Exactly what knowledge do market-leading companies gain from vertical integration? My thought process here considers a very high-level product design process. Though I will portray that process as linear and sequential, the reality is messier, iterative, and probably chaotic.
For my purpose, the process starts with a market spec, which defines the customer experience (a display that can be seen from anywhere in a room), and then moves to a design spec, which defines the technical attributes of the product (a viewing angle of 110 degrees). From there, it moves to architecture, where the decisions are made about which technologies will be used and what tradeoffs will be made in creating the product.
Architecture defines what is done in hardware, what is done in software, whether to use serial or parallel processing... things like that. Decisions also need to be made as to whether the design should use traditional technologies or more leading-edge ones.
Over time, significant shifts in technology have delivered considerable advantages to their adopters. As examples from the silicon world, I have capacitors that enabled enhanced analog performance, the use of multiple layers of metallization to simplify integrated circuit interconnection and reduce die size, and copper interconnect to overcome aluminum’s resistivity and increase circuit speed.
All these examples are very old, but they illustrate the point quite well. Each technology offered an enormous advantage at the product level, but the first adopter was taking a huge risk on whether it would work in the timeframe required (or at all). As a general guideline, consider that a circuit running at a certain speed would need half the circuitry if it could run twice as fast to do the same job. Think of the cost advantage if your product ran twice as fast as those of your competitors and needed half the number of similarly priced components, all because of your technology and architecture.
Vertically integrated companies can bring their architects and process technology experts together to work out the benefit-risk equation. Process experts can propose technology alternatives and assign success probabilities. Architects can weigh the product impact and even influence the market spec to improve features or capability definition. Vertical integration provides a coordinated mechanism for making better architectural decisions.
The majority of what passes for electronic design today (yes, I am being a bit harsh, but not by much) is laying out reference designs from different component suppliers to fit a new product shape. (This leads to an unnecessary proliferation of resistor and capacitor values and MPNs within a product's approved vendor list or manufacturer part number. Each reference design specifies slightly different values for pull-ups and terminations.)
Further reference designs almost always contain components that are unnecessary to the application but get left in the product, adding unnecessary costs forever. This "building block" design has tremendous time-to-market advantages, but it does not yield a competitive advantage over a product with a superior architecture enabled by vertical integration. When pitted against a vertical integration enabled product, the building block design means a fast time to second or third place marketshare or worse.
I do not believe vertical integration by itself is enough to create the competitive advantage. Foxconn Electronics Inc. and Flextronics Corp. (Nasdaq: FLEX) are both vertically integrated, but theirs is more of a manufacturing integration, rather than a product-enabling one. These companies get significant benefits from their factory assets, but those benefits relate more to margin-stacking than enabling products or technology.
Most contract manufacturers' ODM products tend to focus toward the lower end of a product line. Having said that, these manufacturers are in a great position to evolve and grow if they choose to compete with their customers.
My point is evident when looking at the array of new products and technology here at the 2012 Consumer Electronics Show. I am at the Lytica booth (beside ESPN and Ericsson) promoting Freebenchmarking.com and the new Component Cost Estimation Tool -- a must-see tool for electronic designers and buyers. The tradeshow is the perfect place to see what all of the leading companies are doing in consumer electronics. It is clear that vertically integrated companies lead the way in product wow factor.
This amazing show highlights some really cool new products. A large portion of the show is devoted to next-generation TVs, smartphones, and tablets. Asian companies (all vertically integrated) appear to have the largest booths and the most advanced technology: glass-panel thin OLED TVs, glasses-less 3D, etc.
I will provide more CES insights in the days ahead.