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.

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.