Electronics Production |
Bleak EMS/ODM market outlook
The global electronics Contract Manufacturing (CM) industry is undergoing a period of deceleration and consolidation, phenomena that will transform the market by 2013 as competitors are forced to rethink how they deliver value to their customers. iSuppli’s research indicated that 88% of the world’s top EMS/ODM executives believe that by 2013, one or more of these companies—Sanmina, Celestica and Elcoteq—will not exist.
Revenue for the global CM industry, consisting of Electronics Manufacturing Services (EMS) and Original Design Manufacturing (ODM) providers, is set to expand to $432.3 billion by 2012, rising at a Compound Annual Growth Rate (CAGR) of 7.2 percent from $305.5 billion in 2007.
While a $126.7 billion gain in revenue during a five-year period may sound like fantastic growth, it actually represents a major slowdown compared to years past, on a percentage basis.
Global CM revenue rose at a CAGR of 15.5 percent from 2002 to 2007. The industry CAGR amounted to 49 percent during the 1990s.
“Several factors are inhibiting the revenue surge of the past 20 years,” noted Adam Pick, principal analyst, EMS/ODM at iSuppli. “Those factors include the statistical law of large numbers, which makes it difficult for such a large market to expand much on a percentage basis. Other factors include a slowdown at leading EMS provider Foxconn, shifting EMS/ODM business models, new OEM procurement strategies and OEM/CM asset transfers.”
A major consequence of this slower growth is continued consolidation among the world’s top CM providers, as the ranks of the competitors thin out. Revenue consolidation among the leading EMS and ODM companies accelerated during the 2004 to 2007 time frame, as the industry’s global manufacturing capacity remained underutilized.
The latest development in this consolidation trend was the news in June 2007 that EMS provider Flextronics would acquire its former rival, Solectron.
It appears that Wall Street may rally around the idea that consolidation is beneficial for the global CM industry, particularly the more troubled EMS providers. Following the Flextronics/Solectron merger announcement, Celestica’s stock bounced up 11 percent.
iSuppli Corp. believes that consolidation will indeed continue during the next five years and may even accelerate.
“As many of the larger CMs attempt to retrench and right-size their businesses, revenue growth has become stagnant or even negative,” Pick said. “Because of this, an examination of possible acquisition targets becomes a top priority for larger companies.”
In particular, Sanmina, Celestica and Elcoteq suffered 2007 revenue decreases of 6.8 percent, 8.4 percent and 6 percent, respectively.
iSuppli’s research indicated that 88 percent of the world’s top EMS/ODM executives believe that by 2013, one or more of these companies—Sanmina, Celestica and Elcoteq—will not exist.
Key reasons for this include:
· Excess capacity
· Cheap valuations
· Large customer disengagements
· Operational/supply chain issues
· Regional challenges
· Tough competitive landscape
· Challenged financials
· Senior management churn
· Lack of differentiation
· Poor strategic choices
Given the slowed growth in the CM market, there appears to be a fundamental inflection point in the industry. Today, more than ever, leading CMs, their customers and their suppliers are talking openly about their mistakes in the past and their strategic opportunities in the future.
Some of the comments iSuppli has collected regarding the CM business are as follows:
· “PCB assembly is not a winning formula,” said a representative of one OEM.
· “Simple manufacturing is an entry ticket, but it won’t get you anywhere,” observed an executive at a second-tier EMS provider.
· “I don’t think anybody is excited about winning low-margin programs simply to fill capacity,” noted a representative at a semiconductor supplier.
· “I would say that manufacturing processes throughout the industry are stabilized and somewhat standardized. Differentiation will not result from being the best assembly house,” said an executive at a tier-one EMS provider.
The outcome of this new openness is that CMs are reexamining their relationships with their OEM customers. iSuppli's recent interviews with CM executives revealed that these relationships are among their top concerns.
OEMs now employ a wide range of potential engagement models for their CM providers that vary between fully outsourced models and total-control models. In a fully outsourced model, the EMS provider is responsible for most supply chain activities. Conversely, in a total control model, the OEM retains control of most supply chain activities, except for the actual manufacturing.
Often, hybrid models that are a mix of the fully outsourced and total-control strategies have been developed to suit the unique manufacturing and service needs of the OEM.
Given these approaches above, OEMs often find themselves in a state of confusion. In fact, when iSuppli commences an EMS/ODM supplier selection process with an OEM, the first questions asked by the OEM are:
· What is the right engagement model for us?
· Which activities should we outsource?
· Where are our organizational gaps?
Since the technology recession of 2000-2001, the EMS/ODM industry has repeatedly been called “volatile” and “evolutionary” by analysts. During the next five years, iSuppli expects those monikers will continue to populate discussions about the CM marketplace. That said, there are many opportunities for this unique breed of outsourced providers to address newer markets such as medical, aerospace, industrial, and military, offer value-add services and extend their value propositions to garner more spend and enhance shareholder valuations.
A major consequence of this slower growth is continued consolidation among the world’s top CM providers, as the ranks of the competitors thin out. Revenue consolidation among the leading EMS and ODM companies accelerated during the 2004 to 2007 time frame, as the industry’s global manufacturing capacity remained underutilized.
The latest development in this consolidation trend was the news in June 2007 that EMS provider Flextronics would acquire its former rival, Solectron.
It appears that Wall Street may rally around the idea that consolidation is beneficial for the global CM industry, particularly the more troubled EMS providers. Following the Flextronics/Solectron merger announcement, Celestica’s stock bounced up 11 percent.
iSuppli Corp. believes that consolidation will indeed continue during the next five years and may even accelerate.
“As many of the larger CMs attempt to retrench and right-size their businesses, revenue growth has become stagnant or even negative,” Pick said. “Because of this, an examination of possible acquisition targets becomes a top priority for larger companies.”
In particular, Sanmina, Celestica and Elcoteq suffered 2007 revenue decreases of 6.8 percent, 8.4 percent and 6 percent, respectively.
iSuppli’s research indicated that 88 percent of the world’s top EMS/ODM executives believe that by 2013, one or more of these companies—Sanmina, Celestica and Elcoteq—will not exist.
Key reasons for this include:
· Excess capacity
· Cheap valuations
· Large customer disengagements
· Operational/supply chain issues
· Regional challenges
· Tough competitive landscape
· Challenged financials
· Senior management churn
· Lack of differentiation
· Poor strategic choices
Given the slowed growth in the CM market, there appears to be a fundamental inflection point in the industry. Today, more than ever, leading CMs, their customers and their suppliers are talking openly about their mistakes in the past and their strategic opportunities in the future.
Some of the comments iSuppli has collected regarding the CM business are as follows:
· “PCB assembly is not a winning formula,” said a representative of one OEM.
· “Simple manufacturing is an entry ticket, but it won’t get you anywhere,” observed an executive at a second-tier EMS provider.
· “I don’t think anybody is excited about winning low-margin programs simply to fill capacity,” noted a representative at a semiconductor supplier.
· “I would say that manufacturing processes throughout the industry are stabilized and somewhat standardized. Differentiation will not result from being the best assembly house,” said an executive at a tier-one EMS provider.
The outcome of this new openness is that CMs are reexamining their relationships with their OEM customers. iSuppli's recent interviews with CM executives revealed that these relationships are among their top concerns.
OEMs now employ a wide range of potential engagement models for their CM providers that vary between fully outsourced models and total-control models. In a fully outsourced model, the EMS provider is responsible for most supply chain activities. Conversely, in a total control model, the OEM retains control of most supply chain activities, except for the actual manufacturing.
Often, hybrid models that are a mix of the fully outsourced and total-control strategies have been developed to suit the unique manufacturing and service needs of the OEM.
Given these approaches above, OEMs often find themselves in a state of confusion. In fact, when iSuppli commences an EMS/ODM supplier selection process with an OEM, the first questions asked by the OEM are:
· What is the right engagement model for us?
· Which activities should we outsource?
· Where are our organizational gaps?
Since the technology recession of 2000-2001, the EMS/ODM industry has repeatedly been called “volatile” and “evolutionary” by analysts. During the next five years, iSuppli expects those monikers will continue to populate discussions about the CM marketplace. That said, there are many opportunities for this unique breed of outsourced providers to address newer markets such as medical, aerospace, industrial, and military, offer value-add services and extend their value propositions to garner more spend and enhance shareholder valuations.
