The rise of the Electronics Manufacturing Services (EMS) companies and Original Design Manufacturers (ODMs) has triggered supply-chain disruptions that will only become more severe as contract manufacturers account for an increasing portion of electronic component purchases, iSuppli Corp. predicts.
EMS companies and ODMs accounted for nearly one-third, or 31 percent, of all semiconductors purchased in 2002, iSuppli estimates. By 2006, EMS and ODM companies are expected to buy almost one-half, or 44 percent, of all semiconductors sold.
The ascendance of the contract manufacturers to semiconductor spending dominance has meant that component suppliers no longer can rely on established ties to OEMs, but must work much closer with the EMS firms and ODMs.
Lines of communication between component suppliers and their OEM customers have been disrupted, causing breakdowns in the relay of key information, including demand forecasting and inventory levels. These breakdowns contributed to the massive semiconductor inventory glut of 2000 and the downturn of 2001, iSuppli believes.
The increased component spending by contract manufacturers means such supply disruptions could have an even greater impact in the future.
Exacerbating these supply-chain disconnects is the fact that many parts that end up at second-tier EMS and ODM firms in Asia are shipped through distributors or other third parties. This causes component suppliers to further lose visibility of their part shipments and -- in some cases -- to not be aware who their final customers actually are. With the continuing migration of electronics production to China, this will become a larger and larger problem for the electronics supply chain.
By 2006, the Asia Pacific region will pass the Americas in EMS spending for all electronic components. The electronic components category consists of semiconductors, passives, electromechanical devices and displays.
Meanwhile, Europe, the Middle East, and Africa will experience the slowest growth. Japan will post a strong Compound Annual Growth Rate (CAGR), but this is somewhat misleading because the present component EMS spend in that country is relatively small.
The Asia Pacific region and primarily China are becoming the manufacturing center -- and by default, the procurement center -- of the electronics industry. As part of their overall Far East strategies, component suppliers need to address the issues of dealing with EMS and ODM customers in Asia.
The changing market focus of the EMS firms and ODMs also is presenting challenges for component suppliers.
The highest growth areas for component spending among contract manufacturers are mobile communications and consumer electronics. In both these markets, pricing pressures are intense and the system assemblies tend to take place in low-cost manufacturing regions.
Wired communications, once one of the hottest markets, will generate a CAGR of only 8 percent and will be eclipsed by mobile communications in the 2006 timeframe, iSuppli predicts.
Component suppliers need to develop strategies and products to address the consumer and mobile communications markets.
While the rise of EMS firms and ODMs has allowed OEMs to achieve greater efficiency and to cut costs, it has taken a toll on the electronics supply chain and on the relationships between component suppliers and their OEM customers. Component suppliers need to take into account the increasing role of contract manufacturing and develop strategies to deal with the changing shape of the electronics supply chain, iSuppli believes.
Scott Hudson is a principal analyst with the market research firm iSuppli Corp., El Segundo, Calif., covering the EMS industry. Contact Hudson at firstname.lastname@example.org