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

To: John Morelli who wrote (1684)	8/25/1998 10:42:00 AM
From: patroller	Respond to of 2542

HI John if their are price cut demands it would be in the face of the strongest out-sourcing the ecm's have ever seen,really I would think that any oem worth there salt would be happy that they dont have to stand in line,remember the ecms are going to grow at a 35% rate instead of a 25% rate this year according the JC Bradford report .John with that kinda of demand the temptation will be for the oem to price themself's out of the market.jmho patroller

To: John Morelli who wrote (1684)	8/25/1998 12:10:00 PM
From: kolo55	Read Replies (2) \| Respond to of 2542

"Can't get blood out of a turnip." This was SCI System's Colin King's comment at one time; the point being that say a 5% decline in ECM assembly pricing was less than a 0.25% decline in final product pricing. As you can see in the article, the assembly costs for electronic product is only about $35 for a $1000 product; this is less than 5%. A lot of the 'revenues' for ECM companies are 'pass-through' material costs, and that is why a good material purchasing, inventory, and tracking system is critical. If the contract manufacturer can pass on material savings to their customers, they probably share some of the cost savings. Of course as ECM becomes EMS (Electronic Manufacturing Services), and the contract servicer handles box build, warehousing, distribution, and supply chain management, then the portion of revenues they realize from a product increases, but the margin slips. The biggest box builders (SCI) have the lowest margins. Also the guys who assemble a lot of electronic consumer products (FLEXF,CMCI) also tend to have lower margins. But as some analysts have pointed out, margins in this sector isn't the most important measurement parameter (even though I use it to short-cut estimate earnings). Instead focus on the return on value added. See this post for Keith Dunne's (BARS) write-up on this: Message 2965370 One thing that is interesting, is the move into providing routine engineering and design for customers. We know people like Solectron, Flextronics, and Plexus, as well as others, are doing more and more design work. This is a higher margin business, but as yet, not a significant revenue contributor for most companies in the sector. The big trend right now is the move to outsource. I believe that customers save something on the order of 5-8% on their manufactured cost of products due to outsourcing. This due to better facilities and manpower utilization, better materials management, fewer steps in the manufacturing and shipping processes (for total box build, warehousing , and distribution). They also will get faster time to market and order response times than with their own facilites. Compared to this, the cost savings due to cutting the pricing to the ECM is less than 1%. Given the tremendous amount of work being outsourced right now, and over the next several years, I don't see the pricing as the priority. Since turning over all these functions to a EMS supplier requires that the OEM and the supplier work together closely, these relationships will tend to be long lasting. The costs to set up the relationship are low compared to the cost savings for the OEM, but high compared to the minimal price reductions of switching to another EMS supplier. I think the market is focused on the lower margins the sector will see on these $200M plus (annual revenues) deals that the top players are getting, and missing the eventual impact on the bottom line (EPS) which should be substantial. The ECM stocks are priced as attractively as I've seen since I started tracking the sector in the fall of 1996. You have to go back to the spring and summer of 96 (during the tech swoon then) to find as attractive valuations. Paul