Where are the 5-year-forecasts for the EMS industry?

This year, we've noticed there has been a certain reluctance to predict beyond the next few quarters what type of growth numbers can be expected, especially what percent of electronics manufacturing TAM will be outsourced to contract manufacturers. The only forecast we could find that covers more than one year is from InForum. This group's forecast shows modest growth in both TAM and the level of outsourcing over the next five years. CBA has been predicting since late 2009 that by the time 2Q 2012 rolled around, EMS industry growth would slow down substantially. Here’s what we said two years ago: CBA believes the rate of growth pendulum for the EMS sector will reach its apex by the end of 2QCY2012. We have stated this publicly for over a year, but we don’t think it has yet sunk in for many in the industry who wish for happier times and a return to the rock and roll 1990’s when EMS industry growth rates were in the 20 and 30 percent range. Our forecast does not mean that industry growth will stop and begin reversing at that point, but rather that slower growth is expected after that time (in other words, the total revenue line for the EMS industry will flatten out). While it is inevitable that the industry will again experience years of negative growth, it is unknown at this point whether or not the industry moving forward from that point will be net positive, negative or neutral. Unfortunately, the predictive nature of forecasts is much like predicting the beginning and end of recessions: it is only evident after the fact. CBA simply sees the industry as having achieved its maturation level and it will from now on be challenged by increased costs, risk, and the trend towards insourcing. The slowdown in growth in outsourcing goes beyond the current global economic uncertainty to something more fundamental. We believe that the way the industry will go about transforming components into finished electronics goods is about to change dramatically. These changes impact where, how and who will manufacture electronics and will affect the entire product lifecycle from design to aftermarket services. Here are some of the other important trends we believe are at play: - Despite all the positive spin in the industry, probably driven by election year optimism, this will be a very challenging year for the industry. - The fully burdened direct labor rate in China will increase by at least 8% from 4Q2011 to 4Q2012. Further, on a landed cost, not just a TCO basis, labor costs in Mexico are now cheaper than those in China for North American OEMs. - Increasing corporate costs at ODMs combined with higher cost-of-labor will result in an increase to the minimum gross margins ODMs expect, which will be reflected in quotes. - The rate of industry consolidation will continue to increase (unfortunately this will probably drive down valuations and may result in some business failures as the process puts extreme strain on companies while in this process). - Many if not most mid to upper tier EMS will migrate into the ODM space/model (countless examples of this already taking place as the Taiwanese ODMs retract). - A significant number of EMS companies will abandon the service business completely and migrate their business to an OEM like model (CTS is classic example). - At some point remaining available capacity in the EMS industry will drop below the demand capacity which will become the real tripping point for the "in-sourcing" movement, as this is the point on the graph where OEMs will start to lose their advantage/control over pricing.