IBM essentially created the personal computer industry. It won’t be long, however, before the company’s nameplate disappears from PCs and IBM leaves the business, except for the joint venture it recently formed with PC maker Lenovo. Founded in 1984 as a distributor in China of equipment made by IBM and other companies, Lenovo will eventually affix its own logo to the PCs. Certainly, Lenovo has come a long way. So has Sanmina-SCI, the actual manufacturer of some IBM PCs in the United States: It recently acquired some of the factories where the computers are made. Like Lenovo, Sanmina assembles products for a variety of well-known brand owners. The company has expanded its role, however, and now also designs and engineers custom electronic components. These two firms are representative of a host of formerly anonymous makers of brand-name products that are stepping up and pushing the brands themselves aside. Indeed, the complexities of IBM’s environment challenge the common view of contract manufacturing as no more or less than the anxious resort of large brand owners suffering from thinning profit margins.
When Your Contract Manufacturer Becomes Your Competitor
Reprint: R0609J
PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Shanghai Automotive Industry Corporation (SAIC) started out manufacturing vehicles for Volkswagen and GM; now it’s preparing to sell its own cars in China, Europe, and North America. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside.
In this article, the authors explore the double-edged relationships original equipment manufacturers (OEMs) forge with their contract manufacturers (CMs). On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities—research and development, product design, and marketing, for instance. On the other hand, an OEM that retains a contract manufacturer may find itself immersed in a melodrama replete with promiscuity (the ambitious CM pursues liaisons with other OEMs), infidelity (the OEM’s retailers and distributors shift their business to the upstart CM), and betrayal (the brazen CM transmits the OEM’s intellectual property to the OEM’s rivals or keeps it for itself when the contract is up).
OEMs cannot simply terminate their outsourcing arrangements—they need contract manufacturers in order to keep specializing, adding value, and staying competitive. But OEMs can manage these relationships so that they don’t become weak or the CMs too strong. Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers.