Electronics contract manufacturing has sluggish start in 2011

The global electronics contract manufacturing industry will slow down this year after a bumper 2010 according to research by IHS iSuppli.

The industry, which saw a 33.4 percent increase in revenue in 2010, will only see sales rising by 8.5 percent this year.

Despite the slowing growth, the contract electronics industry, consisting of the electronics manufacturing services (EMS) and original design manufacturing (ODM) segments, will finish 2011 with revenue of $376.7 billion. This is up from $347.3 billion in 2010. It said revenue will continue to rise at annual rates between 9 percent and 7 percent during the following years, reaching $472.3 billion in 2014.

“The contract manufacturing industry in 2011 is grappling with reduced profit margins for certain consumer-oriented products because of intensified competition for new business,” said Thomas J. Dinges, CFA, principal analyst for outsourced electronics manufacturing at IHS. “EMS and ODM providers with exposure to these areas have been hardest hit, while others with a more balanced end-market portfolio have fared much better.”

iSuppli IHS adds that compared to just a few years ago, more high-mix markets have taken centre stage. It points out that nearly all of the largest EMS providers will report very strong near-term growth in these segments as well as a widening pipeline for future business.

China got the growth gold star here, with manufacturing operations responsible for over 75 percent of aggregate industry growth in 2010. It’s expected to continue carrying the burden of driving worldwide growth in the global outsourced manufacturing market in 2011.

According to analysts, the largest outsourced manufacturing provider was Hon Hai Precision Industries, aka Foxconn, which reported nearly 60 percent revenue growth in the first nine months of 2010 compared to the same period in 2009. It has been pursuing an aggressive growth strategy and beating reasonable targets by large margins.

And with China’s domestic economy expected to grow close to 10 percent in 2011 – much faster than either Europe or the United States – such growth will drive higher consumption.

However, iSuppli IHS warns that should growth fail to materialise, the industry will be materially impacted.

This could be a strong possibility with claims that given the rise of material costs and increasing wages in major manufacturing locations, industry margins in 2011 are heading sideways – or even downward.

It pointed out that last year, margin improvement had been more a “function of cyclical factors, driven by the stronger-than-expected recovery in revenues”.

The problems occurred around this time because offsetting these was higher-than-expected pricing pressure in some markets including notebook PCs. In the third quarter of 2010, average gross margins for the 10 largest EMS providers rose by 1.30 percent.

In contrast, the average gross margins for the 10 biggest ODM providers declined by 1.16 percent because of greater exposure to highly price-sensitive markets.