EMS Market to Rise 8.5% This Year
EL SEGUNDO, CA -- The global outsourced manufacturing industry sits at a crossroads heading into 2011, according to research firm iSuppli.
With aggregate industry revenues in 2010 projected to finish at $347 billion — up from $260 billion in 2009 — given the much stronger recovery last year, expectations are rife for continued expansion at a relatively high level. For 2011, iSuppli estimates industry revenue growth of 8.5%. Of concern, however, are many of the still unresolved global macro issues that led to the significant decrease in industry revenues in 2009 when global demand faltered. By 2014, iSuppli believes revenue will reach $472.3 billion.
Furthermore, the industry is grappling with lower margins across a couple of consumer-oriented end markets, as competition for new business accelerated throughout 2010. EMS and ODM providers with exposure to these areas have been hardest hit, while others with a more balanced end market portfolio have fared much better. And compared to just a few years back, a greater number of high-mix markets, which comprise less than 30% of the global electronics space, have taken center stage. Nearly all the largest EMS providers report very strong near-term growth in these segments as well as a widening pipeline for future business. All told, the global ODM industry remains still highly geared toward the computing and consumer end markets.
China, once again, is expected in 2011 to continue carrying the burden of driving worldwide growth in the global outsourced manufacturing market. The largest contract manufacturing provider, Hon Hai Precision Industries (Foxconn), reported nearly 60% revenue growth in the first nine months of 2010 compared to the same period in 2009. Hon Hai is also the largest manufacturer in China.
This year, Industry expectations call for Chinese-based operations to once again provide the bulk of industry growth. More than 75 percent of aggregate industry growth was derived from manufacturing operations in China in 2010, iSuppli estimates. With China’s domestic economy expected to grow close to 10 percent in 2011—much faster than either Europe or the United States—the industry believes such growth will drive higher consumption in the country. Should growth fail to materialize, however, the outsourced manufacturing industry would be materially impacted.
Given the rise of material costs and increasing wages in major manufacturing locations like China, industry margins in 2011 are apt to be heading sideways or even downward. Last year, margin improvement had been more a function of cyclical factors, driven by the stronger-than-expected recovery in revenues.
Offsetting this was higher-than-expected pricing pressure in some consumer-oriented product markets, such as notebook PCs. In the third quarter of 2010, average gross margins for the 10 largest EMS providers rose by 1.30 percent. In contrast, the average gross margins for the 10 biggest ODM providers declined by 1.16 percent because of greater exposure to highly price-sensitive markets.
Of more concern, only four of the largest companies across both EMS and ODM industries reported sequentially higher margins despite higher revenue. In 2010, outsourced manufacturing providers with a higher proportion of less price-sensitive consumer-oriented product appeared to have lesser impact on margins.
In iSuppli’s view, margin improvement in 2011 is likely more a factor of product mix, as opposed to pure cyclical aspects such as revenue growth. With the industry starting to add capacity, OEMs have grown more concerned with pricing, and input costs have risen.
