Outsourcing: New phase in manufacturing and civilization

Two buzzwords till recently in business strategy are fading. They are being eroded by a word that conveys a concept almost opposite to that of the two. The fading words are "horizontal integration" and "vertical integration."
The word replacing them is "outsourcing." While integration involves doing more and more within a company to the exclusion of other companies, outsourcing involves doing less and less within a company and getting done more and more by other companies. Three or four years ago companies chose between vertical integration and horizontal integration to be competitive; today, to achieve the same goal they choose an idea-outsourcing-conceptually opposed to integration!
I have not seen a business idea changing so abruptly in such a short period. The rapidity and radicalism of change shows the swiftness at which global business has changed. A recent survey by the US investment-service provider Bear, Stearns & Co. on outsourcing shows that the decision to outsource stems from the need to cut down product unit cost, direct labor, fixed overhead costs, and time to market. The same reasons had made horizontal/vertical integration a great business strategy.
I think an equally important reason for outsourcing is that as technology advances, a large number of leading edge processes, especially in electronics industry, are required, which may not be available under one roof. The number of processes both at the front and back ends in the move from design to system integration through silicon has increased tremendously. Manufacturers are becoming increasingly "manufacturingless." The survey polled 107 companies and found that 81 percent of them will boost their outsourcing efforts. Will "manufacturing-lessness" drive manufacturers to become completely "manufacturingless?"
Look at the evolving situation in the semiconductor industry. Start where the product begins: design. Design work is increasingly outsourced to IDTs (independent design teams) or ODMs (original design manufacturers). Gone are the days when designs were an invaluable trade secret. Even where design is done in-house, a large number of IPs are outsourced or purchased. There does not seem to be any company that can cater entirely to its own needs of IPs, and this situation will aggravate. From design lab, the product goes to the production floor. Manufacturers are divided into fabless manufacturers and integrated device manufacturers (IDMs).
Fabless outsourced wafer production, while IDMs did not. This distinction is vanishing. Almost every IDM outsources wafer production. Leading IDMs, including Intel and Motorola, have confirmed that they would be outsourcing more in the future. In the last three years, Motorola has cut down its facilities from 28 to 10. From manufacturing floor, the product goes for assembly and testing. Manufacturers cavil that to keep pace with latest silicon designs, a new ATE (assembly and test equipment), costing US$4 million, is required almost each year.
This pace may even become faster. So manufacturers are increasingly turning to back-end contract service providers who provide turnkey assembly and testing services, and packaging services. In other words, from design through production to assembly and testing and packaging, everything will gradually be outsourced. So what will be left for the manufacturer to do? Will he merely define and market products? Or will these too be outsourced? Throughout industrial history companies leveraged on product innovation based on their own designs and manufacturing expertise.
The industry's movement from integration to outsourcing is a movement towards disintegration. Ironically, this disintegration is integrating the world like nothing before. For many products, various countries will contribute to their march from concept to consumer. This will be a new phase in the march of civilization.
Sigmund Freud wrote: "Civilization is a process in the service of Eros, whose purpose is to combine single human individuals, and after that families, then races, peoples and nations, into one great unity, the unity of mankind."
Combining single individuals into a unity envisaged through the ages is still a distant dream; but with outsourcing combining the efforts of single individuals into a global product in a global market, one is inspired to pursue the dream.
You can reach Kirtimaya Varma at kirti.varma@rbi-asia.com