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Will Slowdown In Computer Industry Hamper EMS Growth?
December 31, 1969 |Estimated reading time: 7 minutes
The electronics manufacturing services (EMS) industry provides service at minimal cost. To remain strong in the low-profit margin computer market, however, large EMS providers should pursue scale economies, while smaller providers must closely define their niche.
By Raman Monga and Keith Robinson
Computer and computer peripheral OEMs have accepted outsourcing as a viable business model much faster than other industries, such as the telecommunications industry. The computer and computer peripheral OEMs were among the first to clearly understand the benefits of focusing on core competencies to help grow their businesses (e.g., sales marketing, new product research and development [R&D] and more). Now, the EMS industry has reached the stage of providing services at a lower cost than most OEMs can provide for themselves. As a result, OEMs are outsourcing at an increasingly accelerated rate and, thus, can save on capital expenditures and employee costs. There still remains ample business to outsource in the computer industry. However, the amount of work available on a contract basis rapidly is being reduced by firms that have embraced outsourcing, much to their success. Many leading EMS providers are large, multinational corporations that operate on thin profit margins, generally 2 to 3 percent. The computer industry squeezes these margins ever tighter, as their end products continue declining in price. Larger EMS providers are better able to serve many of the computer OEMs because of the resulting need for far-reaching scale economies. And to achieve these aforementioned economies, EMS firms are consolidating rapidly, either through mergers and acquisitions (M&A) or greenfield operations (the former being more common).
Choosing the Successful ProviderRanking as one of computer and computer peripheral OEMs' top selection criteria for choosing an EMS provider is the ability to meet timetables. EMS firms must attain more control of the supply chain with less turnaround time. Computer and computer peripheral products are especially sensitive to meeting introduction schedules if these devices are to be successful. This issue, however, is not always under the EMS providers' control. Consider electronic component shortages that have caused delays for manufacturers meeting demanding delivery schedules, such as tantalum capacitors. As EMS providers grow larger, however, the organizations will attain an increasing amount of influence over current supply chains, which obviously is expected to benefit EMS companies in their quest to meet OEM needs.
The computer and computer peripheral sectors encompass many applications, and EMS organizations classify many varied segments into these categories. To create a focused analysis with usable information, as opposed to general forecasts covering the "entire" computer industry, Frost & Sullivan has defined the computer market as the following specific applications:
- Personal digital assistants (PDA)
- Laptop computers
- Desktop personal computers
- Ruggedized computers
- Hand-held computers.
The computer peripheral applications are defined as:
- Impact printers dot- or line-matrix
- Inkjet printers
- Laser and light emitting diode (LED) printers
- Modems
- Monitors
- Scanners.
In 1999, the total North American market for EMS providers in the computer and computer peripheral industry generated $16.65 billion in revenues from the applications previously mentioned. It is projected that total revenues generated from the computer industry for the North American EMS market in 2000 was $20.43 billion. The market is expected to continue its strong growth, with projected revenues of $42.45 billion in 2006.
Analysis by Major SegmentEMS Market for the Computer Industry. Many large computer OEMs already have outsourced a substantial amount of production to EMS providers. Although slower than some of its counterparts, Compaq is embracing an outsourcing model and is expected to increase its rate of outsourcing quickly. Because the computer sector is further along an outsourcing curve than other industries, the outsourcing rate for the computer sector is less than other industries.
The total computer market, as defined in this report, was projected to be worth $14.78 billion in 2000, and is projected to reach $32.79 billion by 2006.
Market drivers for EMS providers serving the computer industry include:
- More OEMs outsourcing, which expands the EMS market
- Increased interest in the Internet worldwide is pushing computer sales
- OEMs can reduce capital expenditures by outsourcing.
Market restraints for EMS providers serving the computer industry include:
- Some OEMs bringing manufacturing back in-house
- Component shortages that hamper growth
- OEMs headquartered in Asia have been slow to outsource.
EMS Market for the Computer Peripheral Industry. The computer peripheral market is displaying robust growth in North America, especially in Mexico. Mexico is on the rise as a peripheral manufacturing hub for North America, although rebounding markets in Asia have somewhat slowed this growth. As some manufacturing previously transferred to Mexico has moved back to Asia, EMS providers can take advantage of favorable cost structures.
The peripheral market is providing many opportunities for EMS companies that, in turn, have exploited new opportunities provided by the likes of Hewlett-Packard and others. Furthermore, newer virtual companies targeting niche markets also are presenting attractive markets for the small to mid-sized EMS organizations.
As a whole, the peripheral sector has outsourced a substantial portion of its business, but there continues to be an enormous amount of OEM manufacturing projected to be outsourced, especially in Asia. Moreover, real growth for the peripheral sector alone is projected to be enough to sustain healthy growth rates for EMS organizations.
Market drivers for EMS providers serving the computer peripheral industry include:
- Increasing demand from South America
- The North American market is promoting industry growth
- Rapid technology development is driving peripheral OEMs to outsource, expanding EMS revenues.
Market restraints for EMS providers serving the computer peripheral industry include:
- Declining prices for computer peripheral end products have forced EMS providers to cut additional costs
- Slowdown has occurred in some computer peripheral unit shipments
- Harsh competition between EMS providers drives service prices down, restraining revenues.
Competitive AnalysisThe computer sector, more than other segments, increasingly is pressing profit margins. As a result, EMS providers must gain enormous scale economies to remain competitive. Because the EMS industry is a low-margin business to begin with, this is no easy task for EMS providers. The obvious answer is size and expertise. For this reason, the EMS industry is continuing to consolidate so that it can fully tap the lucrative computer market. Even though profit margins are low, the sheer size and potential growth of the computer market makes it extremely attractive.
As the EMS industry continues to develop, EMS organizations aggressively are acquiring, merging and investing in greenfield ventures at an accelerating pace. A sustaining trend in the competitive structure of this industry is that larger EMS companies are growing at a much quicker rate than their smaller counterparts. This trend is driven primarily as a result of the superior resources that the larger firms posses. Consequently, smaller EMS providers must more strictly define their niche to survive in this high-growth, quickly consolidating industry.
ConclusionThe M&A trend is continuing to permeate the EMS industry. Another rising trend in the market is strategic alliance. Relationships formed by such alliances can be beneficial for all parties involved, and can be another method of tapping needed resources in the marketplace. It is believed that this trend will gain momentum among mid-size EMS organizations because of the relatively inexpensive benefits that can be derived.
While many larger EMS providers are acquiring market share in the computer industry at a rapid rate, numerous small and mid-size companies are looking for creative ways to increase their own market share. One option used is an initial public offering (IPO). A major and obvious obstacle to growth for smaller EMS providers is access to capital. Furthermore, debt financing can be prohibitive to a firm's profit margins. An IPO is by no means an answer for the majority of companies in need of financing. However, those that are well established, with generally no less than $100 million in annual revenues, may be prime candidates for an IPO.
In spite of concerns about personal computer sales and general slowdown of the U.S. economy, the EMS industry is not expected to experience a downturn. During periods of economic slowdown, outsourcing becomes an even more viable option as OEMs seek ways to cut costs. EMS providers specialize in maximizing efficiencies so that they can produce the same product for less than OEMs. During a slowdown, there tends to be more pressure on OEMs to cut production or shut down their plants rather than reduce outsourcing.
RAMAN MONGA, research analyst for EMS, and KEITH ROBINSON, industry analyst for SMT and electronic components, may be contacted at Frost & Sullivan, 7550 West Interstate 10, Suite 910, San Antonio, TX 78229; (210) 247-2487 or (210) 247-2402; E-mail: rmonga@frost.com or krobinson@frost.com; Web site: www.frost.com.