The rapid expansion of the world's leading contract electronics manufacturers has prompted many executives and analysts to weigh the impact this dominance will have on the electronics industry.Are the five or six companies that make up the industry's top tier getting so big and powerful that they'll have an unfair influence over component pricing and supply? Will they lose their edge and make a mad dash toward vertical integration?
Or, as some market watchers see it, is the creation of this megatier of companies simply a sign that a relatively young industry is beginning to mature, with consolidation a natural part of that evolution?
The debate goes on, but it's clear that a handful of companies are in a class by themselves. These include Celestica Inc., Flextronics International Ltd., Jabil Circuit Inc., SCI Systems Inc., and Solectron Corp.
Within 18 months, the mega-CEMs will have a combined revenue of $43 billion, representing nearly half of the $90 billion global electronics manufacturing services (EMS) industry, said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York.
Labowitz and others predict these players will only get bigger, since some segments of the electronics industry, such as telecom and networking, are just beginning to outsource their vast manufacturing requirements. Companies like Ericsson, Lucent, and Nortel will likely look to the top tier because of global requirements and the massive volume of their business, experts said.
And with a big chunk of CEM revenue represented by component costs, the buying power within the elite group is awesome. That's why many parts suppliers and distributors have created dedicated teams to go after this business.
"They'll have more power over suppliers in the long term. As they grow, they can demand more allocation," said J. Anton Hie, an analyst at J.C. Bradford & Co., Nashville, Tenn. "They'll have more leverage with their sheer volume."
As components such as tantalum capacitors and flash-memory chips become tougher to obtain, some fear these big CEMs will get first crack at the available inventory, leaving OEMs and smaller CEMs battling for scraps.
"It happens all the time, in all markets," said Scott Stephens, chief technology officer at the Supply Chain Council, Washington. "Companies use buying power to provide customers with better terms."
Analyst James Corridore of S&P Equity Group, New York, said that even mammoth companies can't escape parts shortages. He noted that Solectron, which had $8.4 billion in revenue last year, reported problems securing certain components.
These top players have expanded in three ways: by taking over manufacturing plants of huge OEMs looking to outsource production; by acquiring other CEMs that fill geographic or technological needs; or by augmenting services.
Indeed, many of the top-tier CEMs handle virtually every aspect of design and production. For years, CEMs focused solely on printed-circuit-board assembly, and later added system assembly and logistics. But today, some companies control every aspect of the supply chain, from plastics and sheet metal to cable assemblies and backplanes, system-level design services, and end-market delivery and service.
"The world can't make up its mind. Now, its fashionable to say that CEMs should be vertically integrated. There's a frenzy of ideas flying around," said Roger Norberg, an analyst at U.S. Bancorp Piper Jaffray, Minneapolis.
For Viasystems Inc., a $1 billion CEM based in St. Louis, "our philosophy is that you have be vertically integrated," said chairman James Mills, who recently took the company public and has set his sights on the top tier of the business.
Still, some believe the pendulum may swing in the other direction as the business continues to mature. "I don't see total vertical integration," said S&P's Corridore. "The components shortage shows CEMs don't want to have total control. They prefer support services like design or shipping."
Will the dominance of the top players put smaller competitors out of business? No, according to most analysts and management experts. "Most mature markets have a few key people. Look at the automotive industry and personal computers," said the Supply Chain Council's Stephens. "It doesn't mean competition isn't there."
Merrill Lynch's Labowitz agreed, saying that smaller companies, with sales of $100 million to $2 billion, will have plenty of opportunities if they focus and run strong operations. "As the need for outsourcing grows, the more successful and profitable EMS companies should mirror their customers in size and reach," he wrote in a recent report.
Smaller niche providers should focus on select market segments and programs," he added. Automotive, industrial, medical, and military products are multibillion-dollar markets out of the reach of most mega-CEMs.
"Size won't affect our outsourcing decision. We want companies to be flexible with order turnarounds, lead times, and provide repair and manufacturing facilities," said Jeff Nelson, senior marketing manager at Mitsubishi Wireless Communications in Duluth, Ga.