ODM Direct Model Disrupting the Traditional Value Chain

In the traditional IT business model, companies like IBM/HP/Dell/Cisco/EMC used to sell servers, enterprise hardware and IT consulting services to enterprise customers. At the same time, these companies used to outsource manufacturing of the hardware to original design manufacturers (ODM) or electronics manufacturing services (EMS) providers in Taiwan and China.

In this process, the Asian ODMs (especially Huawei, Quanta, Compal Electronics, Inventec and Wistron) have built up substantial knowhow in server design and data center performance.

In this business model, the brand vendors (OEM) used to make 25-30% gross margins while ODM and EMS vendors only made 6 to 7% gross margin due to the nature of engagement. (See article: Outsourcing cost reductions and benefits)

 

Purchasing ‘white box hardware’ directly from ODMs: In the last few years, a new set of customers have emerged…primarily Internet companies (like Google or Facebook) and telecom operators (like AT&T, Vodafone), seeking to optimize their purchasing and procurement costs for IT hardware further and seeking more configured solutions.

This has led to the emergence of a new business model for ‘white box data center hardware’ in which the customers bypass traditional IT vendors like Dell and HP and go directly to ODMs to procure hardware. 


At this point, it is happening mainly for ‘white box servers’, since servers are becoming more and more standardized in the x86 space the bank states in its report. However, there is an attempt to replicate this for storage and switches as well.