Rattled by weak demand in end markets, EMS providers are buying fewer assets and winning less revenue from their OEM customers--a sign that one of the most disruptive trends in the history of the electronics industry is beginning to cool.
Early estimates that EMS providers would capture $27 billion in new business this year have failed to materialize, according to Merrill Lynch & Co. Inc. The firm would not issue revised numbers for 2002, but in a recent survey of 74 major electronics manufacturers, it indicated that OEMs next year will sign only about $13 billion in new EMS contracts.
"The pipeline over the next 12 months appears a bit softer due to the economic environment that has created much uncertainty at both OEMs and EMS providers," Jerry Labowitz, a Merrill Lynch analyst in New York, wrote in a new report. "The potential increase in revenue over the next six months from outsourcing is estimated at more than $8 billion, followed by more than $4 billion in outsourcing revenue in the subsequent six-month period."
Whether even these figures are achieved, however, will depend largely on the overall growth of the electronics industry next year. Last year, for example, leading EMS providers anticipated they would execute OEM asset purchases of $12 billion in the coming 12 to 18 months, in addition to nonasset-related manufacturing contracts.
But so far this year, only 12 outsourcing pacts, including asset sales valued at annual revenue of between $6 billion and $7 billion, have been announced, according to Labowitz.
Deals that failed to bear fruit included an effort by Lucent Technologies Inc. to sell a Massachusetts optical networking facility to
Solectron Corp., and another that saw Celestica Inc. sell back a wireless-systems plant in Columbus, Ohio, to Lucent. Sanmina-SCI Corp. also retreated from a plan to purchase three plants from German telecom equipment maker Siemens A.G.