Are top-tier CEMs getting too dominant?
Mar. 31, 2000 (Electronic Buyers News - CMP via COMTEX) -- The rapid expansion
of the world's leading contract electronics manufacturers has prompted many
executives and analysts to weigh the impact this dominance will have on the
electronics industry.
Are the five or six companies that make up the industry's top tier getting so
big and powerful that they'll have an unfair influence over component pricing
and supply? Will they lose their edge and make a mad dash toward vertical
integration?
Or, as some market watchers see it, is the creation of this megatier of
companies simply a sign that a relatively young industry is beginning to mature,
with consolidation a natural part of that evolution?
The debate goes on, but it's clear that a handful of companies are in a class by
themselves. These include Celestica Inc., Flextronics International Ltd., Jabil
Circuit Inc., SCI Systems Inc., and Solectron Corp.
Within 18 months, the mega-CEMs will have a combined revenue of $43 billion,
representing nearly half of the $90 billion global electronics manufacturing
services (EMS) industry, said Jerry Labowitz, an analyst at Merrill Lynch & Co.
Inc., New York.
Labowitz and others predict these players will only get bigger, since some
segments of the electronics industry, such as telecom and networking, are just
beginning to outsource their vast manufacturing requirements. Companies like
Ericsson, Lucent, and Nortel will likely look to the top tier because of global
requirements and the massive volume of their business, experts said.
And with a big chunk of CEM revenue represented by component costs, the buying
power within the elite group is awesome. That's why many parts suppliers and
distributors have created dedicated teams to go after this business.
"They'll have more power over suppliers in the long term. As they grow, they can
demand more allocation," said J. Anton Hie, an analyst at J.C. Bradford & Co.,
Nashville, Tenn. "They'll have more leverage with their sheer volume."
As components such as tantalum capacitors and flash-memory chips become tougher
to obtain, some fear these big CEMs will get first crack at the available
inventory, leaving OEMs and smaller CEMs battling for scraps.
"It happens all the time, in all markets," said Scott Stephens, chief technology
officer at the Supply Chain Council, Washington. "Companies use buying power to
provide customers with better terms."
Analyst James Corridore of S&P Equity Group, New York, said that even mammoth
companies can't escape parts shortages. He noted that Solectron, which had $8.4
billion in revenue last year, reported problems securing certain components.
These top players have expanded in three ways: by taking over manufacturing
plants of huge OEMs looking to outsource production; by acquiring other CEMs
that fill geographic or technological needs; or by augmenting services.
Indeed, many of the top-tier CEMs handle virtually every aspect of design and
production. For years, CEMs focused solely on printed-circuit-board assembly,
and later added system assembly and logistics. But today, some companies control
every aspect of the supply chain, from plastics and sheet metal to cable
assemblies and backplanes, system-level design services, and end-market delivery
and service.
"The world can't make up its mind. Now, its fashionable to say that CEMs should
be vertically integrated. There's a frenzy of ideas flying around," said Roger
Norberg, an analyst at U.S. Bancorp Piper Jaffray, Minneapolis.
For Viasystems Inc., a $1 billion CEM based in St. Louis, "our philosophy is
that you have be vertically integrated," said chairman James Mills, who recently
took the company public and has set his sights on the top tier of the business.
Still, some believe the pendulum may swing in the other direction as the
business continues to mature. "I don't see total vertical integration," said
S&P's Corridore. "The components shortage shows CEMs don't want to have total
control. They prefer support services like design or shipping."
Will the dominance of the top players put smaller competitors out of business?
No, according to most analysts and management experts. "Most mature markets have
a few key people. Look at the automotive industry and personal computers," said
the Supply Chain Council's Stephens. "It doesn't mean competition isn't there."
Merrill Lynch's Labowitz agreed, saying that smaller companies, with sales of
$100 million to $2 billion, will have plenty of opportunities if they focus and
run strong operations. "As the need for outsourcing grows, the more successful
and profitable EMS companies should mirror their customers in size and reach,"
he wrote in a recent report.
Smaller niche providers should focus on select market segments and programs," he
added. Automotive, industrial, medical, and military products are
multibillion-dollar markets out of the reach of most mega-CEMs.
"Size won't affect our outsourcing decision. We want companies to be flexible
with order turnarounds, lead times, and provide repair and manufacturing
facilities," said Jeff Nelson, senior marketing manager at Mitsubishi Wireless
Communications in Duluth, Ga.
---
Mega-CEMs lead the pack
Companies
Mega-$5B and more
Celestica, Flextronics International, Jabil Circuit, SCI Systems,
Solectron
Tier One-$2B to $5B
Benchmark Electronics, NatSteel Electronics, Sanmina
Tier Two-$500M to $2B
ACT Manufacturing, Bull Electronics, C-MAC Industries, Manufacturers' Services,
Plexus, Universal Scientific Industrial, Venture Manufacturing
Tier Three-$499M or less
EFTC, IEC Electronics, Nam Tai Electronics
Source: Merrill Lynch & Co. Inc
http://www.ebnonline.com/
By: Claire Serant
Copyright 2000 CMP Media Inc. |
