Three little initials are changing electronics
By Mike Langberg
Mercury News
Posted on Fri, Jul. 30, 2004
Virgin Electronics relocated its tiny staff of 10 people from New York to downtown San Jose earlier this month in pursuit of a very big objective: challenging industry giants such as Sony, Apple, Dell and others in digital music hardware.
Virgin can do this because of a largely unnoticed but titanic shift in the electronics industry: the ODM revolution.
ODM stands for Original Design Manufacturer, and I can guarantee you'll be hearing these initials a lot more in the coming months and years.
ODMs are companies in Asia, almost all of them in Taiwan, capable of creating sophisticated electronics -- MP3 players, notebook computers, DVD players, personal digital assistants, LCD TVs and more -- for the big companies whose brand names are familiar to U.S. consumers.
The big-name companies get products at very low prices with little upfront investment.
ODM is how Dell has been able to start selling PDAs and LCD TVs. Dell presumably went shopping among ODMs until it found products it liked, then asked for modest customization to give those products a Dell-like exterior.
Not that I'm trying to single out Dell. Almost all notebook computers sold in the U.S. today are manufactured by Taiwanese ODMs, and almost nothing you buy from big consumer electronics companies such as Sony, Panasonic and Toshiba is manufactured in plants owned by those companies.
How exactly does the process work? I can't say, because the big computer and electronics companies using ODM absolutely will not discuss the details. They don't want consumers to realize more and more brand-name products contain nothing more than off-the-shelf technology.
What is clear is that ODM will cause empires to crumble, by dramatically lowering the barrier to entry in selling technology products. That's where Virgin Electronics comes into the picture.
British billionaire Richard Branson has built an eclectic collection of companies including Virgin Megastores for music, Virgin Atlantic and the soon-to-be-launched Virgin USA in air travel, and Virgin Mobile cell phones.
The Virgin Group launched the Virgin Pulse line of consumer electronics at Target stores last year, including cordless phones, CD players and a portable LCD TV/DVD player. The products came from ODMs, and were manufactured in China with exteriors and packaging in Virgin's trademark deep red.
Target and Virgin discovered products revolving around music -- CD players and MP3 players -- were the best sellers; no surprise, given the company's roots in selling records.
So Virgin Group decided to focus on music hardware and formed a new company, Virgin Electronics, to replace Virgin Pulse. All the non-music products would be dropped.
This isn't hard to do in the ODM world. Hewlett-Packard can't drop out of the PC business on a whim, no more than Sony could abandon portable CD players after a bad quarter. But Virgin can shift products almost instantly, without having to shut down factories or lay off workers.
To build Virgin Electronics, the parent company recruited two Silicon Valley veterans who had together worked at Handspring, the PDA maker acquired last year by Palm: Greg Woock and Joe Sipher.
Woock, now the chief executive of Virgin Electronics, and Sipher, now senior vice president of marketing, didn't want to just stick the Virgin label on ODM products.
They're designing a unique line of hard-disk MP3 players to compete with Apple's hugely popular iPod, as well as portable speakers, that go on sale in the fall.
With a staff expected to grow to 20 by year's end, Virgin Electronics is free to focus on what makes a difference to consumers: how the product looks and how it works. ODMs will figure out which components are required to make the vision real, and how to manufacture the finished products.
Woock told me last week that Virgin Electronics is somewhat like an architect, conceiving grand buildings and then handing blueprints to a contractor who picks the materials and how to proceed with construction.
``It's the logical progression of things,'' Woock said, noting how Asian manufacturers have progressed from simple assembly line work to more complex assignments.
``But it's very, very new that the ODMs are sophisticated enough to do this,'' Sipher added.
What does this mean for Silicon Valley?
Woock said he moved Virgin Electronics to San Jose because the valley is still ``the pinnacle of new thinking.''
At the same time, ODMs are using their own employees to do all sorts of jobs -- writing software, designing chips, creating engineering specs for hardware -- once done here.
If Virgin Electronics and dozens of other newcomers backed by ODMs succeed, it will be at the expense of established electronics companies in the United States and Japan.
Perhaps, in the end, Silicon Valley will be a service provider to the ODMs, rather than the other way around. They'll hire us for ``new thinking,'' while all the messy work of turning new ideas into products will happen elsewhere.
