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Strategies & Market Trends : Electronic Contract Manufacture (ECM) Sector -- Ignore unavailable to you. Want to Upgrade?

To: Asymmetric who wrote (1518)	5/16/1998 6:16:00 AM
From: Asymmetric	Read Replies (1) \| Respond to of 2542

CEMs face market obstacles -- Inventory problems, product transitions, ASP declines to blame By Jennifer L. Baljko May 04, 1998, TechWeb News Although the OEM outsourcing trend is still robust, market conditions in other high-tech segments are starting to cause some concern for contract electronics manufacturers. While CEMs met Wall Street's first-quarter expectations, inventory problems in the PC industry, product transitions in a number of sectors, and ASP declines have executives and analysts warning of a soft outlook for the current quarter and the early part of summer. As a result, CEMs could see a temporary slowdown in orders as OEMs ramp up for new-product launches and the inventory glut subsides. "There has been a slowdown, and that has been affecting the stock prices," said Scott D. Butler, an analyst at Pacific Crest Securities, Portland, Ore. "Most of the big companies, like Solectron, Jabil Circuit, and other bellwether companies, had a softer outlook. But there is a record level of activity of OEM outsourcing." The problems associated with the PC market have been on the table for several months, and while there is evidence that the tide is turning, CEMs with exposure in that market have looked for ways to spread out their efforts, analysts said. Another area that has been a bit overlooked is the communications segment, a huge growth industry in which contract manufacturers have dedicated a considerable amount of resources. "There is a lot of transition going on in the communications sector," Butler said. "There is a transition from older products to newer ones, and a host of corporate IT managers are waiting for the new products to come out, which is slowing demand for the older versions." That glitch will correct itself in the next couple of months as equipment makers roll out their latest plans and send assembly work to their CEM partners, he said. Regardless of how brief the duration, these setbacks are causing some immediate headaches for electronics manufacturing service companies that focus on printed-circuit boards, power supplies, and backplane production, said J. Keith Dunne, an analyst at BancAmerica Robertson Stephens, San Francisco. Companies such as Hadco Corp. and Praegitzer Industries Inc. directly rely on increased demand from their customers, and when that falls off, business takes a hit. The matter is also complicated by the fact that large CEMs that have gotten into the board business are now able to take some of the market share, according to Dunne. "It's tougher for the product-driven companies than the services companies, or what we call the traditional contract manufacturers," he said. "The dynamics of outsourcing in these areas are not the same." "For the next couple of quarters, the service-oriented [CEMs] will do well," Dunne said. "For the products-based companies, the June quarter will be every bit as tough as the March quarter." What hasn't slowed down in the last three months is the expansion effort. Contract manufacturers are still buying buildings that OEMs no longer want, adding bricks and mortar to existing sites, and breaking into markets that extend their global reach. All things considered, the CEM business is expected to start picking up steam during the summer, when OEMs begin thinking about gearing up for the Christmas selling season, said John McManus, an analyst at Needham & Co., New York. That seasonal upswing plus the ongoing OEM trend to trim costs will spill over into the contract manufacturers' third-quarter results. Copyright (c) 1998 CMP Media Inc.