More consolidation means fewer choices
As electronics outsourcing revenue growth slows, EMS providers will compete harder for OEM business and focus on higher margin opportunities.
By James Carbone -- Purchasing, 10/16/2008 2:00:00 AM
OEM electronics buyers involved in outsourcing decisions should review their roster of electronics manufacturing services (EMS) providers carefully and rethink their outsourcing strategies.
The growth rate for the global electronics contract manufacturing industry is slowing and that means more consolidation and fewer outsourcing choices for buyers. A recent study by researcher iSuppli in El Segundo, Calif., says the compound annual growth rate (CAGR) for the industry will be 7.2% through 2012. That growth rate represents a major slowdown compared to past years. Global electronics outsourcing revenue rose at a CAGR of 15.5% from 2002 to 2007 and industry CAGR was 49% during the 1990s.
Revenue growth is slowing because key customer segments for EMS providers, such as computers and communications, have reached near saturation in terms of outsourcing. At the same time there is excess manufacturing capacity.
Some EMS providers suffered revenue losses in 2007. Sanmina-SCI, Celestica and Elcoteq suffered had 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.
Slower growth also means segmentation in the industry as EMS providers compete by offering services that appeal to OEMs in specific higher-margin vertical markets such as medical or defense and aerospace rather than across multiple industries.
The good news for OEM buyers is that EMS providers will offer more value add, design and procurement services as a way to keep or win new business. However, in the short term, buyers may need to qualify new EMS providers if they want to maintain leverage.
"OEMs that outsource are very concerned about consolidation," says Adam Pick, an EMS industry analyst for iSuppli. He says it marginalizes their ability to leverage their EMS spend.
A company may have three EMS providers, including two large EMS suppliers. If those two merge, suddenly perhaps up to 80% of the OEM's outsourced manufacturing spend could be with one EMS supplier.
A similar scenario happened about a year ago when Flextronics bought out Solectron. Some major OEMs, which used both EMS providers, had to find other EMS providers because they didn't like the idea of one EMS company handling a large chunk of their manufacturing.
Check the financials
Major electronics OEMs says they are carefully evaluating their EMS partners and their outsourcing strategies even if they are not yet qualifying new suppliers.
"We've seen consolidation in the EMS industry and believe it is likely to continue as the industry continues to tighten down," says Pascale Mardirossian, vice president supply management worldwide operations for Sun Microsystems in Santa Clara, Calif. "We keep close alignment with our EMS suppliers to ensure their capabilities grow with our needs. And we monitor their financial health," she says.
Pick says one reason for less revenue growth and consolidation in the EMS industry is that OEM customers have pulled back purchasing of components and other production materials from their EMS providers. Many OEMs when they outsourced manufacturing allowed the EMS providers to handle the sourcing and purchasing of parts for the equipment that the EMS provider was building for them.
EMS providers consolidated purchases from multiple OEM customers, leveraged those purchases with suppliers and realized considerable material costs savings. OEMs now have pulled back purchasing because they want those materials costs savings. "For many EMS providers materials costs savings was a form of a revenue source for them," says Pick. "Now that has largely disappeared."
Many OEMs now maintain control of supplier relationships and negotiate with suppliers. "Our external manufacturer partners purchase all material that they use to build product for Sun," says Mardirossian. "However, we internally manage the relationships of those suppliers that we believe are core and strategic to our business. That includes memory, drives, and processors as some examples." The day-to-day procurement for those materials is handled by Sun's EMS providers.
Diversify diversify diversify
Because EMS suppliers have lost a revenue source, they are looking for ways to diversify and looking to provide more value-added and design services. Ironically, some are beginning to offer up procurement services even if an OEM does not want the EMS provider to manufacture products.
"It's happening with some major OEMs across a couple of different verticals," says Pick. He says EMS providers are looking at procurement services as an opportunity to reach new customers who may not outsource.
If an OEM does not outsource manufacturing and the EMS can save them $1–2 million by purchasing materials for them, the EMS provider can build trust with the OEM and ask for manufacturing business in the future, says Pick.
He says by outsourcing procurement of materials to an EMS provider, an OEM can "maximize bandwidth of its purchasing resources." Some companies are experimenting with this to see what type of return they can get by outsourcing procurement.
Most EMS providers don't offer such procurement services, but some provide commodity management services for a fee. "We will do a bill of materials analysis for a client," says John Boucher, executive vice president, supply chain management solutions and chief procurement officer for EMS provider Celestica in Toronto. "We tell them if the parts on the BOM are single sourced or are going end of life."
He says Celestica buyers "have done a good job getting end of life data about components to OEM buyers and telling them where they have risk."
Boucher says providing commodity management services sometimes is "an entry point to where we do the manufacturing for them, but we are OK just providing the value added service."
New segment potential
EMS companies are trying to boost revenue by pursuing more high-margin customer segments which are just beginning to outsource, such as industrial controls, medical and automotive industries.
"Those segments are being pursued the heaviest because those types of programs are a much higher mix and lower volume and margins are more consistent and product lifecycles are longer," says Pick.
Another emerging customer segment to watch for the EMS industry is energy technology, according to Boucher. "It's not just solar, but all alternative energy technologies. Those companies will need to bring their products to market quickly in every region of the world and will use the outsourcing model," he says.
Businesses such as solar, medical and industrial controls are attractive to EMS because the margins are higher than the traditional EMS business of computers, cell phones and consumer electronics equipment.
"Anytime you go from handsets to an echocardiogram machine, there are more skilled capabilities required and less automation so margins are higher," says Pick. Many such OEMs are looking for contract manufacturers that can both design and manufacture products.
"A multibillion client of ours has nine EMS providers and original design manufacturers (ODMs) and can't manage all those suppliers," says Pick. The OEM is looking to reduce that number and wants contract manufacturers that can provide both EMS and ODM services. EMS providers typically manufacture equipment designed by the OEM customer. An ODM will design a product and often has the intellectual property (IP) for it. The ODM will often design and manufacture a product for multiple OEMs.
The IP factor
The decision of which type of contract manufacturer to use often involves how much intellectual property (IP) the OEM has, according to Pick.
"If I am a networking equipment company and I have some unique technology, I don't want anyone other than a firewalled EMS provider to have visibility into that technology," he says.
The company may in fact decide to use a North American EMS provider for high-end products that have proprietary IP and then use a Taiwanese ODM for low-level products.
He says OEMs are also looking for EMS providers that not only know how to manufacture a product, but understand the business that the OEM is in.
"We are beyond that time where just being able to manufacture a product is enough," says Pick.
| Rank | EMS Provider | CY 2007 | CY 2006 | Change |
| Source: Company Reports, iSuppli Estimates | ||||
| 1 | Foxconn | 54,706 | 39,253 | 39.4% |
| 2 | Flextronics | 33,346 | 28,876 | 15.5% |
| 3 | Jabil Circuit | 12,432 | 11,087 | 12.1% |
| 4 | Sanmina-SCI | 10,138 | 10,872 | -6.8% |
| 5 | Celestica | 8,069 | 8,811 | -8.4% |
| 6 | Elcoteq | 5,740 | 5,139 | 11.7% |
| 7 | Benchmark | 2,915 | 2,907 | 0.3% |
| 8 | Venture | 2,617 | 1,971 | 32.8% |
| 9 | Universal Scientific | 2,046 | 1,676 | 22.1% |
| 10 | Plexus | 1,624 | 1,513 | 7.3% |
| 11 | SIIX Corp. | 1,366 | 1,051 | 30.0% |
| 12 | Zollner | 960 | 731 | 31.3% |
| 13 | ViaSystems Group | 804 | 850 | -5.4% |
| 14 | Nam Tai Electronics | 780 | 865 | -9.8% |
| 15 | Jurong Technologies | 673 | 822 | -18.1% |
| 16 | Alco Electronics | 652 | 624 | 4.5% |
| 17 | APW | 575 | 601 | -4.3% |
| 18 | Beyonics Technology | 573 | 674 | -15.0% |
| 19 | Enics | 489 | 437 | 11.9% |
| 20 | SYNNEX | 470 | 540 | -13.0% |
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