Are three-letter acronyms holding Taiwan hostage?

DDG has worked with a number of medium-sized B2B manufacturers over the years. These companies have hired DDG because they are not satisfied with their current situation. The owners of these companies are tired of having to constantly compete on price, and they feel that they are under-appreciated by their customers. While many owners are pushing to raise prices, in the end, they seem unable to fight the temptation to sell at lower prices to generate orders.

Working on these projects, I have come to a realization that Taiwan manufacturers are trapped in this downward price spiral for one simple reason: because they continue to define themselves as ODMs.

Taiwan’s development followed a path from Original Equipment Manufacturer (OEM) in 1970/80s to Original Design Manufacturer (ODM) in the 1990s, during which Taiwan manufacturers not only offered manufacturing services but also started to develop and design many products purveyed by Western brands. In the 2000s, under the encouragement of the Taiwan government, manufacturers began a transition from ODM to Original Brand Manufacturing (OBM) under which they would design, manufacture and market products under their own brand name. This was touted as the way to greater profitably, and freedom from price-conscious OEM/ODM buyers.

Alas, many companies didn’t make the jump to OBM, being unable to master the marketing and international management challenges poised by this more complex business model. For those that couldn’t succeed as an OBM, the choice was a simple one: return to ODM. And this is where we find many of Taiwan’s small and medium-sized manufactures and their mindsets today.

The problem in returning to the ODM model is that these manufacturers have seemingly failed to advance their mode of operation since the 1990s, as they continue to rely on a combination of product design tied to low-cost manufacturing as a means of winning over international customers. Yet, the world has moved on since the 1990s; the rapid growth of China, the development of new markets in Asia, the Middle East, and Latin America, have fundamentally changed the world’s economic landscape.

Why do so many Taiwan manufacturers continue to view their businesses as ODM, and, why do so many seem to accept that the only three models available to Taiwan businesses are OEM, ODM, and OBM? These terms have trapped Taiwan manufacturers, and, in effect, have contributed to the deteriorating state of Taiwan’s export economy today.

There is a need to break away from this old-line thinking. To seek out new words to define the business of Taiwan’s manufacturers. My experience is that Taiwanese companies are highly competitive. They have something I like to call ‘latent value’. Latent value is hidden value. It exists, but it isn't recognized and it isn’t leveraged by the company. 

To be sure, international customers continue to seek out Taiwan’s manufacturers, and often for more than just design and manufacturing. They see value in a set of services and capabilities that are differentiated from manufacturers in China and other parts of the world. The problem is Taiwanese manufacturers are failing to highlight this latent value. Instead, we as a nation continue to be trapped by the term ODM, which has limited our view and approach to generating business. We continue to rely on the old standard: attending trade shows, promoting factory capacity, and over-emphasizing volume and price as the basis for negotiation.

The clients we have been working with recently all described themselves as ODMs. But, for DDG, we would have never defined their value as design and manufacturing alone. For us, these companies are more like consulting companies with manufacturing services attached at the backend. Yes, while overseas customers ultimately buy the product, what they value from their Taiwan partners are the intangibles: research and development, industry experience and network, attitude towards collaboration, copyright and patent protection, customization services, and production flexibility.

At DDG, we recently helped a leading polyurethane manufacturer redefine itself as a material science company. Their value was in the development of advanced materials and not in the volume production of plastics. Our objective was simple: to highlight the latent value of the company, and in doing so change the relational dynamic with their customers.

When we redefine a company arounds its latent value significant things happen. The sales teams better understand their company’s value, and with it their negotiation capabilities improve. Customers readily understand the depth of offering, and are more accepting of higher pricing. Equally so, the profile of the company raises within the industry and among its competitors.

Maybe a new term such as OCM (original consulting manufacturers) or OKM (original knowledge manufacturers) would help to capture this latent value better. Alas, whether or not we choose to extend the O’x’M terminology, a new term is needed to describe the technical capabilities and service offering of Taiwan’s manufacturers today.