Top-tier strength lifts CEM mkt. -- Manufacturing divestitures, OEM outsourcing boosts sector
Darrell Dunn
Top-tier contract electronics manufacturers proved their mettle during the most recent quarter. Not only did they record strong revenue and profit growth, analysts now see them raising their share of the total CEM market by up to 10% in a couple of years.
The industry's growing strength in the latest quarter was buoyed by increased OEM outsourcing and divestiture of in-house manufacturing operations, a higher level of acquisition activity among major CEMs, and internal expansion to augment services.
Top-tier service providers shone brightly in the third quarter with a growth spurt that outpaced the entire sector. But even as industry executives bask in the sector's new-found strength, exactly how fast the CEM market is growing has lately become a hotly debated issue among research firms and analysts.
During the last quarter, research firm Technology Forecasters Inc., Alameda, Calif., revised downward its estimates of worldwide CEM revenue, as well as its projected growth rate. According to Technology Forecasters, a misinterpretation of earlier completed product sales has necessitated the downward revision of previously published estimates.
The company dropped its estimate of 1998 CEM revenue to $60 billion from an earlier figure of nearly $90 billion, and cut its five-year growth-rate projection from 25% to a more conservative 20% for the period covering 1998 through 2003.
The revision prompted a retort from some analysts, including Jim Savage at Thomas Weisel Partners LLC, New York, who argued that demand for electronic manufacturing services is taxing the ability of top-tier companies. There continues to be a dramatic acceleration of growth at the top tier, according to Savage.
"I think they [Technology Forecasters] are wrong," Savage said. "Companies like Motorola, Nortel, Lucent, Alcatel, Compaq, and Philips are putting out literally billions of dollars in new programs over a short period of time. Nortel is going to do another chunk of well over a billion dollars in the first half of next year."
But whether the CEM growth rate is closer to 20% or 25%, all market watchers seem to agree that the top 10 CEMs are garnering the bulk of the new outsourcing business.
"The top tier is growing somewhere near 40%, and is on its way to 50% in the next two years," Savage said. "If the market is growing as slowly as Technology Forecasters is saying, then virtually all the growth is taking place at the top."
In the June quarter-the most recent with complete data-the top-tier players grew at a rate of about 35%, while the midtier segment rose 28.5% and the rest of the CEM industry increased about 5%, said J. Keith Dunne, an analyst at Robertson Stephens Inc., San Francisco.
"In total, the [CEM] industry remains strong," he said. "Even if we agree with a 20% to 25% total growth rate, you have to consider that total electronic-equipment production is growing only at 8%, so the [CEM] industry is showing at least two and half times the growth of the underlying markets."
The past quarter also remained active in terms of mergers and acquisitions. Some of the most significant transactions completed or announced in the quarter included Benchmark Electronics Inc.'s acquisition of Avex Electronics Inc.; Saturn Electronics & Engineering Inc.'s purchase of Smartflex Systems Inc.; Plexus Corp.'s buy of SeaMED Corp. and the manufacturing assets of Shure Inc.; and Jabil Circuit Inc.'s acquisition of GET Manufacturing Inc.
Most recently, Solectron Corp., the industry's largest CEM, announced intentions to pay $2 billion for memory-module maker Smart Modular Technologies Inc., as well as its plan to buy Nulogix, IBM Corp.'s Canadian technical-services unit, for an undisclosed amount.
In October, SCI Systems Inc. announced plans to purchase TAG Manufacturing Inc., a manufacturer of enclosures for electronic equipment, while the Dii Group Inc. revealed plans to acquire the manufacturing operations of Stanford Telecommunications Inc.
These moves are part of the efforts by top-tier and upper-midtier CEMs to meet growing demand and position themselves with the necessary service offerings to maintain growth, Savage said.
"The seven largest public [CEMs] in North America will see over $8 billion in incremental growth in calendar 1999," he said. "In calendar 2000, the growth is expected to be in the range of $13 billion to $14 billion."
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