Electronics Production | February 24, 2010
2010 Ushers in a New Decade in EMS – Part 2
In the first installment of this article I made a number of pretty specific predictions, some of which have solicited considerable feedback both pro and con. This article will round out my Top 10 predictions for 2010.
By: Ron Keith, Chief Executive Officer at Riverwood Solutions Please keep in mind that these predictions are intended to highlight both EMS industry issues as well as broader global economic issues that impact our industry. Top 10 Predictions for 2010 that Will Impact the EMS Industry 6)Elcoteq is acquired by a tier two Asian EMS provider seeking market expansion and key customer relationships. Although the Videocon investment now seems in doubt, the prospect that Elcoteq is acquired in 2010 remains high due to their continued losses and challenging but improving balance sheet. The same challenges facing Videocon that made Elcoteq seem like an attractive target for the Indian provider makes the company equally attractive for one of the pure-play Asian EMS providers. Over the past several years there has been a lot of interesting activity among the Asian-based tier two and tier three EMS providers: the spectacular flame out of Jurong Hi-Tech in a U.S. type accounting scandal; the exit of Hitachi from the EMS business after amassing more than $500M in EMS sales; and the perpetual contraction of the once formidable Nam Tai as they strive for margins inconsistent with industry norms and switch CEOs every few quarters. These are just a few examples of an industry segment undergoing considerable change. Yet there remains a robust and growing next tier of EMS providers in Asia that continues to gain traction, although most struggle with sales and business development activities in the West. For a number of the more aggressive players in this group, acquiring the customer relationships, sales force, and European NPI capabilities of Elcoteq must surely seem an attractive solution to a significant top-line problem. As with most acquisitions, price is an issue and privately held Asian services companies are not known for overpaying for anything. But I am confident that an independent Elcoteq will not see the dawning of 2011. 7)Increased protectionist rhetoric from the Obama administration and escalating trade tensions between the U.S. and China slows EMS industry growth in China. With many large OEMs now sourcing more than half of their product revenue stream from EMS-produced products in China, the escalating trade and currency tensions between the U.S. and the People’s Republic of China are becoming somewhat of a nail biter. Clearly Hon Hai Precision’s (Foxconn) recent announcement to move forward with its long planned and long delayed $5B investment in Vietnam was at least partially influenced by excess verbosity in Washington and concern over supply chain risk concentration in U.S. boardrooms. For more than a decade now EMS industry growth in China has far outpaced the growth rate of the global EMS industry. But with the threat of increased trade tensions and the undervalued Yuan coming under renewed attack, many corporate supply chain executives are tapping the brakes on new outsourcing to China. Over the next few years China’s EMS industry growth rate will moderate while alternative low-cost sourcing destinations will see an increase in activity. Renewed interest in Mexico, Malaysia, Indonesia, and to a lesser extent Ukraine, Thailand and Tunisia will drive increased fixed investment by EMS providers in these countries. Vietnam and India will continue to be viewed as possible alternatives to China “in a few more years” as these countries struggle to improve physical infrastructure and supply base infrastructure. Figure 1: 2009 EMS production volumes by region vs. 2007 baseline. 8)An EMS industry outsider takes the helm at one of the top 10 EMS providers as the company’s board seeks fresh ideas to improve overall returns. The top 10 players in the EMS industry have not seen a lot of changes in the C-suite over the past five years, and when changes have been made positions were almost always filled by industry insiders or executives from major OEM users of EMS services. Clearly domain knowledge is important in most industries and EMS is no exception. But as some of the publicly traded companies languish with market capitalizations a mere fraction of what they were a decade ago, it seems inevitable that an industry outsider may find himself or herself at the helm of one of the more challenged of the top 10. Figure 2: Approximate years of EMS industry experience for CEOs of the top 10 EMS companies. 9)ODM growth continues to outpace EMS growth; however, that trend will fail to last as long as most industry analysts predict. The rapid growth of ODMs and the outsourced design and manufacturing business model has outstripped pure EMS industry growth over the past decade. But the outperformance of revenue growth in the ODM space is nearing an end as ODM penetration rates in consumer products and the sheer size of the ODM industry will make forecasted growth rates harder to achieve. Adam Pick at iSupply, probably the best forecaster of the EMS/ODM industry, expects to see a 10.8% growth in ODM revenues this year with the EMS industry growing by about half that rate. These estimates are probably proportionally correct for 2010 with that gap narrowing significantly by 2014. But the actual growth estimates are likely a bit high for both industries as the global economic slowdown and the law of big numbers both dampen manufacturing growth. The ODM industry, which includes most major EMS companies at some level, has picked the vast majority of the low hanging fruit in terms of the types of OEM products best suited for an ODM model. Continued growth outperformance going forward would require ODMs to both continue to take market share from EMS providers, and also continue to aggressively capture new product segments. As more and more OEMs are now opting for a CDM model rather than a pure ODM model, the differential growth rates between ODM firms and EMS providers will compress. Pick’s data suggest that ODM growth will be just over twice the rate of EMS growth in 2010 - which is a pretty good prediction. But this number will decline over the next few years with ODM growth outpacing EMS growth by only about 50% in 2014. Figure 3: Riverwood Solutions EMS Index Forecast 2010 - 2019 10) Component shortages and increased lead times will plague the industry for much of the year as component suppliers remain reluctant to add fixed capacity in a sluggish economy. In the months leading up to the market downturn in the fall of 2008, many component suppliers were suffering from flashbacks of 2001 – 2002. Back then they were caught with excess capacity and inventory levels that took several years to work down. As a result of those painful memories many component manufacturers began slashing production and removing fixed capacity in the late summer of 2008. As the electronics industry has staged a mild rebound over the past few quarters, component suppliers have been content to raise lead times and some prices rather than add capacity for what may be a short-lived inventory rebuilding cycle. It looks like the shortages and expanded lead times will likely stay with us through most of 2010, ushering in a new decade in EMS with the same supply chain issues we saw greet the arrival of the previous decade. Please click here to read the first article by Ron Keith, CEO at Riverwood Solutions for evertiq in this session. www.rwsops.com