CEMs anticipate record growth
Darrell Dunn
While others within the electronics industry are approaching 1999 cautiously,
most contract electronics manufacturers are gearing up for potentially
record-breaking years.
"I think, for the top tier [of CEMs], it's going to be the best year in their
history," said James Savage, an analyst at BT Alex. Brown Inc., New York.
"There's going to be a major acceleration of growth for the next 12 to 24
months."
Currently, there are seven CEMs with annual revenue exceeding or nearing $1
billion, and those companies could see average revenue growth approaching
50% in 1999, Savage said. Overall, the CEM industry is likely to grow 30%
or better, he added.
The projected double-digit growth will be driven by OEMs' progressive
efforts to divest manufacturing assets in favor of outsourcing production.
This year, nearly 19% of total worldwide electronic-equipment production will
be outsourced to CEMs, compared with 14.2% in 1997, according to Robert
Kaskel, an analyst at Technology Forecasters Inc., Berkeley, Calif.
This trend in the next two years will accelerate at an even more rapid pace,
bringing that number to 26% by 2001, he added.
"We do see a much faster growth rate in the contract manufacturing industry
than we do in electronics production in general," Kaskel said. The CEM
industry is growing at a compound annual rate of 25%, vs. a 7.5% average
annual growth rate for global electronic-equipment production, he noted.
In the past year alone, top-tier CEMs completed more than a dozen major
acquisitions of OEM manufacturing operations around the world.
Among the key moves were the acquisitions of IBM Corp.'s plants in
Charlotte, N.C., by Solectron Corp. and Manufacturers' Services Ltd.;
Solectron's purchase of assets from Mitsubishi in Braselton, Ga.; Celestica
Inc.'s purchase of assets from Lucent Technologies Inc. in Monterrey,
Mexico, Madge Networks in Dublin, Ireland, and Silicon Graphics Inc. in
Chippewa Falls, Wis.; SCI Systems Inc.'s acquisitions from Nokia in Oulu,
Finland, and Motalao, Sweden; and Jabil Circuit Inc.'s acquisitions from
Hewlett-Packard Co. in Boise, Idaho, and Bergamo, Italy.
In the next 12 months, more multinational OEMs will divest manufacturing
operations and fully embrace the outsourcing model, according to William
Cage, an analyst at J.C. Bradford & Co., Nashville, Tenn.
"We're going to see some mega OEM-asset divestitures," he said.
Companies such as Compaq Computer Corp., Gateway 2000 Corp., and
Motorola Inc., which have traditionally relied on internal manufacturing
operations, have already indicated they intend to use CEMs more heavily in
the future.
With SCI Systems and Solectron approaching $8 billion in annual sales-and at
least five other companies exceeding $1 billion-large OEMs have gained
confidence in CEMs' ability to handle projects as large as $500 million
annually, Savage said.
The acceleration among top-tier players will increase the pressure to keep
pace among second-tier CEMs with revenue of $250 million to $750 million.
This is likely to lead to a number of CEM mergers within that segment in the
next year, according to Cage.
"As they march toward $1 billion, it creates the urge to merge," he said. "We'll
see some of those companies partner with each other to take that leap into the
upper tier."
The regions that have seen the greatest impact over the past year have been
Central and Eastern Europe, and Brazil, where many leading CEMs
established new manufacturing operations.
An anticipated hot market for 1999 will be China, where a handful of CEMs
already have established operations, Cage said. Other regions expected to see
new activity in the next year or two include Australia, India, and Vietnam.
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