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Writing Sample - Technology Forecasters
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Defining
and Predicting the Growth of
Electronic Manufacturing Services
[NOTE: Technology Forecasters is a Bay Area
market research firm. This article summarizes their research into and forecasts
concerning contract electronics manufacturing. The following article appeared in
Circuits Assembly magazine.]
Analysts, manufacturers, and providers of
Electronic Manufacturing Services agree: EMS is growing rapidly, and that growth
shows no signs of any imminent slackening.
But there is a broader question which clouds a
clear understanding of the elements of the EMS equation. It’s the central
question: exactly what are we talking about?
Although the acronym “EMS” is defined clearly as
Electronic Manufacturing Services, and “CEMS” denotes Contract
Electronic Manufacturing Services, it’s clear that any discussion of EMS may
lead to confusion unless there is a clear definition.
For this article, we spoke with a number of key
industry analysts to examine precisely what is growing, by how much, and where
the growth is occurring, both in terms of business focus and, in some cases,
geography.
Randall Sherman: EMS is Going
Up…for a While
Randall Sherman, Senior Analyst with Electronics
Trends Publications, San Jose, late this summer finished an exhaustive study of
the global EMS marketplace. His bottom line: things are looking up – for a
while.
“There are two kinds of EMS,” Sherman says.
“Contract electronic manufacturing, or CEMS, is the one we’re all interested in.
It’s companies like Celestica, Solectron, Flextronics, and others. There is also
a hidden outsourcing market, which is basically OEMs outsourcing to other OEMs.
It is at least as large as the CEMS market, and it consists of many Taiwanese
firms, qualified subcontractors, and Asian companies manufacturing for a prime
contractor or OEM. They make motherboards, audio cards and other things.”
On the other hand, contract electronic
manufacturers, Sherman says, “are independent companies. They do not make their
own products, they only assemble products for someone else. That’s why I don’t
count companies like Acer, which manufacturers computers and motherboards for
companies like Compaq and IBM. Acer also manufactures its own products. Their
contract business is not in my CEMS numbers.”
In his just finished study, The Worldwide Contract
Electronic Manufacturing Services Market, 7th Edition, Sherman estimates the
size of the 1999 CEMS market at $58-billion. He says it consists of three
components -- large, medium, and small companies. The large companies are
$100-million or more, medium are $20 - $100-million, and small are less than
$20-million. Others analysts, as you will see later in this article, define the
“tiers” of this marketplace differently.
Sherman adds that super-large companies also come
into play – those with $1-billion or more in sales. “There are about 60 large
companies today,” he says, “and seven or eight that are super-large.”
The OEM market is even bigger. “I calculate that
the OEM market is currently $96-billion,” Sherman says. That figure, he
emphasizes, doesn’t consist of the computer industry alone. “It includes
electronics manufacturers serving many industries including aerospace and
automotive, but the computer industry is the largest component.”
CAGR: Sherman says the industry’s Compound
Annual Growth Rate, or CAGR, has been about 26% a year for the last five years.
CEMS
Market Size
Randall Sherman
|
1994 |
1999 |
2004 |
|
$18-billion |
$58-billion |
$177-billion |
“I see the market continuing to grow at this
blistering pace of about 25% a year for the next five years,” Sherman says, with
the highest growth occurring this year and next -- about 30% each year. After
that, in the last three years of the forecast period, he says the rate of growth
starts to decline. “It’s mainly an issue of saturation at that point. Most of
the low-hanging fruit is being picked today.”
On the other hand, Sherman says that today, CEMS
manufacturers account for only 10% of the total available market. In 2004, he
estimates they will account for only 16% of total available market. “The most
attractive segments that are available include the computer, communications, and
the consumer marketplaces, although much of that market is dominated by Japan
which isn’t interested in outsourcing.”
CEMS company size: In the future, Sherman expects
CEMS to be a “large supplier” game, principally because of economies of scale
realized through size. Procurement, buying power, global sourcing, distribution,
and across-the-board leverage all benefit when the size of the player is larger.
“Although there will always be small suppliers out there,” he says, “the large
companies that have both vision and the ability to execute will be leading.”
How large will CEMS become? “Over the next few
years, some contract manufacturers will exceed their customers in size, and many
OEMs will lose the ability and know-how to manufacture their own products. At
that point, I expect you’ll see a change in pricing as CEMS are under control.”
The entire design, assembly and distribution
process is becoming transparent to OEMs and customers, Sherman says.
Collaborative design, procurement (the ability to source and buy materials on
behalf of the OEM), software assembly tools affecting supply and velocity, and
distribution are tightly wedding OEMs and CEMS.
North America, including Canada and Mexico, is one
of the strongest markets, he notes, with Mexico especially strong because of
labor costs.
Ralph Kenton & Associates – Solid Growth
Ralph Kenton is not an analyst, but he gathers
detailed information from them, draws conclusions, and uses those conclusions to
advise his clients worldwide.
Kenton’s definition: “The EMS industry consists of
companies specializing in procuring materials and manufacturing, assembly, and
test of various products for OEMS, whose logo or trademark normally appears on
the finished product.”
Kenton, who offers numerous tutorials and
workshops involving contract manufacturing, says there are around 2,200 contract
electronics manufacturers (CEMS) worldwide. He says revenues for CEMS in the
1995 timeframe were $30- $35-billion, and will rise to $100-billion this year or
next.
CEMS
Revenues
Ralph Kenton & Assoc.
|
1995 |
2000 - 2001 |
|
$30- $35-billion |
$100-billion |
Kenton divides the CEMS market into “dynamic”
tiers. “Five years ago,” he explains, “we considered anyone over $1-billion to
be in tier one. The tiers are constantly changing.”
“Organic” Growth: Although Kenton says the
CEMS market is currently growing at an average of 30-35% per year, he
differentiates between growth among different-size manufacturers.
“If you look at the top ten,” he says, “they are
growing today at 35-50% today as a group. The next tier, under $500-million in
annual revenues, have a growth rate of 20-25% a year,” he says, “and smaller
organizations have rates of 8% per year or less, and some are struggling to
survive.”
The growth rates of CEMS and the companies they
support should become equal around 2015, Kenton predicts. “The larger contract
manufacturers are growing through acquisitions,” he says. There are two parts to
a contract manufacturer’s growth. One is organic growth, which means
they’re earning more and more business from their current customers, or they buy
the business by buying entire manufacturing sites from OEMs. I’d like to see
more information on just how much of that accounts for CEMS growth.”
For CEMS, there are advantages and disadvantages
to acquiring former OEM manufacturing facilities. On the one hand, the OEM
guarantees that the CEMS will continue to supply the company for a defined
period of years. On the other hand, Kenton says, acquiring the facilities,
people, intellectual property, process know-how, accounts receivable, inventory,
and work in process creates liabilities if the economy goes sour, if the product
becomes obsolete, of if the customer stops buying. “All the risk goes with all
the assets,” Kenton says.
Not all CEMS agree with separating the two types
of growth. One, in particular, Kenton says, lumps acquired manufacturing
capacity into its Organic Growth numbers.
“I
define ‘organic growth’ as what percentage of key customers’ TAM, or total
available market, contract manufacturers have been enjoying. In 1990, HP’s total
TAM to all contract manufacturers was $20-million. Today, I hear it’s around
$15-billion. Organic growth is best measured by percent of TAM. A
CEMS may say an OEM gave them 15% more business in a given year, but that’s not
good news if the OEM’s TAM grew 25% that year. 15% would be a declining
percentage of TAM. The CEMS’ slice of the pie must increase as the size of the
pie increases for there to be real growth.”
Technology Forecasters:
To define the EMS industry, Bay-area headquartered
Technology Forecasters, Incorporated, begins with the total electronic output
from OEMs, relying on Dataquest figures, to which it applies the Cost of Goods
Sold. “We usually apply an average of 68% to the Dataquest figures,” says TFI
COO Dr. Eric Miscoll, “but we recently decided, within the 10 industry
subsectors we define, to apply a specific percentage to each sector. The average
remains 68%.”
TFI examines 10 EMS market subsectors: automotive
electronics, computer peripherals, computer systems, consumer, industrial,
instrumentation, medical instrumentation, military and aerospace, wired telecom,
and wireless telecom. “The computer industry really fueled the growth of the EMS
industry over the last many years, but growth today is being fueled by wireless
telecom.”
What will fuel future EMS growth? “Consumer is the
largest overall sector by dollar volume, automotive will experience some more
growth, and wireless will continue for a while to fuel industry growth,” Miscoll
says.
TFI sized the market at $60-billion in 1998. “We
see an annual growth rate from now through 2004 of 28%,” Miscoll says. He says
TFI expects industrywide growth from 1998 to 1999 and 1999 to 2000 will be 30%
when all calculations are in, with growth slowing to 28% in 2001, 27% in 2002,
and down to about 25% in 2004.
Which size contract manufacturers will grow most?
“The 12 top tier companies, each of which does over $1-billion in annual
business, grew at 42% over the last couple of years. Mid-tier companies, which
range from $100-million to about $1-billion, we tagged at about a 12% growth
rate, and smaller companies are at 2% or less. The market is driven from the
top, with the top-tier companies commanding close to or in excess of 50% of the
total revenues for the entire industry.”
Like other companies forecasting the EMS
marketplace, TFI sees the EMS companies getting bigger, with more OEMs adopting
virtual manufacturing strategies. “I see contract manufacturers taking on more
capabilities in the value chain, as they have been. Contract manufacturers
largely began in printed circuit board assembly and have grown into design on
the front end, and now do box-build and ship to final customer plus post-sale
service work.”
Miscoll described a recent agreement between
Flextronics and Microsoft where Flextronics will soon apply its name to some
Microsoft mice. “Nobody knows these companies,” Miscoll says, “except the
analysts and the people who really know the industry. It’s an invisible industry
to consumers, but as it grows that will change. It will be interesting to see
the extent to which CMs will be doing ODM work, original design manufacturing,
where they will design and build their own devices and let the CM private-label
it.
It’s infinitely easier for an OEM to manage a relationship where a CM designs
and builds a product for them, than it is to manage a CM which builds the OEM’s
design. That’s much more complex.”
TFI says that the war is being waged on a supply
chain versus supply chain basis. “The effectiveness of a CM’s supply chain is a
key differentiator, inasmuch as CMs are running on very low margins. The
Internet allows the essential communication, trust, and collaboration between
the CM and the OEM to happen more quickly. If the Internet is used
appropriately, its effect on that relationship can be profound. The human
element underlies that, and companies still absolutely require good managerial
talent with the requisite skills to manage the relationship on both ends.”
Indeed, TFI says the growth of the industry is
forcing change in traditional business relationships. “To get the cost
efficiency advantages that the virtual manufacturing strategy offers, CMs must
be allowed to do what they do best. That means allowing them to manage more of
the supply chain and to take over more responsibility for the value chain. OEMs
need to let them order, let them buy bulk from electronics
distributors, allow them to influence design for manufacturability and
selection of components to go on the board. That’s where the efficiencies will
come from.”
With all this upward potential, what can go wrong?
“It’s a growth thing,” Miscoll says. “The only thing that could cause them to
stumble is collective stupidity on the part of the industry, but I just don’t
see that happening. These are going to become huge companies, however, and I
always wonder about the management talent requisite for running an enterprise
like that. It’s one thing to be an engineer, to build boards and configure an
assembly line and run a supply chain. It’s another to be running a multinational
conglomerate that has to answer to Wall Street each quarter.”
Despite the growth of contract manufacturing,
Miscoll says it accounts for only 12% of electronics manufacturing today. But by
2004, TFI predicts that figure will rise to 23%. Where will it end? Much higher,
says TFI. “We think the 70% to 80% range is appropriate. That is because some
OEMs always keep their most cutting edge advanced technology in house, and would
be reluctant to share it.”
Dataquest
“The EMS market consists of companies which
manufacture products for other companies – circuit boards, subassemblies, and
kitting, and which do not have their own brand name. They take customer ideas,
turn them into design prototypes, and manufacture and possibly ship them,” says
Mark Giudici, Director and Principal Analyst of Dataquest’s Semiconductor Supply
& Pricing Service.
Giudici notes that the EMS industry is growing at
two to three times the rate of growth of the semiconductor industry, “probably
at a three-plus rate over electronics, which is at 6% to 7%,” he says. That puts
EMS at between 18 – 25%. Giudici says Solectron is the largest of the CEMs,
having taken over that position from SCI in 1998.
Dataquest currently is quantifying EMS growth by
tiers. According to Giudici, Dataquest has quantified top-tier companies as
those with sales in excess of $1-billion, mid size companies from $200 or
$500-million to $1-billion, plus many smaller companies serving niche markets.
“There are few midsize companies,” he says, “they’re all being taken over by the
top tier.” More information concerning Dataquest and the Gartner Group
appears at the end of this article.
Bishop & Associates
Bishop includes OEM manufacturers in its EMS
estimates – that is, companies that produce their own brands as well as products
branded for others. They sized the total market at $67.8-billion in 1999, rising
to $87.8-billion this year, a 29.4% growth rate. Although they predict the
overall rate of growth will slow to 23.3% between now and 2004, nonetheless they
predict the size of the market then will be a whopping $250.4-billion. That
compares, says Bishop, with a market that was just $3.2-billion in 1985,
$8.6-billion in 1990, and $28.4-billion in 1995.
Conclusion
From every perspective, several points are clear:
-
Top-tier
providers of Contract Electronic Manufacturing Services continue to grow
rapidly, either from additional business generated by current or new customers,
from acquiring manufacturing facilities formerly owned and operated by OEMs, or
from acquiring smaller CEMS providers
-
Most
observers predict that robust growth will continue, although some see the rate of growth declining somewhat during the next four years
-
Most
analysts we interviewed believe that top-tier contract EMS providers before too
many years will rival their customers in size, giving them more power to
negotiate prices and other aspects of their supplier-to-OEM relationship
-
Despite
the explosive and continuing growth of the CEMS, it still serves less than 20%
of the current total available market (TAM), which means substantial upward
potential remains in place
-
The
emergence of the World Wide Web as a tool for design collaboration, supply chain
optimization, and more efficient procurement and logistics management is further
helping to cement the relationship between OEMs and CEMS providers
-
Despite the growth of CEMS in North
America, there has been little CEMS activity within Pacific Rim nations, except
for oriental branches of U. S. CEMS providers, and Japan and Korea are still
expected to be slow adopters of outsourced manufacturing; many continue to
regard manufacturing as a core competency
Editor’s Note: Gartner Group was also
contacted during the preparation of this story. Gartner’s Ann Cavanaugh said
both Dataquest and Gartner are working on a major study which will define the
market, depict its current size, and forecast its growth; the results of their
study are not expected to be released until January, 2001.
Bear Stearns Equity Research and IPC declined to
participate in this article.
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