EMS Companies Boost DSC Market Competition in Taiwan

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Flextronics and Hon Hai are going after the segment's higher profit margins, putting more pressure on Taiwanese DSC contract manufacturers

Recent aggressive moves by electronics manufacturing service (EMS) providers will step up competition in the digital still camera (DSC) manufacturing industry, with Taiwanese contract makers to come under more pressure, market watchers said.

"Manufacturing digital cameras is a growing industry with higher margins, and EMS players want to have a share," said Ken Yu, an analyst with SinoPac Securities Corp.

Worldwide DSC shipments are forecast to hit 95.3 million units this year and 102.3 million next year, up from 87.4 million last year, with momentum seen from the Asia-Pacific region and emerging markets, according to Taipei-based Market Intelligence Center.

Margins for DSC production can easily exceed 10 percent, compared with 5 percent to 6 percent for computer production, Yu said.

Last Tuesday, Singapore-based Flextronics International Ltd, the world's largest EMS firm, announced that it would acquire Eastman Kodak Co's DSC manufacturing division and development center for US$35 million.

Kodak will continue marketing digital cameras under its own brand but production will be outsourced to Flextronics.

Flextronics' move comes on the heels of an announcement by smaller rival Hon Hai Precision Industry Co, which said on June 20 that it would acquire Taiwan's top DSC maker Premier Image Technology Corp through a share swap.

"We believe it is structurally negative to DSC manufacturers because competition will intensify with the entrance of Flextronics, which previously produced small volumes of digital cameras for Casio Computer Co," Macquarie Equities said in a report dated last Thursday.

Given their strong manufacturing background, cost leadership and scale, the world's top two EMS firms will likely boost rivalry among DSC manufacturers like Sanyo Electric Co, Asia Optical Co, Ability Enterprise Co, Altek Corp and add to the decline in margins, Macquarie said.

Premier Image, Asia Optical, Ability and Altek are the nation's first-tier DSC contract makers.

Flextronics' move should be particularly negative to Kodak's current suppliers, such as Altek and Asia Optical, over the long term, the Australian brokerage firm said.

Kodak's orders account for more than 50 percent of Altek's DSC shipments, and 10 percent to 20 percent of Asia Optical's, it said.

"With Flextronics in the picture now, it could also potentially limit planned market share gains by Hon Hai," Macquarie said.

But this does not mean the end for contract makers, Yu said.

"Compared with EMS players, manufacturers such as Asia Optical have mastered technologies for producing camera chips and optical camera lenses, and they also have advantages in camera design," he said.

These manufacturers have good long-term relationships with major Japanese clients such as Casio, Sony Corp, Canon Inc and Nikon Corp, and this is an area where EMS firms might need some time to catch up, Yu said.



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