CEMs cautious about near term
By Jim Savage
May 04, 1998, TechWeb News
Although OEM executives indicate that their long-term
outlook for outsourced production has never been stronger,
the near-term picture for earnings in the contract
electronics manufacturing market is far cloudier.
In general, while first-quarter results have met analysts'
expectations, OEM channel inventory issues, aggressive
ASP declines, product transitions, and the continuing
fallout from last fall's Asian financial meltdown have
prodded some leading CEMs, as well as leaders in the
power supply and printed-circuit-board industry, to
express caution regarding demand and the potential impact
on financial results this spring and summer.
The issues go beyond Compaq Computer Corp. and the PC
industry's well-publicized inventory problems. A series of
product transitions, continuing Asian end-market
weakness, and caution regarding inventory levels have
affected high-tech industries from PCs to datacom to
telecom equipment. Thus, while some key CEM and
related-sector companies, including Flextronics
International, Sanmina Corp., and SCI Systems Inc.,
continue to provide positive earnings guidance, others,
including Computer Products (Artesyn Technologies),
Hadco Corp., Jabil Circuit Inc., Kent Electronics Corp.
(and its K*TEC division), and Solectron have been far
more cautionary.
The impact of Compaq's inventory correction has extended
through its supply chain. Suppliers to both the computer
giants and subsystem OEMs, such as drive companies,
have seen reduced order flow. As a result, bookings
visibility has sagged. However, there are increasing signs
that the issues may be short term and that volumes could
pick up by the end of the second quarter. Similarly, in the
datacom segment, inventory corrections and product
transitions have trickled down through the supply chain,
resulting in uncertainty. But as in the PC sector, currently
struggling networking OEMs are indicating that growth is
likely to resume during the summer.
Overall, we believe that moves by OEMs to tighten their
supply chain management, reduce channel inventory levels,
and cut lead times will have a long-term positive effect on
their core suppliers, which will be able to better respond
to demand trends.
Despite current weak market conditions, investors have
begun to look beyond short-term issues and once again
focus on long-term growth.
In general, investors are anticipating a parting of the
clouds. While it's clear that for many in the CEM and
related sectors spring will be difficult, the second half of
the year is likely to bring a resumption of growth at
historic levels.
-Jim Savage is an analyst at BT Alex. Brown Inc., New
York.
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