Demand for contract manufacturing to slow
By James Carbone -- Purchasing, 9/11/2008 2:00:00 AM
While the growth rate of the global contract manufacturing market will slow down, total revenue will still rise from $305.5 billion in 2007 to $432.3 billion in 2012, according to a new report by researcher iSuppli in El Segundo, Calif.
The contract manufacturing (CM) market, which consists of electronics manufacturing services (EMS) providers and original design manufacturers (ODM), will post a 7.2% growth rate through 2012. The growth rate represents a major slowdown compared to years past, on a percentage basis. Global electronics outsourcing revenue rose at 15.5% from 2002 to 2007 and 49% during the 1990s.
Several factors are inhibiting revenue growth, says Adam Pick, principal analyst, EMS/ODM at iSuppli in the report. One factor is 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, he says.
A major consequence of this slower growth is continued consolidation among the world's top EMS providers and ODMs. "As many of the larger CMs attempt to retrench and right-size their businesses, revenue growth has become stagnant or even negative," says Pick. "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 that 88% of the world's top EMS/ODM executives believe that by 2013, one or more of these companies—Sanmina, Celestica and Elcoteq—will not exist due to excess capacity, cheap valuations, large customer disengagements, operational/supply chain issues and lack of differentiation among others.
Executives at OEMs and EMS providers say board assembly is not enough for a contract manufacturer to be successful. "Simple manufacturing is an entry ticket, but it won't get you anywhere," an executive at a second-tier EMS provider told iSuppli.
"Manufacturing processes throughout the industry are stabilized and somewhat standardized," says an executive at a tier one EMS provider in the iSuppli report. "Differentiation will not result from being the best assembly house."
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