Described as the third wave of handset manufacturing, Original Design Manufacturers are closing in on the market and can now offer an ideal opportunity for network operators to cut costs. Mark Paxman, consultant, wireless technology at PA Consulting explains.
Handset complexity has reduced dramatically over GSM’s lifetime This is simply illustrated in Figure 1 (right) which deals with the number of components within a ‘basic’ GPRS handset). The challenge for a handset manufacturer has changed from ‘making it work’ — meeting the complex type approval and operator approval requirements — to ‘making it cheaper’ — engineering the device and its manufacture for lowest cost.
Though the complexity of ‘making it work’ should not be underestimated (and still requires skilled resource), simplification of handset engineering has dramatically changed handset vendors’ production models and allowed new entrants into the market — giving great opportunities for network operators to reduce costs, provided they can effectively manage new suppliers.
Recently interest has turned towards ‘Original Design Manufacturers’ (ODMs) — a new category of manufacturers who design and build products under contract to wholesale customers, and are happy to hide their own brand and promote only their customer’s brand. This distinguishes them from Original Equipment Manufacturers, whose own brand appears prominently on the product, and contract manufacturers who manufacture, but do not design products. Often the ODMs design starts from a reference design provided by a chipset vendor as a tool to promote chip sales. Figure 2 (opposite page) shows the distinction between categories of manufacturers.
As chipset vendors achieve higher levels of integration, and offer more complete reference designs (detailed descriptions of the design including component lists and PCB layouts), it has become much easier and cheaper to develop a handset. At the same time cost pressures have forced European/US handset manufacturers to move production to lower cost Far Eastern countries, and outsource handset production to more flexible contract manufacturers.
The third wave is just beginning: given intense pricing pressures and a need to manage expensive engineering design resources, handset manufacturers are starting to source complete handsets from the Original Design Manufacturers. The handset vendor simply specifies the device and ensures that it is branded with its own logo. Typically ODMs are major far-Eastern manufacturers with a desire to break into wireless and a great deal of experience in designing low cost products. By purchasing a reference design from a chipset vendor and investing in development and test equipment they can develop competitive products for a fraction of what it would have cost even a few years ago.
This is exactly the same model as exists in the laptop world. Though our laptops are branded HP, Dell or Apple and the design centre may be in the USA, the detailed engineering and production of the entire product is carried out by an ODM manufacturer, probably in Taiwan, based around an Intel or AMD chipset and other off-the-shelf components (LCDs, hard discs, memory).
Most of the major handset manufacturers recognise the importance of ODMs. Some have already sourced handsets through this route while others are considering it. We believe that one major handset manufacturer today sources around 40% of its handset production in this way. The relationship, however, is not without its difficulties — for example Motorola and DBTel (its former ODM partner) have engaged in protracted litigation over trade secret infringement.
So, why should this matter to mobile network operators? If it works for handset manufacturers, it should work for network operators. The rise of the ODM means that there is now, in the Far East, a set of handset manufacturers with competitive and very cheap products, willing and able to customise them to operators’ needs and suppress their own brand in favour of the operator’s. The potential for operators to diversify their range of handsets, cut subsidy costs and source products tailored to their own brand or niche is enormous.
To realise this potential, operators need to:
* be an educated buyer: have a clear view of the functions and features needed in the product, and the chipset vendors’ roadmaps to implement them
* understand how to work with these ODMs: how to specify products in a way which helps both parties
* make it easier for the ODM to do business: ODMs have excellent design and production skills but are new to the cellular market. Operators who work with them should reap the rewards. For example, by licensing cellular intellectual property on the ODM’s behalf.
Be an educated buyer
The ODMs have less experience in the GSM market than the more established players. In addition they have little influence over the chipset vendors and have to ‘take what they’re given’. As a result, network operators procuring from ODMs need more information about chipset features and the design, manufacture and approval of GSM handsets to ensure that the end product will be produced in a timely manner and at the right price. More specifically, operators need to understand the ODM’s (and its chipset vendor’s) roadmap.
Is this procurement a one-off expedient purchase, or is the operator looking to recoup his investment over a longer term relationship including, say, 2.5G or 3G handsets? Does the ODM have a clear view of how to evolve his handset platform to cheaper or more capable products? What are the ODM’s manufacturing and testing strengths? Does the ODM have a track record in consumer devices like handsets? Does the ODM have a credible plan for the complex Full Type Approval Procedures?
Understand how to work with the ODMs
Network operators have long been criticised by handset vendors for producing over-complex specifications for their products which can get in the way of rapid product development. ODMs are likely to have a product already in development when they are approached by a network operator. Furthermore this product will be based on an off-the-shelf chipset and reference design. The ODM will only be able to offer limited customisation of the product to meet the operator’s need. Operators need to understand this and be flexible when specifying the product.
Make it easy for the ODM to do business
ODMs are very skilled at design for manufacture, but have limited exposure to the GSM market. In particular the complex GSM licensing regime can be alien to them.
It has long been known in the industry that licences to fundamental IP embedded within the GSM standards are expensive. Large manufacturers can negotiate favourable deals through cross licensing of their own IP, or through other commercial arrangements. Small manufacturers have no such leverage, and the IP licensing costs they incur are passed directly onto the network operator as part of the handset’s wholesale price.
If network operators could, instead, negotiate deals with the IP holders, using the power of their global procurement and their own IP portfolios as leverage, handsets could be sourced at lower cost and from multiple ODMs.
In conclusion, we believe that ODM manufacturers offer a significant opportunity for network operators to source own-brand handsets at very competitive prices, but a number of hurdles need to be overcome. As stated earlier — ‘if it works for handset manufacturers, it should work for network operators’.