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EL SEGUNDO, CA – Revenue for the global contract manufacturing industry, consisting of EMS and ODM providers, is set to expand to $432.3 billion by 2012, rising at a CAGR of 7.2% from 2007.
While a $126.7 billion gain in revenue during a five-year period may sound like fantastic growth, it actually represents a major slowdown compared to years past, on a percentage basis, says iSuppli Corp.
The global EMS industry undergoing
deceleration and consolidation will transform the market by 2013, as
competitors are forced to rethink how they deliver value to their
customers, says the firm.
Global EMS revenue rose at a CAGR of 15.5% from 2002 to 2007. The industry CAGR amounted to 49% during the 1990s.
“Several
factors are inhibiting the revenue surge of the past 20 years,” noted
Adam Pick, principal analyst, EMS/ODM at iSuppli. “Those factors
include the statistical law of large numbers, which makes it difficult
for such a large market to expand much on a percentage basis. Other
factors include a slowdown at leading EMS provider Foxconn, shifting EMS/ODM business models, new OEM procurement strategies and OEM/CM asset transfers.”
A
major consequence of this slower growth is continued consolidation
among the world’s top EMS providers, as the ranks of the competitors
thin out. Revenue consolidation among the leading EMS and ODM companies
accelerated during the 2004 to 2007 time frame, as the industry’s
global manufacturing capacity remained underutilized, says iSuppli.
The latest development in this consolidation trend was the news in June 2007 that EMS provider Flextronics would acquire its former rival, Solectron.
It
appears Wall Street may rally around the idea that consolidation is
beneficial for the global CM industry, particularly the more troubled
EMS providers. Following the Flextronics/Solectron merger announcement,
Celestica’s stock surged 11%, according to the firm.
iSuppli Corp. believes consolidation will indeed continue during the next five years and may even accelerate.
“As
many of the larger CMs attempt to retrench and right-size their
businesses, revenue growth has become stagnant or even negative,” Pick
said. “Because of this, an examination of possible acquisition targets
becomes a top priority for larger companies.”
In particular, Sanmina, Celestica and Elcoteq suffered 2007 revenue decreases of 6.8%, 8.4% and 6%, respectively.
iSuppli’s
research indicates 88% of the world’s top EMS/ODM executives believe by
2013, one or more of these companies—Sanmina, Celestica and
Elcoteq—will not exist.
Key reasons include excess
capacity; cheap valuations; large customer disengagements;
operational/supply chain issues; regional challenges; tough competitive
landscape; challenged financials; senior management churn; lack of
differentiation, and poor strategic choices, according to the research
company.
Given the slowed growth in the CM market, there
appears to be a fundamental inflection point in the industry. Today,
more than ever, leading CMs, customers and suppliers are talking openly
about past mistakes and future strategic opportunities.
The
outcome of this openness is CMs are reexamining their relationships
with their OEM customers. iSuppli's recent interviews with CM
executives revealed these relationships are among their top concerns.
OEMs
now employ a wide range of potential engagement models for their CM
providers that vary between fully outsourced models and total-control
models. In a fully outsourced model, the EMS provider is responsible
for most supply chain activities. Conversely, in a total control model,
the OEM retains control of most supply chain activities, except for the
actual manufacturing.
Often, hybrid models that are a
mix of the fully outsourced and total-control strategies have been
developed to suit the unique manufacturing and service needs of the OEM.
Given
the above approaches, OEMs often find themselves in a state of
confusion. In fact, when iSuppli commences an EMS/ODM supplier
selection process with an OEM, the first questions asked by the OEM
are: What is the right engagement model for us? Which activities
should we outsource? Where are our organizational gaps?
Since
the technology recession of 2000-2001, the EMS/ODM industry has
repeatedly been called “volatile” and “evolutionary” by analysts.
During the next five years, iSuppli expects those monikers to continue
to populate discussions about the CM marketplace. That said, there are
many opportunities for this unique breed of outsourced providers to
address newer markets such as medical, aerospace, industrial, and
military, offer value-add services and extend their value propositions
to garner more spend and enhance shareholder valuations. -------------- Circuits Assembly's 2008 Directory of EMS Providers: On sale now at circuitsassembly.com/dems. |
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