Electronics Production | November 06, 2008

Electronics Contract Manufacturing Business to stay afloat during recession

The global electronics contract manufacturing business will not escape the impact of the current economic downturn, but it will continue to expand and even experience a mild rebound in three years, according to iSuppli.
Global contract manufacturing revenue, consisting of sales by Electronics Manufacturing Services (EMS) and Original Design Manufacturing (ODM) providers, is expected to grow by 8.3 percent in 2008, down from 16.1 percent in 2007. iSuppli previously forecasted growth of 9.1 percent in 2008.

In 2009, growth will slow to 6.1 percent as the global recession sets in and demand from consumers and enterprises continues to soften. In 2010, OEM demand will stabilize and contract-manufacturing growth will rise to 7.6 percent. For the year 2011, growth will rise to 9 percent as the global electronics and contract manufacturing markets recover.

The attached figure presents iSuppli’s forecast of global electronic contract manufacturing revenue and growth.

“Speculative activities specific to the housing market and mortgage-backed securities will or already have triggered a recession in the United States that could spread across the world,” observed Adam Pick, principal analyst, EMS/ODM, for iSuppli. “Demand specific to the electronics marketplace will continue to soften. As the end-markets erode due to recession, the trickle-down effect will cause less significant revenue growth for electronics supply-chain participants, including EMS/ODM providers.”

However, the contract manufacturing market will continue to expand during this period as OEMs attempt to adjust their cost structures and enhance core competencies.

“OEMs, including Dell, are reported to be selling off up $15 billion in annual manufacturing revenues via a divestiture of desktop and integration facilities,” Pick said. “Furthermore, non-traditional OEMs—i.e. those in the medical, industrial, aerospace markets—will continue to explore, test and adopt external manufacturing partners during the financial downturn.”

The credit crunch and its impact on EMS/ODM
iSuppli’s research also indicates that short-term credit issues are not currently impacting contract manufacturers’ operations. “Fear and concern that most contract manufacturers are at a short-run risk for bankruptcy appear to be overstated,” Pick opined.

An analysis of the bankruptcy risk for the Top-8 EMS providers indicates that most providers remain in a financial safety zone. Furthermore, iSuppli’s quick survey of EMS providers did not indicate any immediate risk specific to upcoming maturity dates for debt instruments. Finally, the short-term cash reserves of the top EMS providers should mitigate any short-term financial crisis.

Another “rubber band effect” to occur
During the last major recession, in the 2001 to 2003 time frame, the contract manufacturing industry managed to maintain growth, and then experienced a surge in revenue in 2004 as the market recovered. The EMS/ODM industry has frequently noted this “rubber-band effect” where the market snaps back vigorously from industry downturns.

“This recession and recovery will be fundamentally different for the contract manufacturers,” Pick stated. “There are several macroeconomic and industrial factors that will prohibit the revenue explosion we saw in 2003, 2004 and 2005.”
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