Full report: EMS / ODM worry about profitability as fall 2011 survey reveals pessimism in electronics supply chain

Economic and employment concerns most troublesome among all 471 survey respondents as inventories have grown leaner. Biggest concern for EMS / ODM respondents is future profitability. Demand upticks will help companies further up the supply chain. VentureOutsource.com believes results in this most recent supply chain analysis accurately represent attitudes and could help to predict, in the short-term, activity in the electronics marketplace.

2011 has not been a good year for the electronics supply chain and our latest survey shows that members in the supply chain are feeling the weight on their shoulders. While the success of tablets, especially the iPad, and a return to enterprise spending helped in the first part of the year, the recovery from the Great Recession is much milder than hoped for.

Natural disasters have rocked the market as well.

The earthquake and tsunami in Japan in March impacted the supply of critical components and the flooding going on in Thailand has taken a large share of manufacturing capacity off line for hard drives, various consumer products, and automotive engines and other systems.

Most worrisome is the macroeconomic environment.

In the US, the inability for the government to manage debt accompanied by high unemployment have impacted consumer confidence and spending. Europe faces a significant debt burden with national defaults a possibility and eurozone finance ministers also possibly facing the potential breakup of the European Union with either scenario forcing EU companies (and those invested in working with / in the EU) to minimize risk by placing cash reserves in safe investments and drastically reducing non-essential expenses.

The economic malaise has also spread to Asia, with growth slowing significantly in China and Japan still faces stagflation plus a rapidly appreciating currency, which will hurt exports.

With these challenges in mind, VentureOutsource.com’s latest Electronics Supply Chain Business Outlook Survey shows supply chain attitudes have fallen nearly 10%, compared to six months ago.

This latest survey interviewed 471 members of the electronics supply chain, 87% of these respondents were either key decision makers for their companies or directly participated in the decision making process.

87% of survey respondents responsible for or participating in purchasing, sales and operational decision making. Nearly one in five survey respondents said they worked in the computer PC industry.

Respondents rated the current situation (based on the economy), employment situation, inventory levels, and sales and purchasing activity 5.3, out of a possible score of 10, down 9% from our spring 2011 survey.

Even worse, respondents who were previously optimistic the outlook would improve in the near future now see no significant improvement in the near-term, with an average score on our Future Index of 5.4 out of 10, down 11% from our last survey. Respondents were most worried about the economy and jobs, as shown in Figure 1.

Figure 1: Average Responses for Future Index and Constituent Elements by Company Type

Among all respondents, key decision makers and respondents from EMS / ODM firms were the most pessimistic.

The Survey
VentureOutsource.com’s Electronics Supply Chain Business Outlook Survey for the fall of 2011 ran for approximately six weeks ending October 23, 2011 and generated responses from 471 people.

Respondents were asked 12 questions about their expectations regarding the current and future business environment: employment, business volume, and product pricing environments.

Survey respondents were asked to rate their views on these questions on a scale of one to ten (one being the most negative and ten for the most optimistic response).

VentureOutsource.com has been surveying the electronics industry for clients for some time. We began doing our own surveys that we began sharing with readers in 2006. (Click for results made public from that first survey) We later moved to a standardized 12-question survey format a couple of years later resulting in the type of public findings / information we share with industry today.

This standardized survey format, which began in April 2009, was also presented to industry in August 2009, April 2010 and April 2011 with each survey asking the same basic 12 questions. Full report findings for each of the above surveys can be found in the links below beginning with the most recent survey report:

http://ventureoutsource.com/2011-fall-report (this report)
http://ventureoutsource.com/2011-spring-report
http://ventureoutsource.com/2010-spring-report
http://ventureoutsource.com/2009-fall-report
http://ventureoutsource.com/2009-spring-report

Our most recent industry survey on the state of the electronics supply chain was sponsored by Digi-Key (www.digikey.com), one of the world’s fastest growing distributors of electronics components.

This survey gathered opinions from 471 respondents from throughout the supply chain and from different market segments. Tables 1 through 3 show the number of respondents by their type of company versus three other demographic categories.

Table 1: Responses by Company Type and Product Area / Market Segment
 

In our most recent fall 2011 survey, more than half of the respondents worked for OEMs (52%) and just 8% for EMS / ODM companies. Semiconductor firms made up the second largest group of respondents with 17% of the sample.

With such a large group of respondents coming from two key constituencies, interpreting the results will require readers keeping in mind the survey is dominated by these company types.

Given the survey went to primarily current readers of VentureOutsource.com, it is not surprising so many responses came from the OEM and semiconductor industries – possibly indicating continued / increasing interest in contract electronics manufacturing outsourcing to reduce costs – the latter interest possibly supported by the online domain’s continued rise in organic traffic for keywords related to the outsourcing electronics industry and ways OEMs are obtaining information they can act on to set strategy and better manage purchasing, outsourcing and supply chain operations cost decisions. (See, also: Outsourcing Calculator for OEMs)

With the large mix of survey respondents coming from non-traditional electronics outsourcing industries, the third option of evaluating current and potential EMS / ODM partners is also likely a primary reason. (Search: EMS Resources Directory)

Semiconductor companies are likely focusing on one of their key routes to market, especially for the two thirds of semiconductor survey respondents from the computer and consumer industries.

Ten percent of respondents identified themselves as working for component manufacturers, and equipment manufacturers generated 8% of responses. Distribution / logistics firms again made up the smallest respondent group as with our spring survey.

Nearly one in five survey respondents said they worked in the computer PC industry.

Nearly half of respondents identified as being part of the industrial (15%), military / aeronautics / avionics (13%), medical electronics (11%) or automotive sectors (9%).

This last distribution of respondents makes sense.

PC manufacturing is dominated by outsourced manufacturing and PCs make up the largest single revenue opportunity for EMS / ODMs.

64% of respondents indicated they were answering for their entire company in the survey.

As for these emerging sectors respondents, they have likely been attracted to learn more about these services by their industries’ increasing use of outsourcers. (See: Top 10 EMS / ODM company rankings)

The consumer electronics sector accounted for 10% of respondents, and the networking (3%), telecommunications (6%), server (6%), and the other segments (7%) round out the list.

The lower share of respondents from the enterprise infrastructure segments probably reflects the more concentrated nature of these end-markets rather than a particular focus on, or disinterest in, outsourced contract electronics manufacturing.

Table 2: Responses by Company Type and Decision Making Role

Key decision makers accounted for over 49% of respondents in the fall 2011 survey, up from previous surveys, while the share of respondents with only a view into the decision making process was down significantly from the last survey.

Only 13% of respondents stated they had a view into decision-making, compared to 20% in the spring.

The number of respondents that participate in decision making for their company was consistent with the previous survey, 38%.

By company type, the distribution by decision making role was largely consistent. There were two sets of exceptions.

First, component manufactures and EMS / ODM respondents had higher share of key decision makers, 53% and 58%, respectively, at the expense of respondents with a view into the decision process.

Secondly, distribution / logistics and equipment manufacturers had higher percentages of respondents with only a view into the decision making process, 23% and 18%, respectively, largely at the expense of key decision makers.

Figure 2: Responses by Decision Making Role

With presenting a balanced view into the current sentiment around the electronics supply chain as its primary goal, this survey tries to go beyond opinions at the very top of organizations.

With 87% of respondents responsible for (or participating in) purchasing, sales, and operational decision making, VentureOutsource.com believes the results presented in this most recent supply chain analysis accurately represent attitudes and could help to predict, in the short-term, activity in the electronics market place.

By including a broad range of survey respondents, VentureOutsource.com can tap the opinions of senior decision makers and their staff, who they rely on, to gather insights into purchasing requirements; sales opportunities, material needs, logistics, and other intelligence necessary for helping them make better purchasing decisions.

The profile for EMS / ODM respondents, combined with the decision making role demographics, will prove significant as we review the supply chain outlook in this report, below.

In fact, in most organizations, decision-making is dispersed throughout the organization.

By surveying each of the major nodes in the supply chain, and at different levels within each node, VentureOutsource.com feels the results you are reading here truly capture current and future sentiment.

Table 3: Responses by Company Type and Business Level

Sixty four percent of respondents indicated they were answering for their entire company in the survey. While this was down slightly from the previous survey, it still means our survey results continue to represent primarily a broad-based company level view of the electronics supply chain.

While equipment manufacturers had a slightly lower average (58%) and component manufacturers had a slightly higher percentage (67%) than the overall survey, they are still largely consistent with the overall average.

EMS / ODM respondents continued to stand out from the majority of respondents.

Outsourced manufacturers (EMS / ODM) had a much higher percentage of respondents answering for the whole company, 82%.

The profile for EMS / ODM respondents, combined with the decision making role demographics, will prove significant as we review the supply chain outlook below.

Survey results
As stated above, the survey consisted of twelve core questions asking respondents for their opinions on multiple aspects of the current and future business environment, in regards to the electronics supply chain, from either selling into, or purchasing from, the supply chain.

For each of these core questions, respondents were asked to provide their opinion on a scale of from one to ten, where one was the most negative response and ten the most positive.

From these 12 core questions asked in the survey, three indices were formed to summarize respondent attitudes toward the state of the electronics supply chain and will be examined in detail below. The indices are:

• Current Index: The average of each of the respondent’s scores for their current outlook regarding the economic situation; employment, inventory levels, business volume, and prices.
• Future Index: The average of each of the respondent’s scores for their expectations regarding the economic situation; employment, business volume, and profits.
• Overall Index: The average of the two indices above.

The survey results show that the outlook for the electronics supply chain has become very pessimistic and does not see much improvement over the next two quarters.

As Figure 3 shows, in our spring survey respondents felt fairly optimistic, providing an average current index score of 5.9 out of 10, given the Tsunami and earthquake in Japan and lackluster economic growth.

Figure 3: Supply Chain Outlook: Spring vs. Fall 2011 Survey Results

In the spring, there was also optimism that market conditions would improve a little over the course of the year as 2011 unfolded.

But, six months later, the electronics supply chain has seen the macroeconomic situation worsen with debt concerns in Europe and a US government unable to solve problems in the US, nearly taking the US into default over partisan issues.

While some economists do not think we will slip into a double dip recession, the recovery from the last recession is anemic and unemployment remains quite high and is expected to remain at current levels through 2012, at least.

The average score on the Overall Index, averaging their current and future outlooks, was 5.34 on a scale of 1 to 10.

Also, developing markets are now starting to feel the economic pain, with China’s growth slowing as her domestic consumption weakens, in addition to lower demand in export markets. (Read: Economic drivers, challenges creating regional electronics industry)

Finally, by the close of this survey (October 2011), the industry was witnessing another natural disaster that had the potential to wreck havoc with the supply chain. Flooding in Thailand manufacturing centers will seriously impact a number of high tech manufacturing segments.

Thailand is home to a large percentage of the manufacturing capacity of hard disk drives, in addition to DSL cameras and lenses. Also, Thailand hosts large manufacturers of automotive engines and other components and STBs.

With factories in Thailand under up to two meters of water for at least two weeks, the clean up and restoration efforts will be significant and take two to four quarters to bring these sites back online or to establish new capacity. For the supply chain and consumers, these floods will reduce availability of products and raise prices.

All of these issues seem to be very much on the minds of respondents this fall, creating a much more mooted, neutral attitude toward business prospects within the electronics supply chain.

The average score on the Overall Index, averaging their current and future outlooks, was 5.34 on a scale of from one to ten, with ten being the most favorable.

This neutral view ties in with increased order volatility seen from leading semiconductor companies in their Q3 earnings discussions.

While some semiconductor firms, such as Intel, have reported positive results, many more companies are reporting mixed results and some have started to lay off employees.

Further, the small increase between the current and future outlook indices that was seen in the spring has also been cut to just a meager 3%, indicating little hope for the near-term outlook to improve.

In the end, responses on all three indexes came in approximately 10% below the average responses in the spring, as shown in Figure 4.

Figure 4: Supply Chain Overall Outlook Index by Company Type and Product Area

Respondents from electronics equipment manufacturers and semiconductor firms had the most positive outlook on the overall situation, especially in the future aspect of the index.

On the other end of the spectrum, respondents from EMS / ODMs were the most pessimistic. These trends generally hold true for the overall index but are especially pronounced regarding the Future Index.

By industry, automotive sector respondents had the most positive perspective regarding the current and future outlook for the supply chain.

For all three indices, the most negative respondents were from the industrial sector.

Its important to also note these extreme views are held in company types or industries that tend to have the highest concentration of key decision makers for our survey.

The optimism or pessimism, relative to the average responses on the indices may be tied to how the senior leadership in a segment is viewing the current situation.

Many product segments are expected to see weak demand through 2012 and this likely concerns most EMS / ODM executives.

Equipment manufacturers have already been through a downturn and may be seeing an upturn in capital spending in the near future.

Japan and Thailand will need to rebuild their capacity and if the supply chain is concerned with their geographic risk, may see the need to invest in additional / alternative regions. Meanwhile, India is making concerted investing efforts, again, in hardware electronics manufacturing. (See: Steps to develop and promote Indian EMS)

These companies may also see the continued cost of labor rising in China as beneficial to their prospects. As labor costs increase, manufacturers may be more likely to invest in automation to control costs. (Read: Foxconn automatons and outsourcing impact more than just jobs)

The explanation for semiconductor respondents is less clear.

The semiconductor segment is seeing revenue growth slowing and layoffs are starting to take place.

In certain areas growth prospects are better, but overall the next several quarters will be challenging for semiconductor firms.

Semiconductor end-user demand is not expected to see any sharp uptakes and prices for most areas are expected to decline.

There are few reasons for semiconductor decision-makers to be optimistic, except that inventories have already tightened, which means any uptick in demand may prove beneficial to their organizations being upstream in the supply chain.

EMS / ODMs, on the other hand, are likely scared of the order volatility they have seen and the worsening end-user demand climate. With the exception of a few areas, most product segments are expected to see weak demand through 2012 and this likely concerns most EMS / ODM executives.

Also, EMS / ODMs have already taken steps through the last recession to right size their operations and take costs out, meaning any slowdown will only cause further damage.

Within the sector, EMS firms are seeing greater competition from ODMs in market segments where they have traditionally enjoyed success. This perspective is especially worrisome, given the profile of EMS / ODM survey respondents – key decision makers with a view of their whole company.

For the automotive sector, the key driver here may be the increasing electronic content within cars is making automotive electronics one of the brighter prospects within the overall electronics industry. (Read: 2010 interview with Society of Automotive Engineers president / executive director and chief technologist with Delphi Corporation, Andrew Brown, Jr., Ph.D.)

With the challenging economic situation, it appears that many respondents from the industrial sector are worried about their customers’ capital spending, which may be in jeopardy.

Respondents rated the current situation at just 5.25 out of a possible score of 10, down 9% from the spring survey.

As discussed above, EMS / ODMs were the most pessimistic, along with respondents from the industrial segment, with average scores of 5.06 and 5.01 respectively. Automotive segment members and respondents from equipment manufacturers gave the most optimistic scores, at 5.5 and 5.34 respectively.

Figure 5: Supply Chain Current Outlook Index by Company Type and Product Area

Table 4 presents the average responses toward the elements that make up the Current Index for our survey. The average score on the Current Index was 5.3 out of 10 and the sentiment on most questions was quite close to the index score.

Noteworthy standouts were current business volume, which seemed to be the brightest area within respondents’ feelings toward the supply chain, and inventory levels.

In fact, attitudes on the current inventory question were only off by two basis points from the spring survey, and the average score on the volume question was off by only 5%.

The three other topics had average scores in the fall survey that were more than 10% below the spring survey.

From what we have seen, electronics supply chain inventories have grown leaner and may help to explain why this topic’s score dropped so little. With lean inventories, any uptick in demand will lead to increased revenues for companies further up the supply chain.

If demand remains weak, lean inventories mitigate risks for suppliers. However, in the spring survey the current inventory score was the lowest among the five constituent elements of the Current Index.

The current volume question is a bit more surprising given the weakness seen across the supply chain in the third quarter. Possibly, the activity leading up to the holiday shopping season influenced scores on this point.

This is especially important for the PC sector, which accounted for 20% of respondents.

Also, the concern over the economy and the employment situation may have been dominant in the minds of respondents.

Table 4: Average Responses for Current Index and Constituent Elements

Turning to attitudes regarding the near future, respondents do not generally expect the situation to improve meaningfully, especially in terms of the economy and the employment situation.

The average score, as seen in Figure 6, for the Future Index was 5.43, down 11% from the spring survey. EMS / ODM respondents had the largest drop in average score, down 18% from the spring with an average score of 5.07.

Figure 6: Supply Chain Future Outlook Index by Company Type and Product Area

Table 5 shows the average responses toward the elements that make up the Future Index. Economic and employment concerns are the most troublesome to respondents, with average scores of 5.3 for each of these questions, compared to the average weighted index score of 5.4.

The average score for future business volumes and profits were both 5.6 in the fall survey, 5% higher than the other two elements of the Future Index.

The score on business volumes indicates survey respondents were still expecting some small growth in the holiday shopping season, even in this down economy.

However, this score was down 11% from six months ago, reinforcing the change in sentiment we have seen.

The sentiment on profitability was the closest to the spring results, down just 3% from the spring as can be seen in Figure 1. This can partially be explained by efforts companies have taken to minimize inventory risks and efforts to take costs out of operations, including the start of layoffs.

Another part of the explanation was a weak outlook for future profitability in the spring survey.

The other two questions, regarding the future economic and employment environment had average scores that fell by 13% to 14% over the past six months. This possibly indicates fear and uncertainty are being felt at a much more personal level.

At the time of writing this analysis, media news lines have continued being dominated by negative economic news and as demand slows, our survey respondents seem to be expecting more layoffs and fewer to little prospects for career mobility.

Table 5: Average Responses for Future Index and Constituent Elements

As mentioned above, respondents from EMS / ODM firms were the most pessimistic on both the current and future indices.

As Figure 7 below shows, on each of the core questions for the Current and Future Indices, EMS / ODMs had a mean score less than the overall survey pool, except for current inventories.

This pessimism by EMS / ODMs ranged from 3% to 4% below the overall survey pool to as high as 14% below the overall survey on future profits.

Figure 7: Average EMS / ODM Responses Compared to Survey Average

On the questions that make up the Current Index, EMS / ODMs had an average score generally about 4% below the survey average. Their greatest concern was business volume.

This makes sense because EMS / ODMs are particularly exposed to swings in end-market demand due to their exposure to inventories building, their need to reduce operations, plus order volatility.

On the Future Index and related questions, EMS / ODMs were even more pessimistic, with an average score running 7% below the overall survey. Besides the normal seasonality which sees a weaker first calendar quarter contributing to this low score, EMS / ODMs are highly concerned about how this slow down will impact orders.

As mentioned above, profitability was the greatest concern for EMS / ODMs. On this point, these respondents’ average score was 14% below the survey average.

EMS / ODM key decision makers were much more pessimistic concerning the employment environment than their coworkers.

The reason for this concern has to be both the economy and the traditional challenges of EMS / ODMs to properly capture value for their services. (See, also: Defining a new value proposition for EMS providers and industry)

Figure 8 shows average values on the three indices by the decision-making role of the respondent. Overall, key decision makers tended to be more pessimistic than other respondents, averaging a 5.3 on the Current Index and 5.4 on the Future Index.

The pessimism of key decision makers varied widely by type of company, with only one set of respondents breaking this trend, key decision makers from distribution / logistics firms. These respondents were more optimistic than their coworkers.

Also this pessimism helps to explain the low sentiment held by EMS / ODMs. Key decision makers, who were over-represented in the survey pool for these firms, were 2% more pessimistic on the Current Index than the average for this group and were 6% more pessimistic on the Future Index.

EMS / ODM key decision makers were much more pessimistic concerning the employment environment than their coworkers, which is in stark contrast to the rest of their coworkers.

Staffing levels are a key tool used by EMS / ODMs to manage costs as production scales with OEM customer program demand, and are thus a significant issue for these respondents. (Click the following to better understand EMS labor and program costs, and OEM savings, and learn about EMS global pricing drivers)

Other levers are already well established and built into EMS / ODM operations, such as slowing purchasing of inventory. But, if EMS / ODMs see the economy is slowing, senior decision makers will look at reducing staffing levels to help reduce costs. EMS / ODM results are therefore highly dependent upon the biases of key decision makers.

Interestingly, attitudes among key decision makers did not vary as much by industry segment.

But in the industrial segment, again with a higher proportion of key decision makers, respondents overall were more negative than in other segments.

Here, industrial key decision makers were 2% and 4% more negative on the current situation and on the future outlook, respectively. Respondents here were also concerned about the future employment situation and current and future business volumes.

Regarding their future outlook, industrial key decision makers were much more pessimistic in their views on future business volumes and profits, than other respondents. Key decision makers’ average scores on future volumes and profits were 5.3 and 5.4, respectively, compared to all respondents whose mean scores were 5.5 and 5.6 for future volume and profits.

Figure 8: Responses by Role in Decision Making

Respondents continue to feel confidence in their responses to the questions of the survey.

As shown in Figure 9, 48% of respondents rated their confidence in their answers at an 8 or higher, on a scale of one to ten. A further 30% rated their confidence as a 7.

With a combined score of 78% rating at 7 or higher, the respondents to the fall survey were only slightly less confident compared to the spring survey when 85% rated their confidence similarly.

Figure 9: Participant Confidence in Their Responses

For a more detailed comparison of the sentiment between the current and previous surveys, by question, see Figure 10.

It is no surprise, given the current situation, that the economic environment, especially in the near-term future, is the most worrisome to supply chain executives. (Read interview with chairperson at the business school with the No. 1 ranked (Gartner) undergraduate and graduate programs in the U.S. for supply chain management: How companies can make their supply chains more competitive)

On this point, the average score dropped 14% from the spring to the fall surveys.

The employment situation, both currently and in the future, also took a major hit with this survey, with response ratings dropping 13%.

Finally, future business activity, shipments or purchasing, had the third worst drop in sentiment rating, down 11%.

On this last topic, respondents our fall survey rated this with the most pessimism.
In the spring, respondents increased their outlook from the current quarter to the near-term future by 8%. In the fall, only a 1% increase was noted in the electronic supply chain’s volume.

On other topics, the gap between the current and the future changed only slightly on the other questions.

Figure 10: Average Supply Chain sentiment, Spring versus Fall 2011

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Future surveys / findings
Readers wanting to receive advance notice of future surveys, and release of survey findings, please send an email to:

insight[at]ventureoutsource[dot]com

Request to be added to our monthly e-newsletter ‘INsight’ or, sign-up directly on the VentureOutsource.com Website.

Other VentureOutsource.com surveys
http://ventureoutsource.com/2011-fall-report (this report)
http://ventureoutsource.com/2011-spring-report
http://ventureoutsource.com/2010-spring-report
http://ventureoutsource.com/2009-fall-report
http://ventureoutsource.com/2009-spring-report

Survey Methodology
VentureOutsource.com’s fall 2012 Electronics Supply Chain Business Outlook Survey was launched and made available to industry clients and Website readers on September 8, 2011. The survey was also sent directly to individuals in electronics corporations, organizations and agencies that use, offer and are employed in electronics contract manufacturing and / or technology supply chain and outsourcing services or subscribe to our opt-in e-newsletter INsight. Survey participation was voluntary. Survey questions designed to define survey respondent demographics did not collect any personally identifying information. The survey closed October 23, 2011. Survey questions focusing on indicators of respondent expectations and experience were posed with a scoring basis of 1 to 10 (1 = very negative experience or expectations and 10 = very positive experience or expectations) per survey question / criteria.

The survey also included questions that asked respondents to describe the type of company they work for; what product areas their business unit or corporation are active in; their role in the decision making process; and what level they can speak to (business ‘units’ versus overall corporation).

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