SAN FRANCISCO -- Aggressive pricing pressure and excess capacity are hurting margins at providers of EMS and ODM services, a top investment bank said today.

Noting the "disappointing" margins of the last quarter turned in by Taiwan-based ODMs Hon Hai, Asustek and Quanta, Deutsche Bank asserted that further downsizing is ahead for the industry.
Taiwan's leading EMS/ODMs have seen margins fall, on average, from 9.9% in 2001 to 4.8% in 2004, DB said. "We believe the difficult pricing environment and weak margin  performance throughout the industry will ultimately drive additional restructuring and capacity reduction," DB analyst Chris Whitmore wrote in a research note issued today.

In the past two weeks three of the top Taiwanese suppliers posted below expected margins. Hon Hai's consolidated net margin fell to 4.4% in the first quarter from roughly 6% sequentially. Asustek reported 1Q margins of 5.8% (DB had forecast 6.2%) and flat profits year-on-year despite an 11% jump in sales.  

"While some of the margin erosion is undoubtedly from a mix shift toward lower margin products and services, appreciation of the Taiwanese dollar and other
non-core operating items and investments, we believe the pricing
environment has had a substantial impact to margins," Whitmore wrote.  

Whitmore forecasts continued pricing pressure for contract manufacturing and
ODM services barring "significant structural change ... for the foreseeable future."

The firm expects the environment will lead to further cuts in manufacturing capacity and consolidation. "We believe weak industry-wide margins and continued lackluster final demand will drive another round of M&A in the EMS/ODM industries," Whitmore wrote.

Whitmore said the analyst also remains concerned about Sanmina-SCI's (and to a lesser extent Solectron's) footprints in high-cost regions such as Europe and North America. 

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