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EMS Market for the North American Communications Industry
December 31, 1969 |Estimated reading time: 6 minutes
By Adam Fries
As telecom and datacom companies embrace outsourcing, EMS providers face new opportunities and challenges.
Telecommunication (telecom) and datacommunication (datacom) OEMs accept outsourcing as a viable business model because electronics manufacturing services (EMS) organizations are furthering their service expertise swiftly. OEMs also see the benefits of focusing on core competencies, such as marketing or research and development (R&D). In many instances, OEMs have decided to divest themselves of manufacturing operations altogether. From the EMS firms' prospective, OEM divestiture acquisitions are a quick and efficient way to increase manufacturing capacity and generate new business. The EMS industry now can provide services at a lower cost than most OEMs. As a result, OEMs are outsourcing at an increasingly accelerated rate.
In 1999, the total North American market for communications industry service providers generated $11.83 billion. The market continues to experience strong growth, with projected revenues of $15.50 billion in 2000. Applications fuelling the EMS industry demand communications industry telecom sector include: wireless private branch exchange (PBX); wireless handsets; pagers; digital cellular infrastructure; global mobile personal communications by satellite (GMPCS); local multipoint distribution system (LMDS) equipment; automatic call distributor (ACD) systems; videoconferencing; and consumer telephones.
Applications in the datacom sector that help to drive revenues for the EMS industry in the communications industry include: wireless wide area networks (WAN); wireless local area networks (LAN); switches; routers; digital subscriber line (xDSL) equipment; and Internet telephony equipment (VoIP).
The telecom industry is developing rapidly and is expected to continue growing because of globalization. Many telecom companies are beginning to realize the benefits of outsourcing, which is increasing functions outsourced by these organizations.
The telecom sector is undergoing many changes. Telecom firms that traditionally have not outsourced are realizing that to remain competitive, and thus increase shareholder value, they must divest themselves of certain manufacturing functions. Telecom OEMs that provide communication products to the wireless industry have embraced outsourcing at a faster rate than wireline OEMs. Nokia and Ericsson, for example, have outsourced substantial production over the past few years, and many other telecom OEMs are following their example. Once an OEM views outsourcing as a viable business strategy, it generally increases its outsourcing level swiftly.
Numerous organizations that traditionally have viewed manufacturing as a core competency, such as Motorola and Alcatel, also are becoming serious about outsourcing. However, the rate at which these firms actually will embrace the outsourcing model is yet to be determined. While traditional outsourcers, including ADC Telecommunications and Adaptive Broadband, have built very focused organizations that do not view manufacturing as a distinctive or competitive advantage, nontraditional firms also are beginning to outsource vigorously. One such company, Nortel, has divested at a furious pace, benefitting EMS providers such as SCI Systems and C-MAC Industries.
As the voice communications industry continues globalizing at a rapid rate, the datacom sector also promotes this rapid change. Datacom OEMs have embraced outsourcing more quickly than their telecom counterparts, partly because many datacom OEMs are younger companies that did not vertically integrate from the outset, as opposed to the old and ingrained bureaucracies of some telecom giants. A company such as Cisco is a good example of a large datacom OEM that truly has adopted the outsourcing model as a core business strategy.
Analysis by Major SegmentEMS market for the telecom industry. The telecom industry currently is demonstrating explosive growth in North America (and the world). A large amount of this growth can be contributed to high growth in the wireless communications sectors. Large telecom OEMs have begun accepting and adopting outsourcing as a competitive strategy, and EMS providers aggressively target these organizations. Because the telecom market currently is undergoing rapid change, outsourcing not only is a mechanism for streamlining, but also increasingly becomes a means of remaining competitive. EMS revenues generated from the telecom sector were $8.69 billion in 1999.
Market drivers for EMS providers serving the telecom industry include:
- Telecom OEM-driven outsourcing expands EMS market
- Increased telecom electronics use by end users cultivates EMS growth
- Strong North American economy promotes strong EMS growth
- EMS providers augment service capabilities, which drives EMS revenues
- Rapid technology development drives telecom OEMs to outsource, expanding EMS revenues.
Market restraints for EMS providers serving the telecom sector include:
- Managing growth hinders EMS sector development
- Pricing pressures force EMS providers to cut additional costs
- OEM reluctance to outsource hinders EMS expansion
- Harsh competition between EMS providers drives service prices down, restraining revenues
- Skilled workforce shortage hampers EMS sector growth.
EMS market for the datacom industry. The datacom sector is in the midst of dynamic growth and change, and the speed of this change is contributing to an increase in EMS provider business in North America (and the world). Total EMS revenues generated from the datacom industry were $3.14 billion in 1999.
Market drivers for EMS providers serving the datacom industry include:
- Datacom OEMs' adoption of outsourcing model expands EMS market
- Exponential Internet and datacom product use by end users cultivates EMS growth
- Robust North American economy fuels dynamic EMS market growth
- EMS providers move down the experience curve, resulting in an expanding revenue base
- Time-to-market issues drive datacom OEMs to outsource, expanding EMS revenues.
Market restraints for EMS firms providing services to the datacom market include the following:
- Controlling growth impedes EMS expansion
- Pricing demands compel EMS providers to cut additional costs
- Inertia of some OEMs to outsource hinders EMS expansion
- Sharp competition between EMS organizations drives service prices down, suppressing revenues
- Insufficient skilled workforce pool impedes EMS growth.
Communication OEMs' EMS industry perspective. Outsourcing currently is a significant and far reaching business trend in North America (and the world). Business models are changing swiftly, and originally vertically integrated, ingrained bureaucracies are becoming downsized, flat organizations.
Communication OEMs' leading motivations for using EMS providers are: reducing cost; capacity limitations; time-to-market issues; and meeting global needs. The leading concerns expressed by communication OEMs regarding the EMS industry include: delivery assurance; ability to meet capacity needs; services beyond manufacturing; global presence; and information technology (IT) issues.
If EMS providers are aware of the different directions and strategies of major communications OEMs, they will be prepared to forecast and address the needs of these firms correctly. By being prepared to meet these needs, EMS providers will capitalize on potential business opportunities in the communications industry.
Competitive AnalysisMany large EMS providers have a competitive advantage over smaller firms in serving telecom organizations because of an extensive global footprint. These enable larger EMS providers to service telecom OEMs such as Nortel Networks and Lucent that require sophisticated supply chain capabilities to meet demanding time-to-market issues. Additionally, advancing IT systems and expanding services capabilities will continue contributing to market share gains and losses.
Many larger EMS organizations, such as Solectron, SCI Systems and Celestica, produce a large portion of revenues by providing manufacturing services to the datacom industry. The structure of a large number of datacom OEMs is very flat. These organizations invest heavily in R&D and marketing and outsource the remaining business functions, including manufacturing, warranty service, testing and design.
The EMS providers most capable of servicing datacom companies are large organizations with substantial global footprints and extensive IT systems. These aspects encompass supply chain capabilities that, in the fast-pace world of the datacom industry, always are important.
EMS industry participants in North America face many challenges; some leading issues include:
- Managing expansion forces EMS providers to retain direction
- Time-to-market issues drive EMS providers increasingly to optimize supply chain efficiency
- Upholding financial viability drives EMS providers to increase cost-effectiveness
- Communication OEMs require EMS firms to augment global facilities
- Telecom and datacom OEMs encourage EMS providers to develop service competencies.
Many EMS providers overcome these challenges using some of the following methods:
- Supply chain compression
- IT system implementation
- Global facilities expansion
- Increased procurement power through growth
- Flexibility.
ConclusionEMS organizations displaying dynamic market growth are focusing on managing information flows by implementing IT systems and advancing supply chain capabilities. Furthering the supply chain offers EMS providers' additional areas in which to reduce expenditures. Because the EMS industry currently has a net margin of approximately 2 to 3 percent, constantly improving efficiency is paramount to remaining competitive. Datacom and telecom OEMs will continue to push prices downward and demand an increased number of services. Effective IT systems and supply chains will help EMS firms distinguish themselves from their competitors. As the industry becomes increasingly competitive, differentiation will become more difficult for EMS organizations.
For more information, contact SHANTEL WILKINS, media relations executive, at Frost & Sullivan, 7550 IH 10 West, Suite 910, San Antonio, TX 78229; (210) 348-1015; Fax: (210) 348-1003; E-mail: swilkins@frost.com; Web site: www.frost.com.