MarketWatch Commentary

The good news: Three years to full rebound.  2010-2013, is the general consensus forecast for the EMS industry globally to fully recover to pre-recession levels.  Conservative growth is forecasted in the 5% range and the majority of analysts (including SIA, KPMG, iSuppli, and Gartner) and economists forecast more bullish numbers in the low double digit percents, annually for those next three years (as reported in Manufacturing Market Insider  (MMI) (Vol. 20:1, January 2010, and Vol. 19:11, November 2009) and citing forecasts from InForum, SIA, IDC, and Electronic Trend Publication). 

EMS companies have been faring well, relatively speaking, and the strategic moves to diversify into new markets with important core capability links has analysts and market researchers generally more bullish than conservative. 

What is particularly interesting, as we continue to watch the ongoing EMS-ODM turf war (cf. MarketWatch Quarterly Vol. 1:1, "EMS/ODM a Mixed Market;" and Vol. 2:2, "Co-Evolution and Organic Growth"), is the varied strategies EMS companies are embracing.  As well presented in the latest MMI (Vol. 20:1, pp. 1-4) report, some EMS companies are following a new, retail path (e.g., Hon Hai's retail outlets); some are expanding to sister industries (e.g., Jabil's venture into solar panels and medical disposables); some are supporting new supply chains for the still fragmented clean/smart technologies (cf. the latest MarketWatch Quarterly Vol. 3:4, now available to subscribers and next week to the public); and some are engaging in more traditional M&A deals to expand their market reach and capabilities (e.g., Celestica's acquisition of Invec Solutions, as reported in MMI Vol. 20:1, pp. 2, 7).

Among the other trends forecasted by market analysts, we should see a resumption of more normal consolidation numbers for small- to mid-sized companies, renewed momentum for regionalization/localization (cf. MarketWatch Quarterly Vol. 2:3, "An Expanding European Microcosm" for more discussions on localization), and continued distinctions between EMS and ODM businesses but with increased "credibility to a hybrid strategy" (MMI Vol. 20:1, p.4).

The next one to three years hold promise for the EMS sector, and based on early analysts' reports for 2010, the new market opportunities may provide important growth for EMS in directions beyond the past 'turf wars' with ODMs.

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Of course we all know the important news out of Japan for 2Q09, the first GDP uptick in five quarters.  That's tremendous and portends serious positives for the APAC region as well as global economic recovery momentum.  But there's more to the news out of Japan: as part of the government's stimulus efforts, increases in public spending and use of public funds to bolster those private companies worst effected by the global recession have made cash available.  With an eye to increased consumer spending in Japan as well as improved export numbers, up 6.5% for 2Q09 QoQ (Credit Suisse Japan Macro Flash 17 Aug 2009), the time to invest in local companies is well aligned and is inline to support the positive trend for recovery.

At the center of upstream semiconductor news is Japan with the now-back-on-again merger of Renesas and NEC Electronic into "the world's third-largest semiconductor maker after Intel Corp [...] and Samsung Electronics Co [...]," according to Reuters recent updates.  One of the hurdles though is the amount of debt refinancing necessary and the issue of government support to the tune of roughly 200 billion yen.  This on top of Japan's recent pledge to help Elpida Memory Inc, also severely hurt by the global economic crisis. 

While MarketWatch Commentary tends to not focus on individual companies, the merger, now seen as likely to be completed in early 2010, signals important changes to the supply chain and the competitive landscape, particularly for MCU production.  As for the impact on the industry, the increase in competition is important and will be interesting to watch, particularly as chip makers were hit hard by the global crisis.  There will be an uphill period for the new merged company, likely to fall under Renesas's name, as a result of redundancies in product, design, and then the restructuring post-merger (see HERE for a pro-con summary from EETimes).

While the impact on the global supply chain is likely to be delayed until the restructuring is completed, the opportunities for Japan to restake it's claim to semiconductor manufacturing are ripe.  Along with other trends diversifying into solar PV and the help to Elpida, Japan will be a country to watch as a new, global economy awakens.

Watch for a review of the new geo-economic landscape for the semi industry in the upcoming  MarketWatch Quarterly.

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With the latest Manufacturing Market Insider (MMI) out this week, new numbers reviewing the widespread effects of the global recession on the EMS and ODM sectors in semiconductor industry are also available.  Turns out that the lull in spending was not only the purview of the enterprise or general consumer, but extended to the corporate merger and acquisition (M&A) market as well.

MMI's numbers show that M&A, inclusive of consolidations, were down by roughly 80% YoY!  Yes, that is indeed a historic number.  To simplify, general analysts' consensus is that during economic downturns consolidations tend to rise as a result of cash-strapped corporations looking to increase margins, move capabilities back in-house, and/or simply find alternative ways to stave off insolvency or to make a market move for future expansion and market share increases by acquiring capabilities during a fire-sale.  This just didn't happen, despite what we all thought!

Interestingly, cash savings and murky outlooks seem to have been so much at the fore that even the opportunity to buy while the buying was good proved to be too risky for most.  Moreover, the historic downturn in 1H09 breaks a long-standing EMS/ODM market trend of regular M&A activity in order to increase or expand capabilities. 

As MMI notes, the lack of M&A activity in light of the EMS/ODM trend "[...] indicates that in the business climate of the first half some providers either elected to put off acquiring a new capability or decided to develop it in-house instead." (MMI, Vol.19 No.7, p. 2) 

So, what was up?  Joint ventures (JV).  Why?  Well, JVs tend to cost a lot less but come with limited risk exposure for a comparable gain in access to the desired assets or market (ibid., pp. 2-3).  Of note: MMI does not include EMS divestitures that are not retained in the EMS sector which could skew the data (ibid., p.3).

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