Growth Expectations for Outsourcing Grossly Underestimated
Thursday June 29 10:40am
Source: BusinessWire
NEW YORK--(BUSINESS WIRE)--June 29, 2000--
Bear Stearns 3rd Annual Electronics Manufacturing and
Supply-Chain Survey Reveals Underlying Investment
Opportunities for Electronics Manufacturing Services
They may not be the companies whose names appear on products like your
computer or cell phone, but they make nearly all of the motherboards inside
and in many cases, the entire product itself. Electronics manufacturing
service providers or "contract manufacturers" are hired by the Ciscos,
Motorolas, and Hewlett-Packards of the world to take over the manufacturing
functions of these previously vertically-integrated original equipment
manufacturers (OEMs) on an outsourced basis. The services that these
companies offer are in high demand and, according to Bear Stearns'
managing director and electronics manufacturing services (EMS) analyst Tom
Hopkins, the demand is only getting stronger. Hopkins' analysis is based on
his recently completed 3rd Annual Electronics Manufacturing and
Supply-Chain Survey, which is one of the most comprehensive surveys in the
electronics manufacturing services industry. Hopkins polled 200 of the world's
leading original equipment manufacturers (OEMs) and received 103
responses from companies such as: Nortel Networks, Hewlett-Packard, Dell,
Motorola, and Sony Electronics. The companies that responded totaled $2.3
trillion in equity market capitalization, $564 billion in sales, and $373 billion in
cost of goods sold. "It was a difficult and time consuming process," said
Hopkins. "But in order to really understand the market outlook for electronics
manufacturing services companies, you have to talk to their customers."
Tremendous Growth Ahead
The poll found that nearly all the leaders in each tech-hardware sector intend
to outsource significant parts - if not the majority - of their manufacturing. Of
those polled, 90% said they plan to increase their use of electronics
manufacturing services over the next 12 months. On average, OEMs
responded with a long-term goal to outsource 72% of their cost of goods
manufactured; a number which is almost five times higher than the current
industry estimate of 15% outsourced. This figure implies that over the next
five years the current contract manufacturer industry of $75 billion could grow
to $350 billion. "Both the rate and the magnitude of outsourcing is
accelerating, and it is accelerating rapidly," said Hopkins.
The poll also found that virtually all of the start-up OEMs on the cutting edge
of high-tech are forsaking building internal manufacturing plants. The
companies are planning to totally rely on EMS providers. Most companies
cited cost reductions as the #1 reason they are choosing to outsource their
production, followed by capacity constraints and time-to-market.
$50 Billion EMS Giant on the Horizon
Given the enormity of the total available market to be outsourced and the
commitment by leading technology hardware OEMs to adopt "virtual
manufacturing strategies," it is clear that we will see a $50 billion EMS player
in 3-5 years. For example, assuming no acquisitions, Solectron would double
to $32 billion in 5 years if it were to grow at 15% compounded annual growth
rate (CAGR) on its estimated calendar 2000 revenues of $16 billion.
However, the company is currently expected to grow two to three times that
rate at 35%-40% a year. Hopkins cited 5 stocks that he believes are worthy of
a Buy rating: Solectron (SLR-$41), SCI Systems (SCI-$39), Celestica
(CLS-$51), Flextronics (FLEX-$69) and Jabil Circuit (JBL-$48). |
