| Recession Spells End of Foxconn Effect, Analyst Says |
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| Wednesday, 22 October 2008 12:09 | |||
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SAN JOSE – The top 10 EMS firms showed collective first-half growth of 4.3%, down from 20% last year, and the forecast, if not dire, is dimmer than before. In a 2008 wrap-up about the economic status of the electronics industry, iSuppli Corp. today said EMS/ODM firms have been hit hard by macroeconomic concerns and drops in demand. The environment has led the firm to lower its growth outlook for the sector to 8.2% CAGR. The subprime mortage resets peak during the second quarter, coupled with problems at Fannie Mae and Freddie Mac, loom large over economy, iSuppli noted. Said Adam Pick, principal analyst, EMS/ODM services, “In a recession, the Dow drops 48 to 49%, so it could still get worse.” There’s no question the broader economic situation is being felt at the EMS/ODM level. ODM shipments are dropping tremendously this year. The No. 1 company, Compal Communications, a supplier to Motorola, Nokia and LG, has seen shipments drop 33.3% from last year. No. 2 Quanta dropped 7.5%, while Qisda is down a whopping 50%. TPV dipped 14.3%, and Asus is down 6.1%. “ODMs are definitely getting hit,” Pick said. “Revenues are down; shipments are down; forecasts are down.” The big question now is, Of the EMS companies and ODMs, who’s going to survive? And are there any likely bankruptcies? According to a new report by iSuppli, most firms are okay. However, without naming names, Pick suggested some firms could be in trouble during a recession. The iSuppli report, “Recession Hits EMS/ODMs,” is due out Nov. 7. On the flip side, some CEOs are saying a recession is good for contract manufacturers because OEMs are rethinking their strategies, and Flextronics is positioned to be a prime beneficiary of a new wave outsourcing. “Is the rubber-band effect fact or fiction?” asked Pick. “The rubber-band effect was material during the last recession. But today is not 2001.” Jeffrey Wu, senior analyst, EMS/ODM services, pointed to the recent postponement of a major joint EMS/ODM investment. That deal, between Foxconn and HP in St. Petersburg, Russia, would have invested $50 million in a new 32,000 sq. meter site capable of producing 40,000 PCs per month. The opening was scheduled for early 2009, and its postponement shows even the largest EMS provider is now “feeling the hurt.” “Weaker demand is having impact on OEMs and EMS providers alike,” Pick said. iSuppli predicts one of two scenarios: Electronics will grow, but at a slower rate, or the market contracts. The latter, Pick said, “is what we fear the most.” For OEMs, he advised, it’s time to reduce outsource production and prepare for EMS/ODM consolidation. OEMs also need to ask how they can best reduce capacity. “This is reminiscent of post 2001,” he said. For EMS firms, he mentioned the seasonality of the first half of the year as a problem. “It’s time for EMS to back off.” While margins are actually stabilizing and restructurings are slowing, according to Pick, “consolidation is a definite need to know.” “The Foxconn effect is pretty much over,” he added. Its revenues at the beginning of the decade were $3 billion and grew to $50 billion last year, but “Foxconn has hit some hiccups. Their stock was down 63% in the last 18 months.” The biggest hiccup, however, has been Benchmark, whose sales are down 10% sequentially. Sanmina’s sales have beat expectations, and Celestica is seeing a turnaround in Europe and Mexico, while its “ROI continues to go up and up,” said Pick. For ODMs, the global trend toward mobile computing has been good for growth. The top 10 firms were up 21.3% last quarter, said Pick. Inventec, for instance, has seen a 28% spike in revenue on higher HP and Toshiba orders. Nevertheless, Quanta has had issues with R&D, labor and material, while Compal has struggled with contraction.
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| Last Updated on Wednesday, 22 October 2008 12:10 |
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