Future EMS Opportunity

Estimated reading time: 4 minutes

While the electronics manufacturing services provider segment of the industry is expected to grow significantly in the future, providers must assume more product design work, diversify into numerous end-use industries and acquire supply chain management expertise.

By Raman Monga

Contact manufacturing (CM) has become an integral part of electronics manufacturing. In the last four years, CM has grown multifolds, from $62.4 billion in 1999 to $95.1 billion in 2000. There was a steady deterioration of demand throughout 2001. The worldwide EMS market is projected at $92.2 billion in 2002. With OEMs increasingly outsourcing functions that were traditionally in-house, the electronics manufacturing services (EMS) market is expected to experience a long-term compound annual growth rate (CAGR) of 18 to 20 percent.

The year 2001 was a challenging and turbulent year. The inventory corrections were exacerbated by curtailed corporate spending. OEMs and EMS providers were ravaged by overcapacity, falling prices, shrinking margins and increasing competition. During the year, many mid- to small-tier companies filed for bankruptcy protection. While EMS providers cut $2.3 billion in operations through major layoffs and plant consolidation, some EMS providers auctioned equipment and property. Additional restructuring charges are expected as EMS providers eliminate excess capacity.

The recession that gripped the global economy continues to linger on in 2003. The economic environment has created much uncertainty in the marketplace. Persistent weak demand in end markets has resulted in EMS providers curtailing purchase of plants and equipment from OEM customers. Companies slowly are moving production lines to lower cost regions. Further, the rise in popularity of Asian original design manufacturers (ODM) is threatening to steal business from EMS providers.

Broadened Service Offerings

There is a continued weakness in telecommunications and computing. With no clear sign of an upturn, more EMS providers are widening their service offering to bag high-volume contracts. EMS providers are pushing for design services, new product introduction (NPI) services and test services. By partnering with EMS providers, OEMs eventually will be able to bring products faster to the marketplace once the economy improves. Traditionally, OEMs have kept design services to themselves and do not allow EMS providers to participate in design except for low-end-type products.

Demand for outsourced manufacturing is expected to increase despite the economic slowdown, which will spur growth for the EMS market. The strongest growth driver will continue to be the trend toward outsourced manufacturing. Outsourcing allows OEMs to better compete in a global and rapidly evolving marketplace. More OEMs are likely to outsource production to CMs that can perform the service better, cheaper and faster. Outsourcing penetration was at 18 percent in 2002, and is likely to reach above 50 percent in the next seven years, which will drive growth of the EMS market.

EMS companies continue growing by expanding their service offerings. EMS providers are offering printed circuit board (PCB) assembly box build, design services, prototyping, test, and after-market services such as repair, customization and fulfillment logistics. Typically, electronic components constitute more than 80 percent of the cost of a product, and EMS providers can obtain components at the best available price.

Further, Japan is likely to divest OEM capacity, which will provide significant growth opportunities for large EMS providers. It is estimated that the EMS market will achieve a CAGR of 20 percent over the next five years and reach $158.5 billion in 2005. Tier-one EMS providers represented more than 50 percent of the market, and this percentage is likely to grow more in the future. The table depicts projected market revenues and market share trends of tier-one EMS providers for 2002.

During the current downturn, reducing manufacturing costs has become a key consideration to outsource production. The weakened global economy has accelerated the trend adoption of an outsourced model and long-term prospects appear bright.

EMS vs. ODM

The demarcation line between ODMs and EMS providers is becoming more blurred. ODMs have had great success concentrating on manufacturing-mature products such as notebooks, PDAs and desktop PCs; EMS providers are adding to their design capabilities to compete with ODMs. ODMs offer ready-made products that improve time to market, while EMS providers produce to OEM request. Additionally, ODMs design entire products and own their intellectual property, while EMS providers offer design services that are limited to PCBs and the OEM's own intellectual property. ODMs are branching into cell phones and communication products.

Revenues are expected to reach $80 billion in 2005 from $33 billion in 2002.

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Lower Cost Manufacturing

Companies are turning to China for low-cost scaleable manufacturing solutions. The trend has been the relocation of manufacturing facilities to Asia, particularly China in the wake of lower wages and cheaper components. In the early '90s, EMS providers shut manufacturing factories in the United States and moved to lower cost regions such as Mexico and Asia. Similarly, in Europe, there has been a movement to shut underutilized plants in United Kingdom, France, Scotland and Germany, and relocate to Eastern Europe and Asia in a bid to cut costs and remain competitive. Recently, the market has seen an exodus of manufacturing plants from Mexico to China and Asian countries to cut costs. Mexico's labor costs have increased steadily, making the country unattractive for high-volume electronics manufacturing.

Conclusion

EMS will become an increasingly valuable alternative than cannot be overlooked. In the future, there will be opportunities for EMS providers to assume more product design work. Telecommunications-focused EMS providers must diversify into other end-user industries, including automotive, industrial and medical to increase market penetration. To be successful in the future, EMS providers will have to acquire supply chain management expertise, including procurement, inventory management and order fulfillment. By providing complete solutions from design to manufacture and configure to order to direct fulfillment, EMS providers can help OEMs lower costs and improve time to market.

For more information, contact Julia Rowell, Frost & Sullivan, (210) 247-3870; E-mail: Julia_Rowell@frost.com.