass along significant savings
to OEMs in material and component costs.
Furthermo re, very sophisticated manufacturing
activities require enormous investments in employee
training. For Nortel, employee training has always
been an overriding imperative to ensure top quality.
But training costs are now transferred to CEMS,
which must meet Nortels quality standards.

ICTs
(information
and
communications
technologies), in particular Internet, Supply Chain
Management software and ERP systems, allow Nokia
and Nortel to communicate with their business
partners, optimize their business processes and better
manage their product life cycles. Outsourcing to
CEMS is not efficient without the use of standardized
communications, digital design, groupware, etc (The
Economist, 2000; Tracey, 1999). Nokia and Nortel
both rely extensively on ICTs. For example, Nortel
has developed a private network with one CEMS to
streamline the transfer of technical data between the
two entities. One has to acknowledge that a Cisco is a
step ahead in embracing ebusiness and the use of the
web (The Economist, 1999).

Collaborating with CEMS has resulted in

significant cost reductions for Nokia and Nortel by
eliminating warehouses, selling manufacturing
plants, slashing stocks and improving distribution.
C. Differentiated specific strategies
Even though Nokia and Nortel are responding to
the same three competitive imperatives, as mentioned
in the previous section, they rely on CEMS for
different specific strategies.

2) Overriding importance of velocity

The increasing importance of velocity also seems
to be a key factor forcing OEMs to collaborate with
CEMS. Velocity can be defined as the optimal speed
at which physical and virtual interactions must take
place in order to reach the market at the consumers
desired place and time (Lger et al., 2000; Magretta,
1998a, 1998b). Today, CEMS can ramp up a

1) Nortel Networks
Nortel Networks has close relationships with two
CEMS: CMAC for the assembly of its chassis
(electromechanical manufacturing) for many years,
as is the case with most OEMs, and, very recently,
SCI for the procurement and assembly of some of its
non-complex subsystems.

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As well as responding to the common driving

forces mentioned above, Nortel outsources some of
its sub-assembly activities to SCI because of the high
quality of its work. According to Nortels norms, the
quality of its products must be transparent to the final
customer (Computing Canada, 1999). Therefore, the
CEMS must offer, at a minimum, the same quality
that Nortel would if it manufactured the whole
product in-house. To emphasize this focus on quality,
Nortel conducts qualification audits before choosing
its business partners and control audits during and
after the sub-assembly of a specific line of products;
in addition, it always requires the CEMS to develop a
prototype of a specific sub-assembly before it decides
to outsource a subsystem manufacturing process. It is
also important to mention that all Nortels partners,
including the CEMS, are ISO 14000 certified or soon
to be so.

family of products. CEMS involvement is less

important for switches than for base stations. The
main reason for this is that switches are highly
customized and generally manufactured with a maketo-order strategy. Nokia only outsources to strategic
partners non-complex, non-core or off-the-shelf
components and subsystems, whose proportion varies
from 20% to 30% depending on the final product.
CEMS are granted the responsibility of the whole
sub-manufacturing cycle, from subsystem design to
subsystem testing. For the customized portion of the
switch, Nokia carries on all other required
manufacturing activities internally.
Within the base station product family, some
second-generation radio access products are
considered mature. Even if these base stations require
many
ASIC
components
and
subsystems
development, the production volume justifies their
gradual
complete
outsourcing
to
contract
manufacturing. In fact, SCI Systems recently bought
Nokias Oulu manufacturing plant to undertake the
box building for the second-generation base station.

At present, Nortel only outsources the assembly

of its subsystems to SCI Systems, while all other
manufacturing activities (subsystem testing, system
manufacturing, etc.) are still done internally by
Nortels own personnel. As well, switch subsystems
that respect the following three criteria are
subcontracted:

D. The evolving relationship between OEMs and

CEMS
Based on the empirical evidence gathered from
the two case studies, we propose a conceptual model
that reflects the evolving relationship between OEMs
and CEMS (Fig. 3).

1) The corresponding product is mature and has no

breakthrough technologies;
2) Nortel will not outsource the assembly of a core
subsystem
that
could
jeopardize
the
competitiveness of the organization;
3) Nortel outsources its subsystems to SCI according
to its cost of sell. Cost of sell represents the
numbers of units sold versus the percentage of
time for which they monopolize the line. It
outsources to SCI those subsystems that
monopolize the assembly line while not many
units are sold on the market.

At the lower end of the Figure 3, a generic value

chain for network equipment is illustrated. It
represents the main activities related to the network
equipment product value chain. The five evolutionary
stages are represented on the vertical axis, from the
least complex to the most, corresponding to the level
of relationship and integration between the OEM and
its CEMS.

We believe this is only the beginning of a long

relationship between Nortel and its CEMS: it may
adopt the same outsourcing strategy as Bay
Networks, a company developing products for the
Internet that was acquired by Nortel in 1998. Bay
Networks is known for outsourcing all of its physical
activities to its CEMS.

The first stage, which constitutes the lowest level

of investments for both parties, is called noncomplex system contracting. This stage corresponds
to a limited outsourcing relationship between the
OEM and its CEMS. A first-stage OEM will
outsource the manufacturing of non-complex
subsystems and modules such as electromechanical
manufacturing (chassis), but will still carry out all
other sub-manufacturing activities as well as design,
procurement, testing and final assembly activities.

2) Nokia
The case of Nokia is very noteworthy because the
Finnish manufacturers network equipment division
has been outsourcing to CEMS for many years. Our
case study reveals that the level of relationship
between the OEM and the CEMS depends on the

Turnkey subsystem contracting is the second

stage of partnership. At this point, the OEM
outsources the complete sub-manufacturing cycle for

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Less complex

More complex

Evolution stages

Life cycle
fulfillment

Box building for

the whole familly
of products

Mature products
box building

Sub-systems
turnkey
contracting

Non-complex
subsystem
contracting
Recycling

After-sales

Integration

Distribution

System testing

System
Manufacturing

Sub-system
testing

Sub-system
manufacturing

Outsourcing to 3rd
party recycling (3PR)

Procurement

Design Subsystem

Outsourcing to 3rd
party logistics (3PL)

Design
System

Outsourcing to CEMs

Product Value Chain

Collaboration between
CEMs and OEM

a non-complex subsystem (e.g. a power supply

subsystem) and/or a subsystem for which the OEM
Fig. 3: Evolutionary stages

does not have or does not wish to retain the required

competencies (e.g. an ADSL card in a Nokia switch).
In other words, the CEMS is given the responsibility
of the whole set of sub-manufacturing-related
activities such as subsystem design, procurement,
sub-manufacturing
and
testing.
Most
telecommunications manufacturers are currently at
this stage.

contract manufacturers. For example, CEMS must be

involved early in the product development stage in
order to provide the OEM with manufacturing
specifications.
The final stage is called life cycle fulfillment. All
physical activities related to the life cycle of a family
of products, including integration, after-sales service
and recycling, are outsourced to third parties. At this
stage, the OEM becomes completely fab-less while
CEMS offer their services across the entire product
life.

The third stage is called mature products box

building. At this stage, the CEMS acquires the
responsibility for the complete manufacturing cycle
for a mature product (from subsystem design to
system testing). Mature products are products that
have already been ramped up and have reached a
mature development stage in terms of both
manufacturing processes and technology. The OEM
is still carrying out the ramp -up of new products and
retains a vast amount of manufacturing expertise.
Leading-edge telecommunications manufacturers are
currently at this stage.

The model presented in Figure 3 also illustrates

which activities are usually outsourced at each stage.
Each activity can be outsourced to one or many
strategic partners such as third party logistics (3PL)
and third party recycling (3PR). Even though this
paper mainly focuses on CEMS, other strategic
partners play different roles and have different
interests that must be balanced appropriately.

Box building of the whole family of products is

the fourth stage, which consists in the complete
outsourcing of the manufacturing cycle for both new
and mature products. In other words, the CEMS
acquires the responsibility for the complete
manufacturing cycle for an entire product family of
an OEM. At this point, OEMs must rely almost
completely on the manufacturing expertise of their

IV. CONCLUSION
CEMS now play a crucial role in the
telecommunications industry. They are becoming
more
experienced
and
knowledgeable
in
manufacturing techniques than OEMs in this
industry. This is a win-win situation. On one hand,

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OEMs are looking to CEMS for faster product

introduction, lower costs and capital investment
avoidance, and increased agility and flexibility. On
the other hand, CEMS can achieve cost reductions
because of high volumes, gain cross-learning from
manufacturing products for their major customers
(which are often direct competitors) and expand their
services beyond manufacturing.

BRATHWAITE, N.E. (1999). EMS providers must

take the technology lead. Surface Mount
International Conference and Exposition. SMI 98
Proceedings, pp. 117-123.
CIMENTO, A.P. (1999). Whats behind the moves
to virtual manufacturing?. Machine Design,
September.
COLLINS, R. and B. KIMBERLY (1999).
Outsourcing in the chemical and automotive
industries: Choice or competitive imperative. The
Journal of Supply Chain Management, Fall, pp. 4-11.

The two case studies illustrate how the major

competitive imperatives largely dictate an OEMs
reliance on CEMS. They also demonstrate how the
outsourcing strategies of OEMs differ not only from
each other but also for each family of products
(switches versus base stations), as well as how the
relationship between CEMS and OEMs evolves over
time. CEMS seem to move from non-complex
subsystem manufacturing (stage 1) to full life cycle
fulfillment of new products (stage 5). Will OEMs
concentrate more and more on their core
competencies (design, marketing, sales) and
outsource the other activities necessary for the
development of their family of products to CEMS,
whether these are simple or complex, new or mature?
Will OEMs, as some analysts predict, conduct no
more physical activities by 2010? If so, stage 5 may
raise issues such as design secrecy when CEMS are
involved in early design requirements, a shift in
power since CEMS could become more powerful
(especially in terms of buying power) than OEMs,
and the transfer of tacit knowledge gained from
competing products.

DUNN, D. (1999). No longer just board stuffers,

CEM will enter the new century as a proven
industry. Electronics Buyers News, June 1999.
DUNNE, J.K. (1999). EMS boosted by outsourcing
trend. Electronics Buyers News, February 1999.
LGER, P.M., E.LEFEBVRE, P. HADAYA and R.
GAUTHIER-OUELLET, Optimizing Product Value
Chain, Procedings of the 9th Conference on
Management of Technology, Miami, February 2000.
MAGRETTA (1998a). The power of virtual
integration: An interview with Dell Computer's
Michael Dell, Harvard Business Review, Boston,
Mar/Apr 1998, Vol. 76, no. 2; pp. 72- 85.
MAGRETTA J. (1998b). Fast, global, and
entrepreneurial: Supply chain management, Hong
Kong style: An interview with Victor Fung,
Harvard Business Review, Boston, Sep/Oct 1998;
Vol. 76, no. 5, pp. 102-115.
MENEZES, J. (1999). Analysts question Nortels
job-cutting scheme. Computing Canada, January.
WCEMSM (1999). Sixth edition, Electronic Trend
Publication Inc., San Jose, California, USA.

The conceptual model we have proposed in this

paper must be further validated with other
multinationals in the telecommunications industry.
Future research should be conducted in different
industry segments to confirm whether the
relationship between OEMs and their CEMS evolves
over time in the same way as in the
telecommunications industry.

TSAY, A.A. (1999). The quantity flexibility

contract
and
supplier-customer
incentives.
Management Science, Vol. 45, no. 10, pp. 13391358.
TRACEY, B. (1999). Using the Internet to increase
the efficiency of the value chain [PCB contract
manufacturing].
Electronic
Packaging
and
Production, Vol. 38, no. 14, pp. 70-73.

V. REFERENCES
THE ECONOMIST (1999). Cisco@speed, June
1999.
CONTACT 1999). Solectron An unknown global
company, October.
THE ECONOMIST (2000). Have factory, will
travel, February.
BALJKO, J.L. (1999). Supply chain successes
demand new skills of chip makers. Electronics
Buyers News, November.

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