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iSuppli: no great expectations for EMS/ODM

Posted: 16 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:business EMS/ODM? industry recession? high-tech weak?

Conditions in the global electronics contract manufacturing business are continuing to deteriorate due to the recession and the weakening high-tech industry, prompting iSuppli Corp. to further cut its short- and long-term growth expectations for this volatile industry.

Global contract manufacturing industry revenueconsisting of sales by EMS and ODM providersnow is expected to decrease by 9.9 percent during 2009 with revenues of $270.8 billion, compared to $300.7 billion in 2008.

"This marks the third significant cut to our forecast during the past 24 months. The recessionary ripple has compounded the pre-existing conditions that already pressured the manufacturing value chain," said Adam Pick, principal analyst for EMS/ODM at iSuppli.

"Looking forward, it's not pretty," Pick added. "Stalwarts of the electronics marketplaceincluding leading brands, manufacturers and component suppliershave issued lackluster guidance, or in Sanmina's case, no guidance at all. Plus, the ODM rally seems to be losing steam as Taiwan manufacturers are seeing sales drop and inventories rise."

Pick predicts that global contract manufacturing revenue will rise at a CAGR of only 1.3 percent from 2006 though 2012, down from the previous outlook of a 5.3 percent increase.

"iSuppli research indicates that electronics OEMs continue to value the benefits of outsourced manufacturing," Pick said. "However, weak demand has triggered program delays and push-outs. Also, we have detected some OEM in-sourcing activities that will hamper EMS/ODM industry performance during 2009."

'Slippery slope'
EMS sales guidance for Q1 09 reveals that hopes for a near-term market bottom are unrealistic. Revenue guidance issued by Flextronics, Celestica and Sanmina was well below seasonal patterns.

"It feels like a slippery slope for the EMS providers. Sales are down, layoffs are abundant, margins are contracting, capital expenditures have been cut, and solvency questions have reappeared," Pick noted.

Additional hurt was experienced by some EMS providers when telecom-giant Nortel Networks announced its bankruptcy on Jan. 14. iSuppli estimates that Nortel spent more than $1.7 billion with its external manufacturing supply base during 2008.

As for the ODMs, the Q4 08 results and market commentary from the Taiwan manufacturers is fairly bearish. Asustek posted its first quarterly loss as a public company, and Compal experienced an 8 percent annual revenue contraction during the period. As for notebook shipments, a recent report suggested that mobile PC shipments during January were down 30 percent compared to the prior month.

"In addition to this data, iSuppli recently concluded a broad, survey of supply-chain participants regarding January demand levels," Pick said. "The qualitative and quantitative inputs captured during those interviews compelled us to further reduce our EMS/ODM forecast."

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