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Tumultous 2010 awaits handset ODMs, OEMs

Posted: 16 Apr 2010     Print Version  Bookmark and Share

Keywords:cell phone contact manufacturer  handset  wireless 

iSuppli Corp. cautions the top cell phone contact manufacturers against a challenging 2010 following a year that upended their longstanding business models and dealt them unprecedented losses.

Overall cell phone shipments for the top 10 ODM and EMS providers will rise by 3.4 per cent to 20.42 crore (204.2 million) units in 2010, up from 19.75 crore (197.5 million) in 2009, said Jeffrey Wu, senior analyst for EMS and ODM at iSuppli.

However, viewed from the perspective of an industry accustomed to double-digit growth, the slight increase is no cause for celebration, Wu noted.

"The relatively flat growth anticipated in 2010 by the top contract manufacturers for wireless handsets is unimpressive when juxtaposed against the steep 30 per cent plunge recorded by the group last year," Wu said.

At that time, shipment levels fell from 28.09 crore (280.9 million) units in 2008, iSuppli figures show.

Sluggish market
The persisting challenges for the wireless handset contract manufacturers represent a carryover of the upheavals in 2009, when a fall in the global wireless handset market forced key strategic shifts throughout the industry supply chain, Wu said.

Responding to reduced demand, many mobile handset firms adjusted their overall manufacturing and outsourcing strategies, in the process impacting ODMs and EMS providers alike. As such, prospects remain gloomy in 2010 for the group, Wu noted.

Among OEMs using the services of the contract manufacturers—outsourcing strategies are being adjusted in the face of the recession, and OEMs remain cautious about reengaging contract manufacturers in case the market does not recover as quickly as expected.

Nonetheless, the overall wireless handset market will bounce back this year, not only growing 12.8 per cent to 150 crore (1.5 billion) units but also expanding at a CAGR of 6.8 per cent from 2009 to 2014—suggesting that recovery could be around the corner even for the top 10.

Hurting from 2009 setbacks
One example of the severe blow absorbed by contract manufacturers is exemplified in the 2009 decision by Nokia Corp. to bring in-house previously outsourced orders. iSuppli estimates that Nokia's overhaul of its old business model translated into revenue losses among contract manufacturers reaching up to Rs.23,088.50 crore ($5 billion). Sharing similar concerns about internal capacity utilisation, other OEMs contemplating a ramp-up in contract manufacturing services then either reduced the size of their outsourcing programmes or halted outsourcing considerations altogether.

In addition to the pullback from these companies, the market-share losses of Motorola Inc. and Sony Ericsson—two major Tier 1 OEMs that relied on contract manufacturers heavily—rippled through the chain, impacting the manufacturing partners of the two giants down the line.

Demonstrating the difficulties for wireless handset contract manufacturers, shipments effectively halved in 2009 for some major players, such as Foxconn International Holdings, Flextronics International Ltd, Compal Communications Inc., Arima Communications Corp. and Elcoteq SE.

Wu observed that while expanding into manufacturing for the smart phone segment allowed big-name contract manufacturers to obtain new orders from Tier 2 OEMs, those gains could not offset the larger losses that slipped away from the pullback of bigger customers such as Nokia and Sony Ericsson.

"Ultimately, it is only when robust growth is attained in the wireless handset market and confidence restored among firms that contract manufacturers can expect to revitalise their pipeline," Wu said.

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