What does Philips’ decision to stop making television sets for sale in the US and Canada have to do with the iPod or Videocon’s bid for Motorola’s mobile phone business? The short answer is: Everything.
Philips will continue to sell television sets in the US and Canada, but while the sets will sport the Dutch electronic firm’s brand they will be made by someone else. Contract manufacturing or electronic manufacturing services—or EMS as some prefer to call it— isn’t new, except that over the past few years it has evolved into a very nuanced play of the risk-return or effort-return equation. Companies all over the world are discovering that they can make money from ideas, cutting-edge technology (read: IP, or intellectual property) and brands (which are, at the end of the day, one form of IP). They are also discovering that while they can generate more revenues from actually making the products or delivering the services arising from such IP, they will also end up spending a lot of money doing this.
Illustration: Jayachandran/ Mint
To put it simply, everyone has realized that they can make more profits by not actually getting their hands dirty manufacturing products or delivering services.
In some cases, the company decides to follow this approach on its own; in other cases, its integrated operation runs into losses and shareholders force it into the decision.
That presents an opportunity for companies in India and China, which is where Videocon’s bid for Motorola’s cellular business comes in. It helps that Videocon has been granted a licence to start mobile telephony services in India.
The terms under which Motorola will sell its business aren’t known yet. It is unlikely, however, that the company will allow the buyer to use the Motorola brand for too long (much like IBM didn’t want Lenovo to use its PC brand for very long after the purchase). Caveat: the way Motorola has been managed over the past few years, it could well happen that the firm makes yet another error of judgement and allows the buyer of its mobile phone business use the brand in perpetuity.
Brands and IP—as Steve Jobs’ Apple has shown, especially with the iPod (which is essentially a hard disk with a nifty and innovative user-interface and a fine piece of software accompanying it)— are more valuable than manufacturing plants. And no, Apple doesn’t make the iPod itself. It’s made in China by an EMS firm that also recently opened shop in India.
Is India ready for the contract manufacturing challenge in electronics? Write to us at firstname.lastname@example.org