Electronics Production | February 10, 2009

A Slippery Slope For Contract Manufacturers

Conditions in the global electronics contract manufacturing business are continuing to deteriorate due to the recession and the weakening high-tech industry, prompting iSuppli to further cut its short- and long-term growth expectations for this volatile industry.
Global contract manufacturing industry revenue, consisting of sales by Electronics Manufacturing Services (EMS) and Original Design Manufacturing (ODM) providers, now is expected to decrease by 9.9% during 2009 with revenues of $270.8 billion, compared to $300.7 billion in 2008. iSuppli’s previous forecast, issued last November, predicted 2.2% growth for the year.

“This marks the third significant cut to our forecast during the past 24 months. The recessionary ripple has compounded the pre-existing conditions that already pressured the manufacturing value chain,” said Adam Pick, principal analyst, EMS/ODM for iSuppli.

“Looking forward, it’s not pretty,” Mr Pick added. “Stalwarts of the electronics marketplace— including leading brands, manufacturers and component suppliers—have issued lackluster guidance, or in Sanmina’s case, no guidance at all. Plus, the ODM rally seems to be losing steam as Taiwanese manufacturers are seeing sales drop and inventories rise.”

He predicts that global contract manufacturing revenue will rise at a Compound Annual Growth Rate (CAGR) of only 1.3% from 2006 though 2012, down from the previous outlook of a 5.3% increase. “iSuppli research indicates that electronics OEMs continue to value the benefits of outsourced manufacturing,” Adam Pick said. “However, weak demand has triggered program delays and push-outs. Also, we have detected some OEM in-sourcing activities that will hamper EMS/ODM industry performance during 2009.”

The attached figure presents iSuppli’s forecast of global contract manufacturing revenue broken down by the EMS and ODM segments.

No signs of a market bottom
EMS sales guidance for the first quarter of 2009 reveals that hopes for a near-term market bottom are unrealistic. Revenue guidance issued by Flextronics, Celestica and Sanmina was well below seasonal patterns.

“It feels like a slippery slope for the EMS providers. Sales are down, layoffs are abundant, margins are contracting, capital expenditures have been cut and solvency questions have reappeared,” Mr Pick noted. Additional hurt was experienced by some EMS providers when telecom-giant Nortel Networks announced its bankruptcy on Jan. 14. iSuppli estimates that Nortel spent more than $1.7 billion with its external manufacturing supply base during 2008.

As for the ODMs, the fourth-quarter of 2008 results and market commentary from the Taiwanese manufacturers is fairly bearish. Asustek posted its first quarterly loss as a public company and Compal experienced an 8% annual revenue contraction during the period. As for notebook shipments, a recent report suggested that mobile PC shipments during January were down 30% compared to the prior month.

“In addition to this data, iSuppli recently concluded a broad, survey of supply-chain participants regarding January demand levels,” Adam Pick said. “The qualitative and quantitative inputs captured during those interviews compelled us to further reduce our EMS/ODM forecast.”


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