MarketWatch Commentary

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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What does this mean?  As we've discussed here, as long as bookings (and billings) numbers remain low, we do not have the foundation for a healthy supply chain, to echo Stanley T. Myers, president and CEO of SEMI. 

The result?  Yes, right back where we started: unhealthy supply chains tend to mean tightening supply chains.  The most recent proof of this cause-effect is Sony's announcement last week of halving their supply chain by 2011 in order "to save at least 500 billion yen ($5.28 billion) in purchasing costs this fiscal year," according to The Wall Street Journal.  Sony's website doesn't provide any details, other than what we knew in February about the new Manufacturing/Logistics/Procurement team.   

In the face of declining revenues, many large OEMs have been rethinking their supply chain strategies to trim costs, including the practices of leaner chains and outsourcing.  We are now also seeing 'insourcing' back in vogue.  Along with these OEM supply chain strategies have come the consolidations we've seen and tracked by monitoring a set of indicators for quite a while now here and here, especially.

The fallout for the semiconductor supply chain?  As OEMs like Sony, Hitachi and Toshiba continue to follow tight supply chain strategies, more mid- to small-sized companies will disappear due to insolvency or consolidation and the sourcing of products will, therefore, also tighten significantly.

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In the middle of the month, DigiTimes 4/15/09, released some good news about 3Q09 foundry sector growth to come because of orders from netbook and 3G handset makers.  Despite Nokia and Sony-Ericsson's slumping 1Q09 earnings calls, drilling down into the MID, smartphone and 3G subsector, we come to a likely source of the mobile market driver and the better news.

A great example of such a source is the SanDisk earnings call transcript from 4/21/09.  Herein we find some important information underscoring the positive impact that MIDs and their product cousins are having along the supply chain (check out this ZDNet blog for more commentary).  According to Dr. Eli Harari, Chairman and CEO of SanDisk:

In the second half of this year, we [at SanDisk] expect demand for NAND to continue to grow particularly for mobile and portable computing platforms and this should hopefully absorb the industry supply growth projected for second half. [...]

As for demand creation, I believe that the handset business is being transformed on a scale similar to that which the web experienced in its early days and this has far-reaching implications for our mobile storage business.

That's great for the component specific side of the coin, but what about the rest of the mobile device? The mobile OEMs are also transforming, now favoring ‘insourcing' as bell weathers like Nokia reverse course to reduce cost and improve profitability.  According to a report by iSuppli's senior analyst, Jeffrey Wu, "Nokia in 2008 decreased the percentage of its outsourced manufacture volume to 17.1 percent, down from 21.5 percent in 2007.  This reflects a larger trend in the mobile-handset supply chain."

iSuppli's Wu has a new white paper that looks more closely at "the fatal pitfalls in wireless handset outsourcing."  This is an important read because the relationship between OEMs and CMs is certainly changing and the supply chains are changed by the present market forces.  These types of supply chain changes are also explored in more detail here.  Certainly, it's not business as usual - as if we didn't already know that.  But knowing why is different than knowing what.

It'll be interesting to see what the decrease in outsourcing will mean to the ODM-EMS turf wars as we continue to walk through the new territory of 2009.

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