OEMs planning larger role for EMS
Electronic Buyers News, Friday, July 02, 1999 at 22:48
(Published on Monday, July 05, 1999 at 00:00)
by Thomas Hopkins
The outsourcing of the manufacture of electronic products,
particularly in the United States, will continue to gain momentum
through 1999 and into the next century.
The results of the second annual Bear Stearns Electronics
Manufacturing Services (EMS) and Supply-Chain Poll clearly indicate
that outsourcing is accelerating.
As part of our coverage of the EMS industry for the past two years,
Bear Stearns has conducted a survey of the world's leading, midtier,
and emerging OEMs in the computer, storage, peripheral, telecom
hardware, data-networking, consumer, and related electronics
industries.
This year, we polled more than 120 companies and received 88
responses.
The respondents together represent companies with more than $329
billion in cost of goods sold (COGS), $510 billion in sales, and
greater than $1.6 trillion in equity-market capitalization.
The $329 billion in COGS accounts for more than half of the estimated
global $650 billion in COGS in the electronics and technology hardware
sector.
Eighty-four percent of the OEMs surveyed (compared with 74% last
year), including the market-share leaders, answered yes to the key
question: "Do you intend to increase your use of EMS providers over the
next 12 months?"
We believe incremental growth from outsourcing is the key reason EMS
providers are growing faster than overall technology hardware. Weighted
by each company's COGS, we determined that, on average, 25% of our
respondents' manufactured product is outsourced to CEMs.
We believe that our results are higher than industry estimates of 15%
to 20% global outsourcing because of a higher concentration of North
American participants, which are further along in outsourcing compared
with Asian and Western European OEMs.
In any case, it's clear that we are still in the early stages of
outsourcing, with many OEMs expressing an interest in outsourcing as
much as 50% of their manufactured product.
The wide-scale adoption of a virtual manufacturing strategy may be the
most important secular change in the technology sector, after the
proliferation of the Internet. Nearly every market-share leader in each
hardware sector has indicated its intention to outsource significant
parts, if not the majority, of its manufacturing.
In addition, many start-up OEMs on the cutting edge of high technology
are forsaking building any internal manufacturing plants or capacity
for a virtual strategy, resulting in total reliance on CEMs.
Poll results by sales size confirm that the market-share leaders and
emerging-growth companies are the most aggressive outsourcers, with 90%
of those having COGS between $10 billion and $50 billion indicating
they will increase their use of CEMs. Of emerging-growth companies with
less than $1 billion in COGS, 91% indicated they will increase their
use of CEMs.
The high level of outsourcing by leading and emerging OEMs will put
pressure on midtier OEMs to use CEMs, further accelerating EMS-industry
growth.
We also asked OEMs to rank their reasons for outsourcing. Fifty-three
percent indicated the primary reason was to reduce cost by lowering
labor, overhead, and capital expenditures, and for better component
pricing in some cases.
It is important to note that reduced costs could also include the
investment required to keep up with the latest manufacturing processes.
Capacity constraints and time-to-market accounted for 27% and 19%,
respectively.
Companies in the telecom industry were most concerned with reducing
cost (67%), followed by capacity limitations (25%), and time-to-market
(8%).
Computer and storage and peripheral companies were most focused on
reducing cost (51%), followed by time-to-market (26%), and capacity
constraints (23%).
OEM divestitures have been a key factor in the acceleration of
outsourcing. Year-to-date, there have been at least 13 major OEM
divestitures, which translates to 30 on an annualized basis, compared
with 24 in 1998 and 13 in 1997.
With Nortel's announced plans to divest 10 assembly, manufacturing,
and repair operations to CEMs, we expect the number of OEM divestitures
easily to exceed 30 by year's end.
-Thomas Hopkins is a CEM-industry analyst at Bear, Stearns & Co. Inc.,
New York.
Copyright © 1999 CMP Media Inc. |
