Electronics Asia discussed the state of the contract manufacturing industry with Arthur Tan, President and CEO, Integrated Microelectronics Inc., and Elocoteq SE, (name of the interviewee withheld at the Company痴 request). Excerpts:
How has the electronics outsourcing business been faring in 2007? Tan: The electronics outsourcing business is generally doing well based on the robust H1 07 performance of some publicly listed EMS providers and ODMs. While the OEMs are competing fiercely with one another for successful market penetration and new product introduction, they use more and more EMS and ODM companies to help them cut their production cost and reduce their time-to-market. At present, the combined EMS and ODM industries account for only a quarter of the total available outsourcing market, which is the OEM痴 total cost of goods sold. This means that there is ample room for growth for these industries. However, the OEMs are becoming more demanding. They are paying more attention to total delivered cost, which means greater emphasis on logistics capabilities of EMS and ODM companies. OEMs are also outsourcing more design activities, preferring outsourcing partners who offer complete product realization services from design to manufacturing and order fulfillment.
How would you describe the outlook of the global electronics industry as a whole? What new opportunities do you see in the market today? Elcoteq: The overall market for electronics is projected to expand strongly over the next four to five years as consumption and replacement of electronics products continue and new products fuel demand. Computer and communications markets will continue to be the largest segments of the electronics industry. LCD TVs are a good example of a fast-growing sub or niche-segment, currently witnessing strong double-digit growth. Tan: As the world we live in becomes increasingly dependent on electronics, the electronics industry remains a critical sector of the global economy. The industry is driven by constant innovation and the ever-increasing demand for computers, mobile phones, and consumer electronic devices. The trend of converging technologies in a single electronic device continues, and so products like Apple痴 iPhone are introduced in the market. On top of that, there are emerging applications for the automotive, medical, defense, and other fields. In the automotive sector, for instance, the electronic content of cars is on the rise, making driving a safer, more convenient, and more entertaining experience.
What will be the impact of the consolidation trend in the EMS and ODM industries on the electronics industry? Do you think this will continue? Tan: As EMS or ODM companies consolidate, OEMs stand to benefit from enhanced capabilities, more efficient operations resulting from scaling up, and diverse geographic locations offered by the consolidated entities. As regional EMS and ODM players expand their global footprint and as the outsourcing industry becomes more competitive, the consolidation trend is likely to continue. Elcoteq: Despite some speculation revolving around ailing EMS giants, we are unlikely to see more Flextronics-Solectron type of mega-mergers. Typically the top 10 EMS/ODM companies get most of the coverage, since they represent a majority of the industry revenue, but if you look under the tip of the iceberg, the consolidation and fight for survival also go on in the top 100 EMS companies. EMS remains an industry with razor thin margins.
Please comment upon Asia as a player in global contract manufacturing industry. What are the areas of strengths and weaknesses? Elcoteq: Asia continues to attract contract manufacturing due to low wages and end-market proximity. China痴 manufacturing prowess has continued relatively unchallenged, with most EMS companies engaged in expansion activities in China. China remains the leader in low-cost manufacturing by continuing to leverage its low-cost labor, well established infrastructure and supply chain, and fast-growing domestic market. The country is strategically well-positioned as a manufacturing location. At the same time, India痴 momentum has continued despite its infrastructure challenges. Naturally, low-cost labor is just one criterion in contract manufacturing location decisions. In some cases, logistics cost can be more important. Tan: Asia continues to dominate in the EMS and ODM industries. China remains the leader in low-cost manufacturing, accounting for about 70% of the Asian EMS and ODM market. Southeast Asian countries like the Philippines, Malaysia, and Indonesia also have a substantial share of the Asian EMS and ODM market pie, while Vietnam and India are emerging as low-cost outsourcing locations. Asia痴 strength lies mainly in the availability of low-cost skilled labor and the promise of large domestic markets. On the other hand, there are countries in the region with weak supply base, infrastructure problems, and shortage of skilled engineers and managers.
How have EU and China environmental directives impacted contract manufacturing? Tan: Many EMS providers and ODMs have implemented compliance assurance systems (CAS) that include compliance to environmental directives or regulations. For instance, product-level compliance to the RoHS directive has become a prerequisite for EMS and ODM companies serving the leading OEMs. Elcoteq: The directives have added new requirements to the collection and management of product specific environmental information throughout the supply-chain and management of chemicals and substances. Also, the shift to lead-free manufacturing and products in compliance with the RoHS directive has been implemented.
What痴 your industry forecast for next year? Tan: My take is that the outsourcing industry will continue to grow faster than the OEM industry. As long as electronic products and devices continue to significantly affect our daily lives and OEMs continue to introduce new products in the market, OEMs will rely increasingly on EMS and ODM companies to enable them to focus on technology research and development and brand marketing.
