Wall Street on EMS vs. ODM market share and market segments

Research from IDC, and Deutsche Bank Equity Research, paint a good picture of the electronics outsource manufacturing and design landscape and the end-market segment opportunities aggressively sought after by electronics manufacturing services (EMS) providers and original design manufacturing (ODM) companies across the globe.

An excerpt from these findings follows.

Deutsche Bank believes the combined EMS and ODM market can be divided into seven segments:

1. Computers
2. Consumer devices
3. Servers and storage
4. Networking
5. Telecom
6. Peripherals, and
7. Emerging (which includes automotive, medical, and industrial electronics)

The largest of these seven end-market segments is computers, which accounted for just over a third of the $238B market in 2006. Next largest by size is consumer devices at 27% of the overall EMS and ODM market.

As seen in Figure 1, these two segments represented more than 60% of combined EMS and ODM revenue in 2006. While the computer segment accounts for a large portion of the total EMS and ODM market, a significant portion of the revenue comes from the ODM side, with ODMs earning roughly 64% of the market revenue in 2006. As a result, the computers segment accounts for a smaller portion of EMS revenue, with only 19% of EMS revenue in 2006.

Figure 1: Combined EMS and ODM share by market segment

As seen in Figure 2, consumer devices is the largest segment for the EMS market, with roughly a third of the $153B market coming from consumer devices in 2006.

Computers rank as the second largest segment for EMS, followed by networking at 10% of revenue.

Figure 2: EMS revenue share by market segment

The fastest growing segments are computers and consumer devices. Consumer devices has seen the fastest growth, with combined ODM and EMS revenue growing 40% and 33% in 2005 and 2006, respectively. The second fastest growing segment has been computers, with combined ODM and EMS revenue growing 21% and 18% in 2005 and 2006, respectively. Deutsche Bank believes this growth is being driven by the notebook market, however due to market saturation, this segment is expected to slow over the next five years.

Figure 3: Combined EMS and ODM revenue growth by market segment

As seen in Figure 3, emerging segments like automotive electronics, medical electronics, and industrial electronics are expected to see the fastest growth over the next five years, driven by further penetration of these relatively untapped markets, and growth from a small base.

Of the major segments, consumer devices is forecast to be the fastest growing segment, with revenue increasing at a CAGR of 11% over the next five years. Below, Deutsche Bank discusses each segment in detail and highlights the top EMS providers for each segment.

The revenue segmentation Deutsche Bank uses is based on IDC’s definition, as each EMS vendor defines these categories differently.

Many EMS and ODM vendors offer both electronics hardware manufacturing and electronics design services. For the purposes of simplicity in this report, Deutsche Bank defines EMS and ODM providers by their primary business.

Companies defined as EMS (electronics manufacturing services) providers include: Benchmark , Celestica, Elcoteq, Flextronics, Hon Hai, Jabil, Plexus, and Sanmina-SCI. Companies defined as ODM (original design manufacturers) include: ASUSTeK, BenQ, Compal, Inventec, Lite-On, Quanta, and Wistron (Figure 4).

Figure 4: Top 22 EMS and ODM companies

Consumer devices

Consumer devices is a varied category, which encompasses a number of different products including mobile phones, set-top boxes, flat-panel TVs, videogame systems, portable music players, digital cameras, and handheld devices. This segment is the second largest category for the combined EMS and ODM markets accounting for 27% of revenue, and is the largest category for the EMS market representing 32% of revenue. As seen in Figure 5, EMS accounts for 75% of this segment, with ODM vendors accounting for 25%.

Figure 5: EMS and ODM market share for consumer devices

In 2006, revenue grew 33% and consumer electronics devices is expected to be the fastest growing of the major product segments, it is forecast to grow at a CAGR of 11% over the next five years.

Figure 6: Top 5 EMS providers for consumer devices

The top EMS vendor in the consumer electronics devices segment is Foxconn International Holdings (FIH), the mobile phone subsidiary of Hon Hai, with 22% share. The second largest EMS vendor was Foxconn, with 19% share, helped by its relationship with Apple for iPods. As seen in Figure 6, above, Hon Hai (which operates under the brand name Foxconn and owns a majority stake in FIH), accounted for 41% of revenue in this segment.

Flextronics was the number three EMS vendor in the consumer devices category, with 17% share. Flextronics has strong relationships with Sony-Ericsson and Motorola for mobile phones, and makes digital still cameras for Kodak. Flextronics also builds set-top boxes for Thomson, Scientific Atlantic, and Motorola.

Elcoteq was the fourth largest EMS vendor with 9% share. The company primarily focuses on mobile phones, with strong relationships in the European market. For this report, Jabil came in at number five with 8% share.

Computers

The computer segment includes desktop and mobile PCs. Computer is the largest segment for the ODM market and accounted for 60% of ODM revenue in 2006. As a result, this segment is largely dominated by ODM vendors, which account of 64% of the market (Figure 7).

The computers segment is the second largest segment for the EMS market, accounting for 19% of total EMS revenue. In 2006, computer revenue grew 18%, primarily driven by growth of mobile computers, and this segment is forecast to grow at a five-year CAGR of 7%.

Figure 7: EMS and ODM market share for computer segment

The top EMS vendor in the computer segment is Foxconn with 55% share (Figure 8). Foxconn has benefited from its customer relationships with Apple and HP, who have grown share in the PC market over the past year.

Figure 8: Top 5 EMS providers for computer market segment

Sanmina-SCI was the next largest EMS provider with 11% share, helped by its relationships with IBM, HP and Lenovo.

Flextronics is the third largest EMS vendor in the computer segment with 6% share. At its November 2007 Analyst Day, Flextronics announced plans to more aggressively target the computer market, as it believes this market will continue to benefit from the growth of notebook PCs.

Networking equipment

The networking segment includes products such as electronics switches, routers, wireless LAN (local area network) devices, and other networking equipment. (See, also: (Top 10 EMS/ODM company rankings)

This segment has historically been a core EMS segment, with EMS providers accounting for 88% of revenue (Figure 9).

Figure 9: EMS and ODM market share for networking segment

In 2006, revenue grew 20% in the networking segment, although this growth rate was up significantly versus flat revenue growth in 2005. Over the next five years, networking revenue is forecasted to grow 8%, helped by the demand for video over networks, increased networked storage requirements, and the adoption of optical networking.

Figure 10: Top 6 EMS providers for networking market segment

Market share in the networking segment is relatively fragmented, with the top five EMS vendors accounting for just under 60% of the revenue (Figure 10). The top EMS vendor in the networking segment was Solectron (now owned by Flextronics), with 18% share. The second largest EMS vendor was Celestica with 15% share in 2006.

Both companies have manufacturing relationships with Cisco, the largest customer in this segment. The third largest vendor in networking was Jabil with 11% share, followed by Foxconn and Flextronics.

Servers and storage equipment

The servers and storage segment includes the manufacturing and electronics subassembly, or integration, of products such as servers, workstations, disk storage systems, tape drives, and optical storage as well as traditional printed circuit board assembly (PCBA) work.

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This segment is another historically strong segment for the EMS vendors, with EMS revenue accounting for 70% of revenue (Figure 11). In 2006, revenue grew 17% in this segment, although this was a significant acceleration from 5% revenue growth in 2005. Servers and storage revenue is forecast to grow a five-year CAGR of 7%.

Figure 11: EMS and ODM market share for servers and storage

The top vendor in the servers and storage segment is Solectron, with 22% share (Figure 12). The second largest EMS vendor is Celestica with 19% share. Sanmina-SCI followed in third place with 13% share, followed by Benchmark and Jabil. Market share rankings have been relatively stable in this segment over the past two years.

Figure 12: Top 5 EMS providers for servers and storage

Telecommunications equipment

The telecommunications segment (telecom) is another segment dominated by EMS vendors, with 90% of this segment’s revenue going to EMS providers (Figure 13). Telecom includes mobile wireless infrastructure, broadband, traditional telephony, IP telephony, cordless phones, answering machines, and optical transport equipment.

Figure 13: EMS and ODM share for telecom market segment

In 2005 and 2006, telecom revenue grew 7% and 8%, respectively, and the segment is expected to grow at a CAGR of 9% over the next five years, helped by further adoption of IP telephony.

Figure 14: Top 5 EMS providers for telecom market segment

The top vendor in the telecom electronics market segment is Flextronics with 26% share, helped by a contract win with Nortel and its relationship with Ericsson Telecom (Figure 14). Sanmina-SCI is the second largest EMS vendor with 18% share. Solectron placed third in the telecom segment with 16% share, helped by new business with Lucent. Celestica held the fourth place spot with 14% share, while Elcoteq rounded out the top five with 7% share.

Peripherals

The electronics peripherals segment includes stand-alone video displays, LCD monitors, printers, copiers and fax machines. As seen in Figure 15, EMS and ODM revenue is relatively even in this segment, with ODMs having particular strength in displays, while EMS tends to be strong in printers.

In 2006, revenue grew 7%, helped by strong growth in the computer segment. However, this segment is expected to be up only 2% over the next five years.

Figure 15: EMS and ODM market share for peripherals

Flextronics holds the top EMS share in the peripherals segment with 19%, helped by its relationship with HP for printers, and relationships with Kodak and Kyocera (Figure 16). Jabil held the second place position with 13% share.

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Venture was third, with 11% share, and primarily focuses on the manufacturing of printers. Celestica was the fourth largest EMS manufacturer in this segment, with 8% share, followed by Foxconn at 4% share.

Figure 16: Top 5 EMS providers for peripherals market segment

Emerging opportunities

Emerging electronics opportunities segments represent roughly 11% of the combined EMS and ODM markets, and roughly 17% of EMS revenue. Emerging segments include new market opportunities for EMS and ODM suppliers in sectors that have historically not outsourced much of their manufacturing business. This includes the automotive sector, medical, and other industrial applications.

Figure 17: Combined EMS / ODM revenue / forecasts for emerging markets

As seen in Figure 17, above, while emerging segments are relatively small, because of low penetration of outsourced electronics contract manufacturing, these markets are expected to see good growth over the next few years, with 5-year CAGRs ranging from 15% to 24%. Figure 18 through Figure 21 highlights each of these three segments and the top EMS providers.

Figure 18: Emerging opportunities segment revenue percent of share

Automotive electronics
Automotive is the smallest of the emerging electronics sector opportunities, with revenue of $3B in 2006, which represented just over 1% of the combined EMS/ODM market. The segment includes PCBA work for automobiles, automobile electronics subsystems, and other electronic components for automobiles including automotive controls, management, entertainment, and navigational systems.
 

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While ODMs have capitalized on their strength in LCD panels and their proximity to the Asian automotive suppliers, EMS providers are the clear leaders in the automotive segment, with roughly 90% of the revenue going to EMS providers.

Figure 19: Top 5 EMS providers for automotive market segment

As seen in Figure 19, above, the top EMS provider in 2006 for automotive was Jabil, with 20% share, and the company has targeted this sector as a growth opportunity.

The second largest EMS provider is Universal Scientific, which focuses primarily on the automotive industry. Sanmina-SCI, Flextronics, and Solectron are the next largest EMS suppliers, respectively.

Medical electronics
Medical is the second largest of the emerging segments, with revenue of $7B in 2006 representing 3% of the combined EMS / ODM market. The segment includes medical devices, medical instrumentation, and medical systems, and the segment is very fragmented, with smaller, specialized firms representing the majority of the revenue.

In addition, the medical electronics market segment has high barriers to entry due to government compliance and regulatory requirements, quality control, and safety concerns. As the volumes in this segment are small and products are generally more complex, EMS companies represent 100% of the revenue.
 

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Figure 20 shows the top five EMS providers in this segment, with Jabil and Sanmina-SCI holding the top spots at 13% and 10% share, respectively. The number three and four market share leaders, Plexus and Benchmark, have both targeted this segment for growth.

Figure 20: Top 5 EMS providers for medical market segment

Industrial electronics and other

Industrial and other is the largest of the emerging segments, with $16B in revenue representing 7% of the combined EMS/ODM market. Industrial includes control systems, semiconductor equipment, test and measure equipment, aerospace, and defense electronics.
 

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EMS represents nearly all of the revenue in this segment, with ODM accounting for just 2% of revenue.

Figure 21: Top 5 EMS providers for industrial market segment

As seen in Figure 21, this segment is also highly fragmented, with the top 5 vendors representing less than 30% of revenue.

Source: IDC, Deutsche Bank Equity Research, VentureOutsource.com March 2008