Industry Recession Deepened for Electronics Contract Manufacturing, Says TFI

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Alameda, Calif. — Whereas the global electronics manufacturing services (EMS) industry grew at an average of more than 20 percent per year from 1993 until 2001, the industry came to a screeching halt, declining 4.7 percent in 2001 and 9 percent in 2002, according to a new study from Technology Forecasters Inc. (TFI).

At the June 9 Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain event, TFI presented its 12th "Annual Productivity Benchmarking of EMS Companies by Tiers."

From a revenue standpoint, EMS companies with 2002 revenues larger than US $2 billion clearly benefited disproportionately from high industry growth from 1999 to 2000, and they experienced less variance in revenue over the past two years. However, although Wall Street has historically judged the industry on the basis of expected future revenue, the last two years have highlighted the shortcomings of a focus on revenue. Conducted by TFI Senior Consultant Matt Chanoff, this report's focus was on the costs of managing rapid growth in the global EMS industry, how companies have responded to the industry recession, and how their responses have positioned them for the future.

The study was based on TFI's interviews with 65 private and public EMS companies of all sizes from all over the world. For each of four size categories of EMS companies, the study analyzed a dozen financial and performance ratios. Of these ratios, Return on Invested Capital (ROIC — the ratio of net operating profits after taxes to invested capital) is among the most valuable measures because it avoids distortions based on the fact that normal accounting principles treat the cost of different types of capital differently. ROIC looks more directly at the return generated by the capital in the business.

For the study, TFI also interviewed several Wall Street analysts who cover the EMS industry. With respect to end markets, the analysts felt that in the current environment the worst sectors for EMS were telecom, data communications and optical. Better end markets for EMS include automotive, consumer, industrial, enterprise hardware, storage and medical electronics. As a sign of the wavering health of the EMS industry, dozens of Wall Street analysts who previously covered the industry are no longer doing so; TFI discovered that currently only five such analysts have been covering the EMS industry for more than two years.

Other TFI reports presented at the June 9thQuarterly Forum included "International Logistics for Electronic Products, and Carriers' Entrée into Contract Manufacturing Management," "Introduction of TFI's New Model of Electronics Manufacturing Lifecycle, with Insights for OEMs on Outsourcing," "The Military/Aerospace Electronics Market: Unique Hurdles and Timely Opportunities, and Implications for Other Sectors," and "Global Pricing Model: True Costs for Contract Manufacturing in Countries Around the World."

Parametric Technology Corp. (PTC), a corporate sponsor of the Quarterly Forum, hosted the event in their Needham, Mass. headquarters. PTC interviewed Unisys regarding communications with suppliers throughout a product's lifecycle. Other corporate sponsors are Agile, Elcoteq and SMT Ltd. Elcoteq is hosting the September 9 Quarterly Forum at its Monterrey, Mexico, facility.

TFI is a strategic consulting firm helping electronic-product executives to improve supply-chain, outsourcing, and environmental strategies for cost benefits. For more information, visit



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