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Electronics Production | March 10, 2009

“Foxconn Effect” fades as Top10 EMS-providers’ revenue shrinks in 2008

After years of single-handedly powering the robust growth of the global Electronics Manufacturing Services (EMS) business, Foxconn, AKA Hon Hai Precision Industry achieved only a marginal revenue increase in 2008, causing the top-tier EMS market to contract, according to preliminary market-share results from iSuppli.
The collective revenue for the world’s Top-10 EMS providers in 2008 amounted to $129.9 billion, down 2.8% from $133.6 billion in 2007, according to iSuppli’s preliminary estimate. This represents a major downturn compared to growth of 19.2% in 2007 and 20.3% in 2006. It also marks the first time since 2002 that the Top-10 EMS providers saw their aggregate revenue decline on an annual basis.

“The EMS industry has moved well beyond the inflection point and has been decelerating for some time” noted Adam Pick, principal analyst, EMS & ODM services, for iSuppli. “The data coming out of the industry has been indicating a state of slowdown for the last 12 months.” Taiwan’s Foxconn, the world’s leading EMS provider, achieved revenue growth of only 1.3% in 2008 with estimated sales of $55.4 billion, up from $54.7 billion in 2007. This compares to Foxconn’s booming increases of 39.4% in 2007 and 43.7% in 2006.

The attached table presents iSuppli’s preliminary ranking of the Top-10 EMS providers in 2008.



Foxconn’s foibles
“The preliminary 2008 EMS rankings show that the “Foxconn Effect” has run its course,” noted Pick. “Foxconn’s robust growth has been the primary factor driving the perennial double-digit expansions of the global EMS market. For example, if Foxconn’s contribution was removed from the Top-10 EMS providers’ results in 2007, total revenue growth would have amounted to only 8.3%, rather than 19.2%.”

Pick cited two factors for Foxconn’s growth slowdown: a steep decline in consumer demand and exchange-rate issues. “As demand waned during 2008 for Foxconn’s consumer-oriented products like desktop PCs and mobile handsets, the company was forced to issue profit warnings, to restructure operations and to rescind prior growth forecasts,” Pick observed. “Another factor that greatly impacted Foxconn’s consolidated gross sales was the precipitous drop in the exchange rate between the Taiwanese dollar and the U.S. dollar.”

An EMS mess in 2008
As recently announced, iSuppli cut its revenue forecast for the 2006-2012 timeframe to a 1.3% Compound Annual Growth Rate (CAGR), down from 5.3% before. Beyond Foxconn’s tepid growth in 2008, several other developments during the past 12 months suggest that iSuppli’s lowered expectations for the EMS industry are likely to be realized. For one, No.-5 EMS provider Sanmina-SCI Corp. continues to face major challenges.

While Sanmina-SCI did experience an investor and operational rally following the sale of its PC assets to Foxconn and Lenovo during 2008, the boost was short-lived. The company’s revenue plunged by 32.5% during 2008—amounting to a decrease of $3.3 billion. “Selling its PC assets wasn’t enough for Sanmina to re-ignite its growth engine,” Pick noted. “Our estimates suggest that Sanmina lost over $400 million in sales from its core business, which now is heavily oriented toward higher-mix, lower-volume programs.”

During the fourth quarter, Sanmina-SCI’s sales dropped by 16.7% sequentially to $1.4 billion. Given the volatility in demand from its OEM customers, Sanmina-SCI chose to not offer guidance for the first quarter of 2009.

Diversification deferred
Another factor impacting the EMS industry’s growth in 2009 is the slow pace of program diversification initiatives among some of the Top-10 providers.

The 2008 results from Elcoteq SE and Benchmark Electronics, Inc. indicate their diversification efforts are not yielding any significant increases in revenue. No.-6 EMS provider Elcoteq saw its revenue fall by 13% during 2008 as Nokia continued to shift handset orders to competitors FIH, Jabil Circuit and BYD. Now, Elcoteq considers BlackBerry-seller Research In Motion to be its largest customer.

As for No.-8 ranked Benchmark, its revenue dropped by 11.2% during 2008 as both Sun Microsystems and EMC diverted spend to alternate suppliers and/or terminated mature product lines. iSuppli expects very challenging times for EMS providers in 2009, given the global recession and financial crisis. iSuppli’s outlook calls for sales to shrink 9.9% as demand erodes and operating concerns increase.

Image source: Cogent

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