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Electronics Production | October 22, 2008

Are macroeconomic forces impacting Contract Manufacturing?

Some contract manufacturers weathered the storm in the first half of 2008 despite a housing market slump and credit crunch impacting the U.S. and the world.
But what does the second half of the year hold for Electronic Manufacturing Service/Original Design Manufactures (EMS/ODM)? No thanks to a visious trickle down effect in the electronic value chain, EMS/ODM suppliers, iSuppli believes, will continue to grow, albeit at a slower rate, during this financial recession.

“Most EMS providers don’t have any short-term debt maturities that could impact operations and most have significant cash reserves that could mitigate them during short-run financial issues,” said Adam Pick, principal analyst for EMS/ODM at iSuppli. “In fact, a recession could prove opportunistic contract manufacturers.”

Reasons for outsourcing opportunity
Specifically to EMS/ODM, a recessionary environment may be opportunistic in nature. During the 2001-2003 recession, EMS/ODM suppliers experienced a “rubber band effect” that stimulated significant revenue growth post-recession. Top ODMs increased their annual sales from $12 billion to $37 billion during the 2001-2004 while EMS providers had a Compound Annual Growth Rate (CAGR) of 11% during the same timeframe.

This same “rubber band effect” may apply this time around as OEMs:
· Refocus resources on core competencies
· Investigate ways to minimize cost structure
· Shore-up their balance sheet

“This doesn’t mean things will be all rosy. Some EMS/ODM suppliers will definitely feel the pinch of a slow economy and shifting, OEM outsourcing strategies,” Pick said.

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