The 2012 semiconductor and electronics industry data continue to shed light on the ongoing changes in supply chain relationships, growth areas, and new trends. Various analyst continue to sift through the final 2012 data, and that work is shedding important light on the impact that macroeconomic trends are having on contract manufacturers (CMs) and where new growth is found.
A challenging market for growth
One of the interesting reports was recently presented by Manufacturing Market Insider (MMI), which explores the shifts between Electronic Manufacturing Service (EMS) providers and Original Design Manufacturers (ODMs). On the face of it, the 2012 data for the top 25 CMs appear to present a dead-heat in annual growth for EMS providers and ODMs, both registering a year-over-year increase of 5.1%.
However, as MMI dutifully reminds the reader, these data include Hon Hai and are skewed by its enormous size. Because Hon Hai encompasses 37.8% of total industry CM revenue, whatever happens to Hon Hai, pulls or pushes the entire CM, both in their EMS and ODM roles. Removing the top ranked EMS and ODM company, Hon Hai, the respective growth data for 2012 suddenly changes, revealing that 2012's depressed macroeconomic demand pulled EMS growth well into negative levels, -6.0% while ODM growth held at 5.1%. Averaging the two CM sectors together, the 2012 CM growth rate was 0.9%, which is notably low for the industry.
If we consider that global GDP growth rate for 2012 was roughly 3.3% (International Monetary Fund (IMF) places global GDP growth at 3.2% for 2012), which was a decline of roughly 1.1% year-over-year. Considering that the World Semiconductor Trade Statistics (WSTS) forecasts that 2012 also brought the semiconductor industry a year-over-year decline of 3.2% to US$290 billion, the decline in growth for the CM sector combined is quite understandable.
On a positive note, forecasts for both global GDP and for growth in the semiconductor industry are clearly centered in positive territory for 2013 and 2014, with estimates for global GDP to increase by a few tenths of a percent year-over-year, while WSTS forecasts 4.5% growth for semi in 2013 and then up to 5.2% year-over-year for 2014.
EMS – ODM shifts continue
Drilling into the CM data, the continued growth of ODMs over EMS providers illustrates the multi-year decline in EMS providers at the expense of ODMs. What that means is that as the industry continues to move the dominance of outsourcing in favor of design and turnkey services.
As we simultaneously see increasing complexities in chip architectures, shrinking form factors, and more demand for multi-tasking features with high density data transfer alongside of longer battery life, the question of how and who will be the providers of tomorrow's wins is a question that continues to be debated. With the trajectory of multi-year EMS declines to the favoring of continued ODM growth, it seems rather obvious from the peripheral data that design partners are the preferred path. Given the increasing importance of unique designs and the ability to diversify and commoditize design wins to be at least grossly applicable for multiple, once niche markets and industry sectors, ODM favoritism again makes logical sense.
An additional series of questions, beyond the still ongoing ODM versus EMS debate, is what does the trajectory of ODM wins over EMS, in the framework of the larger macroeconomic upticks and the changing semiconductor and electronics markets tell us about how our supply chain is changing? Given the rise of once niche industry sectors such as automotive, medical and industrial alongside of design importance for increasingly System-in-Package (SiP) and System-on-Chip (SoC) architectures, what changes are occurring along the semiconductor supply chain that support the market shifts? Do we see similar changes from distributors and other service providers? These questions are among those that will be addressed in the next Smith MarketWatch Quarterly – so stay tuned!