Electronics manufacturing services industry will see a slow recovery
Buyers may have fewer EMS choices as the downturn leads to more consolidation.
By James Carbone -- Purchasing, 10/15/2009 2:00:00 AM
The electronics manufacturing services (EMS) industry has been hard hit by the global economic downturn as total revenue of global EMS providers will fall 12% in 2009 after declining 5% in 2008. However, the industry will start to recover in 2010 when the revenue of EMS providers increases 3%, according to researcher iSuppli.
"It's been a tough, challenging year for EMS providers," says Adam Pick, director and principal analyst EMS/ODM services for iSuppli in El Segundo, Calif. "Some EMS firms were down 25%. Some are holding on a little bit better than others, but the pain is being felt by all. It's just a matter of degree."
Pick says EMS providers have been "quick to take action" during the downturn, closing facilities and reducing headcount. He says about 90,000 jobs have been cut in the industry over the last seven months. Foxconn and Celestica have closed plants.
"Some EMS providers have pulled back and are running at capacity four days per week in some cases. They are doing all the things possible to insure OEM customers that they will continue to be around," he says.
EMS providers have also reduced inventory levels. For instance, Flextronics reduced its inventory from $4.6 billion in the third quarter of last year to $2.7 billion in the second quarter of 2009. Jabil cuts its inventory levels during the same time by $148 million; Celestica, $61 million and Benchmark, $23 million.
Because of the downturn, buyers involved in outsourcing decisions are reviewing the financials of their EMS providers with a fine-tooth comb because the downturn will likely result in more consolidation in the industry.
"They are looking far more closely at our financial status, our balance sheet," says John Boucher, executive vice president global sales and supply chain solutions for EMS provider Celestica in Toronto. "(OEM buyers) are doing due diligence on the financials of their EMS partners and we are doing the same with our suppliers," he says.
While EMS industry executives acknowledge the past year has been difficult, they are optimistic that their business will get back on track once the recession ends and demand for electronics equipment picks up. In fact, some believe that the recession has helped their business because it has made outsourcing more appealing to OEMs that have not outsourced before.
"We think any downturn like this will be good for our business because it drives OEMs to outsource with a great level of urgency and aggressiveness," says Bill Muir, executive vice president and CEO of Jabil's EMS division, headquartered in St. Petersburg, Fla. "It shakes up the playing field. It creates more separation between people doing well and those who aren't."
He says Jabil has gained market share during the downturn. "With any recession you get near-term pain, but the good companies get some long-term gain out of it," he says.
However, in the short term, no one is benefiting from the downturn, according to Charlie Barnhart, co-founder of electronics outsourcing consulting firm Charlie Barnhart and Associates in Maui, Hawaii.
He says some of the larger companies are trying to be positive because they won some new business and they saw some short-term improvement.
"But when you dig down into it, you find out business improved in one plant in one country in one geography and they are actually closing down two other plants," he says.
Be rational
Barnhart says the EMS business environment has been tough this year and EMS providers are reacting to the downturn in different ways. "Some people are irrationally optimistic and some people are on the verge of suicide and other people are hunkered down and just want to get through this. It is a strange, almost psychotic environment out there," says Barnhart.
Longer term, Barnhart says business will improve, but exactly when that will happen remains to be seen.
"Right now, we're not seeing any evidence of any long-term growth," says Boucher. "We see stability, but our customer base is not saying there will be good growth. No one is giving a long-term projection to us."
In the short term, business revenue will decline 12% to $152.3 billion this year, according to iSuppli. In 2010 there will be modest 3% growth and revenue will reach $171.3 billion in 2013.
Besides an overall decline in end equipment demand, another reason for the EMS decline is some large companies, including Nokia and Alcatel-Lucent among others, have changed their outsourcing strategy. They have brought back some manufacturing in-house in order to keep their own factories running.
However, not all companies are insourcing. In fact, there is no clear-cut outsourcing strategy that OEMs are employing during the recession.
"The only clear-cut strategy I have seen is no one wants to spend money," says Barnhart. "They are not traveling, not launching new initiatives. Some OEMs have switched [EMS providers]. Some have culled down their supply base. Rather than cutting everything equally, they have dropped off suppliers," he says.
Pam Wiseman, a consultant at Technology Forecasters, based in Alameda, Calif., agrees that there is no one strategy that OEMs are using.
"I have seen examples of OEMs making decisions to move manufacturing and procurement out as well as in-house," she says. "There is so much unpredictability."
For instance, she notes electronics giant Sony is selling its North American television manufacturing business in Mexico to Hon Hai and will use the EMS provider to build TVs. However, instrument maker LeCroy, which had outsourced manufacturing to Plexus, is bringing manufacturing back in house. Hon Hai ranks Number One in revenue on IDC's list of Top EMS providers.
Other companies are outsourcing for the first time. For instance, Coca-Cola recently announced it would have Plexus build a new high-tech soda dispenser.
Defense, aerospace and medical OEMs, which had built equipment in-house, are now starting to outsource to reduce cost. EMS providers say those industries will drive the next wave of growth once the recession ends. However, computing, mobile communications and wired communications will continue to be the top three segments for the EMS industry, accounting for 78% of all EMS business in 2013.
China anyone?
In deciding which EMS providers to use, OEM buyers need to check out the global manufacturing footprint of providers in addition to the providers' manufacturing expertise. Some providers have facilities only in North America while others are global.
China has evolved as a preferred manufacturing location for many OEMs and EMS providers because of low labor costs. However, OEM purchasers involved in outsourcing decisions need to know that when it comes to low-cost manufacturing, it isn't just about China anymore.
While China is still appealing to many OEMs that outsource high-volume consumer products such as laptop computers and cell phones, more OEMs are looking for manufacturing locations that offer the lowest total landed cost.
"About 18–24 months ago, there had been a singular focus on manufacturing having to be done in China," says Muir of Jabil. "China was the be-all, end-all answer." But he says EMS providers are seeing more openness by OEMs "to a landed cost model that takes into account logistics, currency fluctuation, oil and transportation costs." More OEMs are looking for the truly lowest cost of manufacturing, he says.
Some OEMs that outsource to China to save on labor costs saw their savings minimized when oil prices and transportation costs increased last year and some have opted to move manufacturing to regions closer to where the product will be sold.
Where a product should be built depends on the type of product, what the volumes are and where the end market is, says Gary Watson, senior director of strategy and marketing for EMS provider Flextronics.
"High-volume consumer products such as printers, cell phones and PCs are driven by price so low-cost manufacturing regions like China make sense for them," says Watson.
But lower volume, large form-factor products like communications infrastructure systems may benefit from being built in or near the market where they are sold, he says. That is especially true during a downturn when volumes decline and a company is not able to maximize the cost benefit of building in a distant low-cost country because of the higher transportation costs, says Watson.
Regardless of where equipment is built, the current downturn will end and the EMS industry will recover, but the recovery will be slow.
"The recovery is not going to look like a big party," says Barnhart. "It will be more subtle. It's kind of like how do you know when a hangover is over? At some point you realize you aren't in as much pain as you were. At some point the pain goes away."
Top EMS Providers
($ millions revenue worldwide)
| Rank | Company | 2008 | 2007 |
| Source: IDC |
|||
| 1 | Hon Hai Precision Industries | 46,605 | 37,675 |
| 2 | Flextronics | 33,320 | 33,975 |
| 3 | Jabil Circuit | 12,775 | 12,473 |
| 4 | Foxconn International | 9,271 | 10,870 |
| 5 | Sanmina-SCI | 7,874 | 10,138 |
| 6 | Celestica | 7,678 | 8,070 |
| 7 | Elcoteq | 5,057 | 5,546 |
| 8 | Venture Corp. | 2,678 | 2,570 |
| 9 | Benchmark Electronics | 2,590 | 2,916 |
| 10 | Universal Scientific Industrial | 2,061 | 1,982 |
| 11 | Plexus | 1,839 | 1,624 |
| 12 | CTS | 692 | 686 |
| 13 | Nam Tai Electronics | 623 | 781 |
| 14 | LaBarge | 251 | 289 |
| 15 | SMTC | 243 | 256 |
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