Decline in Electronics Contract Manufacturing in 2012

06 February 2012

Alistair Winning

Analyst iSuppli predicts that the global electronics contract manufacture business will decline slightly in 2012.

The decline is due to the continuing economic uncertainty in Europe and the US. The market is expected to decline slightly less than 1%, from $360 billion in 2011 to $357 billion this year.

Both EMS and ODM segments are not projected to perform well for this year. Revenue in the EMS sector for 2012 will be practically flat at $207.5 billion, up by a negligible 0.3% from $206.8 billion in 2011. The ODM sector is forecast to shrink 2.3% to $150.0 billion, down from $153.0 billion. The anticipated performance for the overall contract manufacturing industry this year represents a step down from 2011, particularly during the first half of the year, when growth was solid.

Last year, EMS boasted 10.1% growth on top of a 34.7% increase in revenue during 2009. However, the ODM market already was struggling in 2011, with a 1.7% decline.

The main factor affecting electronics contract manufacturing in 2011 is the sovereign debt crisis in Europe.

Europe remains a key market for products built all over the globe. If Europe goes into recession because of its financial problems, and the recession then spreads to the United States — already hobbled by high unemployment and assorted economic travails — there will be very little that the global contract manufacturing industry can do. A recession is not certain to occur this year. Still, the forecasts paint a picture of reduced growth for both Europe and the United States in 2012.

A bright spot can be discerned concerning China. Overall expectations point to another round of high single-digit growth this year in that country, which already accounts for more than half of the contract manufacturing industry’s aggregate revenues. China also has grown to be the world’s largest consumption market of smartphones and PCs, so China’s pace of growth in those markets will determine how quickly those areas expand.

China, though, is no longer the nexus of cheap labour, instead sitting atop a list of countries characterised by low manufacturing wages. China in 2011 had wages averaging $2.19 for each worker per hour, which is rising at nearly 15% per year.

Despite this, IHS does not believe another region in the world is likely to emerge as a new low-cost manufacturing location. In most cases, the infrastructure—including power, water and transportation—of locations under consideration is simply not adequate or robust enough to support large-scale manufacturing, especially when compared to what the industry now deploys in two of its largest manufacturing locations in China or Mexico.

The bottom line
On a positive note, the continuing popularity among consumers of devices like smartphones and tablets means contract manufacturing in these areas can be expected to help compensate for slow growth elsewhere in the industry.

A shift toward fewer product offerings in the notebook industry also will have positive impacts, leading to improved inventory velocity throughout the PC notebook supply chain. Moreover, lower component pricing this year should help improve industry margins for the near term.

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