BOSTON – EMS designers, look out: OEMs will bring design back in-house over the next five years.

This trend will actually roller coaster, however, as OEMs will initially kick even more designs to their contractors, a leading electronics manufacturing analyst asserts.

But industry leading mid-market OEMs have already begun restructuring their supply chains, a multi-step process that will take several years, says Charlie Barnhart, disengaging and reworking their manufacturing agreements with ODMs, and reconsidering regionalization builds, a phenomenon known as reshoring.

"This is a very definitive trend," said Charlie Barnhart, speaking at the Outsourcing Navigator Council meeting last week at Teradyne in suburban Boston. "It started with disk drives in Thailand," he opines. The rampant flooding that took the vast majority of the disk drive market offline for months "woke everyone up."

The ODM model, not so long ago the envy of the contract manufacturing world because of its higher margins, is being torn apart. Customers are pushing for additional services and in the process driving up internal ODM costs, Barnhart said, citing data that such costs have risen from to 5% from 1% over the past decade. In response, ODMs like HTC are doing what many analysts always warned they would do: turning into OEMs.

"Keep in mind, that's what ODMs will do," Barnhart said. "No one stays in place. No sector stays in place – consolidation, expansion, etc."

Barnhart says that the underlying driver is the inherent advantage the OEM has over the rest of the supply chain: "No one has more power than the guy who designed a company (supplier) in."

Over the next one to three years, Barnhart says, the trend will be toward EMS/JDM (joint design manufacturer) for design, as OEMs continue to shed their internal design teams. Yet while that happens, the back-end trend will be to move final assembly, test and built to order in-house, he says. "Focusing on the downstream supply chain will become common," Barnhart says. During this period, we can expect to see an increase in fulfillment centers that can supply to dynamic demand. "Regional solutions are coming into alignment with demand" as companies seek to ensure they can fulfill the "can't miss" orders.

Three to five years out, OEMs will move design back in house. Innovation, not incremental improvement, will be the driver, Barnhart says. "People will stop outsourcing design (as they) see the value of being innovative."

NPI will also return inside, and failure analysis, BTO and configure to order (CTO) will become fully regionalized with "a significant percentage" moved in-house. The supply chain will decide "fewer nodes is better," says Barnhart. During this phase, assemblers and fabricators will be regionalized under direct OEM control. ("We already see movement in this direction, with Apple as the leader," Barnhart notes.) And the OEM will negotiate all material purchases throughout the supply chain.

Looking out to 2017 and beyond, Barnhart sees design fully reintegrated in-house and distributed globally under a follow-the-sun model. NPI capabilities will be significantly expanded under the OEM roof, and all material procurement and planning will be inside as well.

During this period, EMS companies will convert some 20% to 40% of their revenue away from commodity-type assembly to higher-revenue services such as logistics, manufacturing private label products, and other after-market services such as warranty and repair.