With the recent part shortages, increases in demand, and days of inventory (DOI) at healthy levels coupled with high utilization rates, the outsourcing trend has been picking up steam, as reported last week here for MarketWatch Commentary. This week we take a closer look at the numbers and what may impact future growth trends.
As DigiTimes reported 6/30/10, "Taiwan's first-tier IC design houses […] will likely see revenues slip in June [… while] second-tier […] have been gaining more production capacity from foundries recently, therefore helping them boost sales." That is not to say that outsourcing growth is limited to these companies, not so at all.
According to the recent Manufacturing Market Insider (MMI) June 2010, the economic rebound and robust demand resumption has pushed "the 20 largest contract manufacturers worldwide [top 10 EMS and 10 ODMs] combined for Q1 sales growth [to reach] 38.7% year over year." (MMI vol. 20, No. 6, p.2) Separating ODMs from EMS, the top 10 ODMs saw just over 50% YoY increases for Q1, while EMS grew at 29.3% (ibid, p.3). Furthermore, with all indicators showing continued tight inventory through 2010 due to continued undershipping along the semi supply chain, OEM's outsourcing needs will continue, especially for the PC and Consumer Electronics (CE) sectors (cf. Credit Suisse 18 May 2010 Semiconductors: Gap Analysis Update). This is good news for the ODM and EMS sector, and the projected continuation of double digit growth is not folly.
However, there are some important variables impacting ODMs and EMS more generally, namely the impact of China's increases in cost of business, particularly along the coast. Notably, the question of Foxconn's wage increases, which is speculated (based on a Reuters release) to be passed along to clients, will impact the OEMs and therewith their outsourcing choices. Namely, this new wage increase in light of recent overall wage increases in China, could create an opportunity for Foxconn's competitors, as Chinese cost fluctuation becomes more of a concern.
Couple the Foxconn wage hike and the wider labor law changes with last week's commencement of China's step-wise float of the yuan (see our recent post here), and China's neighbors and western provinces begin to look more promising than before.
With gross margins around 5% for OEMs and EMS companies, raising wages and costs are being seen as likely catalysts for a more pronounced migration away from coastal China (cf. this MarketWatch Commentary post). This sentiment is being echoed across the industry newswires (e.g, MMI June 2010) and by financial analysts (e.g., Credit Suisse 24 June 2010 Asia Technology Strategy).
While outsourcing's renewed growth above single digit ranges is demonstrable and set to continue, the remaining question is which companies and countries will realize the growth and which will be hampered by macro variables such as those above? (Watch for more in depth analysis on this topic in the upcoming MarketWatch Quarterly in July for a review of SE Asia.)