Hon Hai and several ODMs investing in optoelectronics to take advantage of growing LED TV market. OEMs increasingly turn to third parties for product design. ODM sector increases share of overall electronics contract manufacturing revenues to 45%. EMS industry expected to grow consistently for next five years, with 8% CAGR, ODMs with slightly stronger CAGR of 9%.

Outlooks for any industry are typically based on assumptions and industry market knowledge.

This is no different for the electronics manufacturing services (EMS) industry.

But, while anyone can make assumptions, it is important to look at the source.

In looking at segments from a report prepared by leading research firm IDC and available for purchase from the firm, VentureOutsource.com highlights for readers some of the assumptions IDC makes regarding the near-term outlook for trends in the EMS and the original design manufacturing (ODM) sectors. These include:

• The real recovery is just getting started. We can expect to see demand fluctuate over the course of 2010 as unemployment continues and government subsidies remain a key component to the economic outlook. OEMs and EMS / ODMs will remain concerned about inventories at the same time component shortages are impacting growth opportunities.

• The end of average selling prices (ASP) erosion will benefit revenue growth in the PC segment. As netbook and smartbook growth slows, new form factors will continue to emerge as OEMs attempt to reach out to new markets.

• The consumer device segment will see end-market demand improve, increased outsourcing, and opportunities in new product areas.

• OEMs and EMS providers are increasingly focusing on the total cost to deliver products and service customers instead of labor costs in the choice of manufacturing locations. While China remains the center for manufacturing, firms are increasingly shifting to less expensive regions within the country.

• OEMs that in-sourced production are returning to outsourcing in 2010 because they will not invest in additional capacity, though the level of activity will take an additional year to return to pre-recession levels.

• The real recovery is just getting started. We can expect to see demand fluctuate over the course of 2010 as unemployment continues and government subsidies remain a key component to the economic outlook. OEMs and EMS / ODMs will remain concerned about inventories at the same time component shortages are impacting growth opportunities.

• The end of average selling prices (ASP) erosion will benefit revenue growth in the PC segment. As netbook and smartbook growth slows, new form factors will continue to emerge as OEMs attempt to reach out to new markets.

• The consumer device segment will see end-market demand improve, increased outsourcing, and opportunities in new product areas.

• OEMs and EMS providers are increasingly focusing on the total cost to deliver products and service customers instead of labor costs in the choice of manufacturing locations. While China remains the center for manufacturing, firms are increasingly shifting to less expensive regions within the country.

• OEMs that in-sourced production are returning to outsourcing in 2010 because they will not invest in additional capacity, though the level of activity will take an additional year to return to pre-recession levels.

• A stronger PC segment will likely lead some ODMs to pull-back investments in emerging products in the consumer space and own-branded operations may cause a limited backlash from OEMs, though probably less severe than that seen in previous years.

• Clean-tech opportunities will continue to be critical for the industrial EMS segment in the near term because of government subsidiaries.

• Cloud computing will change the nature of market opportunities, product requirements, and business models for OEMs.

• ODMs are investing in their after-market support services offerings, including expanding their service delivery infrastructure.

Long-term EMS forecast
Looking further out, the long-term EMS outlook sees end-user demand returning while market conditions remain difficult for EMS / ODMs provider due to multiple issues:

• The shift in the mix of computer and consumer products to lower priced products will continue to place downward pressure on EMS / ODM revenues.

• While there is some shift underway to focus on the total costs to manufacture and deliver products, many OEMs are expected to continue following commodity purchasing patterns, which erode profits.

• OEM desires to increase efficiency in supply chains will continue to pressure lead times and inventory levels.

• Consolidation of traditional OEMs and suppliers will continue even as emerging entrants from developing regions begin to impact global markets.

• Alternative service providers are likely to pose a greater competitive threat to the EMS industry.

• Outsourcing maturity among OEMs may increase, but EMS firms will be challenged to keep pace providing new value to their clients.

On the bright side for EMS / ODMs, OEMs will still rely on outsourced manufacturing as they want to avoid acquiring assets; focus on cost reduction; deal with the scarcity of engineering and design expertise; and tap EMS / ODMs for manufacturing process and supply chain expertise.
 

 
Additionally, OEMs are also increasingly turning to third parties to design new products in segments other than the computing segment, where most major OEMs have already turned the majority of product design functions over to ODMs.

Worldwide EMS revenue forecast, 2005 – 2014

The EMS industry generated $250.2 billion in revenues in 2009, down 11% from 2008 as the electronics industry suffered through the worst recession in 60 years. Only the beginnings of a recovery in the second half of the year helped avoid the originally expected decline of 17%.

ODMs also managed to avoid revenue declines due to the resurgence of PCs in the second half of the year. ODMs were off only $1 million from 2008 results, the EMS sector revenues declined by $29 million. This difference allowed ODMs to increase their share of the overall industry’s revenues to 45%.

The industry is expected to grow consistently for the next five years, with a CAGR of 8%. ODMs should have a slightly stronger CAGR of 9%, with growth rates dropping in the later half of the forecast period while the more diversified EMS sector should put in a much more regular performance throughout the forecast period and generate a CAGR of just under 8%.

Meanwhile, the overall EMS industry declined by 11% in 2009, driven by weak end-markets, shifting product mixes, in-sourcing, and delayed market penetration. The industry should grow 8% in 2010 due to the resurgent PCs and ODMs.

The networking, automotive, and medical segments should also help the market out of the recession. Longer term, growing penetration in emerging markets by the EMS sector will support industry growth rates in the 8% to 9% range.

EMS vs. ODM
ODM sector: 2009 showed just a slight decline (-0.6% AGR) as the PC market kept the industry moving forward and will power the recovery, growing 10% in 2010 and 8% in 2014.

EMS sector: Revenues declined 18% from losses in all segments except medical, which was flat. In 2010, all segments will come back to a greater or lesser extent as the market grows to 6% on increased PC revenues, DTV outsourcing, and stronger demand for networking and automotive electronics. As strength varies from segment to segment over the next five years, the diversified sector should be able to maintain solid 8% AGRs.

Consumer electronics
The recession had the most significant impact on the consumer devices segment, decreasing its share of nearly 29% in 2007 to 23% in 2009. Some key points of interest in the consumer markets follow.

Despite the growth in DTV outsourcing and several emerging products, the in-sourcing of mobile phones in 2009 that will not return until late 2010, the segment’s share will continue to fall through 2013 before a small increase in 2014, when the segment will drive 20% of the industry’s revenues.

Worldwide consumer devices revenue forecast, 2005 – 2014

The recession’s interruption of mobile phone contract manufacturing will continue for most of 2010 before demand drives volume back to levels where OEMs will resume previous outsourcing levels. Additionally, other points of interest include:

• Smartphones are attracting more attention in the market and most leading ODMs have projects underway developing products.

• Smartphones are more expensive and more profitable, for both OEMs and EMS / ODMS and should account for between 40% to 66% of phones in developed markets and from 10% to 20% in developing regions by 2014. Flextronics, FIH, and other EMS firms are building ODM teams in the mobile phone space to pursue this opportunity.

• EMS and ODMs are also critical partners for developing and manufacturing phones targeting emerging regions, an opportunity that should grow over the forecast period.

• EMS providers and service providers are increasingly connecting directly, bypassing OEMs, for handset deals. The phones are often being branded by the ODM. This could cause a backlash among OEMs who will shift contracts to partners who do not have branded operations and who do not compete directly for service provider contracts.

• Sony, LG, and other OEMs have started to or are expanding their outsourcing for DTV design and / or manufacturing, a key driver for the forecast. DTVs have been the best opportunity in the consumer segment and will continue to be throughout the forecast period. To improve their competitiveness, Hon Hai and several ODMs are investing in optoelectronics to take advantage of the growing LED TV market. ODMs without panel manufacturing investments are partnering with other panel makers without contract manufacturing ties.

While consolidation has eroded opportunities in various mobile consumer electronics markets, new products gained momentum in 2009 and will continue to gain a strong foothold through 2010.

E-readers, the Apple iPad, and other tablet devices…While their scale will probably not be felt on the forecast until later in the forecast period, they have gained significant media attention in 2010. (Read: Apple iPad vs. netbooks, notebooks, smartphones)

Another area that will gain momentum in 2010 are various video on demand / over the web products that will stream video over IP and other networks to consumers.

While this space will attract attention, their impact on the EMS / ODM market will likely be muted by the fragmented, emerging nature of the space, with no clear winning products and platforms emerging in the next year or so.

Also, IPTV services from Telcos and improved offerings from cable operators may further erode the demand for alternative video content sources.

Strength in the PC market may dampen the drive to diversify among leading ODMs, which has resulted in multiple new reference designs in emerging areas, including tablets, smartbooks, digital photo frames, media phones and other emerging consumer categories.
 

 
Looking at EMS services, advantages for OEMs include the EMS providers’ manufacturing and support services capabilities in or near end-markets, which makes some EMS providers attractive partners for more expensive and larger OEM products.

Other points of interest in the report, specific to consumer devices, include:

• The consumer devices segment declined, for a second year, by 18% in 2009, to reach $58.2 billion in revenues. This segment is expected to grow 6% in 2010 and should grow to $76.4 billion in revenues by 2014, a CAGR of 6%.

• The EMS consumer devices sector shrank 9% in 2009, generating $40.5 billion in revenues. The sector is expected to grow 7% in 2010, reaching $43.2B.  This sector should grow to $53.7B in revenues by 2014, a CAGR of 6%.

• The ODM consumer devices sector shrank by 14% in 2009, with $17.7 billion in revenues.  The sector is expected to grow 4% in 2010. This sector should grow to $22.8 billion in revenues by 2014, a CAGR of 5%.

Other key information points from the report covering the specified date range indicate the EMS sector accounted for 70% of the consumer devices segment in 2009. Additionally, by 2014, the EMS sector should account for 70% of the overall consumer devices segment. Meanwhile, ODMs accounted for 30% in 2009 and are also expected to account for 30% in 2014.

Source: IDC, VentureOutsource.com

 

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