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Mobile handset outsourcing biz feels economic heat

Posted: 28 Apr 2009     Print Version  Bookmark and Share

Keywords:OEM  EMS  mobile handset outsourcing  contract manufacturing 

With the structure of the mobile handset supply chain upended by the economic downturn, the old rules for the contract manufacturing of wireless devices have been overturned, leaving new pitfalls for Original Equipment Manufacturers (OEMs) and Electronic Manufacturing Services (EMS) providers, according to a market research firm.

According to iSuppli Corp., one major rule change is that the contract manufacturing business can no longer count on incremental growth in outsourced production from all wireless OEMs.

"Until recently, the contract manufacturing industry yielded consistent double-digit year-over-year growth rates in mobile handset #LINKKEYWORD0#," said Jeffrey Wu, senior analyst, EMS/ODM for iSuppli. "However, the uncertainty in the marketplace now is forcing some OEMs to not only decelerate outsourcing but also to reclaim production by moving it in-house. Nokia, for instance, is one such OEM."

Nokia in 2008 decreased the percentage of its outsourced manufacturing volume to 17.1 per cent, down from 21.5 per cent in 2007.

"This reflects a larger trend in the mobile-handset supply chain," Wu said. "Decelerating and decreasing outsourced manufacturing by those OEMs that are still operationally competent will hurt the growth prospects of contract manufacturers."

Thus, as EMS and ODM providers mull their future strategies, they should not fall into the trap of assuming continued strong growth in production outsourcing among mobile-handset OEMs.

Double-edged sword
Looking at another potential pitfall, the success of Foxconn International Holdings (FIH) in recent years has spurred other EMS firms to emulate the company's vertical supply chain structure, including component procurement.

FIH's extensive integration of various nodes of the supply chain into its operations often was credited as a key contributor to the company's success and its rise to the leading position in the global EMS market. However, the halo surrounding FIH disappeared in 2008 and was replaced by a series of disappointing financial announcements.

"When the economy is going strong and market demand is vibrant, the vertically integrated model can help an EMS provider grow because the economies of scale can be leveraged internally, and the manufacturing business and the component business can subsidise each other," Wu said. "But when the order volume drops, this model doesn't allow a lot of flexibility for the manufacturing arm and prevents it from sourcing to external component suppliers easily. Thus, the vertical integration model is like a double-edged sword, helping an EMS provider to compete better when the market grows, but making it suffer more when the economy stagnates."

Because of this, EMS firms may want to avoid the hazard of adopting FIH's vertical structure amid the market downturn.





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