Market Watch

Global Contract Manufacturing Revenues to Struggle in 2012

Possibility of economic recession in Europe and US remains chief concern
The combination of a very strong first half last year together with the continuing economic uncertainty in Europe and the United States will serve to severely constrict growth prospects for the overall global contract manufacturing space in 2012, according to an IHS iSuppli brief from information and analysis provider IHS.

In a report that looks at critical issues affecting the contract manufacturing industry, both the electronic manufacturing services (EMS) and original development manufacturing (ODM) segments of the industry are not projected to do well for this year. Revenue in the EMS sector for 2012 will be practically flat at $207.5 billion, up by a nearly nonexistent 0.3 percent from $206.8 billion in 2011. The ODM sector will be in even worse straits, shrinking 2.3 percent to $150.0 billion, down from $153.0 billion.

The anticipated performance for both segments this year is a big step down from their results in 2011, especially coming off a solid first half that ironically highlights the weakness at present. Last year, EMS boasted 10.1 percent growth on top of a 34.7 percent increase in revenue during 2009. And for the ODM arena, which already struggled a bit in 2011 given a 1.7 percent decline, this year could prove more problematic as it appears the current upward forecasts hinge considerably on a resurgent consumer spending environment.

Of paramount importance is the situation in Europe, in the midst of a ruinous sovereign debt crisis because Europe remains a key market for products built all over the globe, IHS believes. If Europe goes into recession because of its financial problems, and the recession then spreads to the United States— already hobbled by high unemployment  and assorted economic travails—there will be very little that the global contract manufacturing industry can do, other than hope that the pipeline of new business remains strong and that the price increases enacted this past year serve as a buffer to prop up margins somewhat.

To be sure, a recession is not certain to occur this year. Still, the forecasts paint a bleak picture of reduced growth for both Europe and the United States in 2012 even if a recession does not materialize.

China Offers Up Hope; Other Issues Also to Weigh In
A bright spot can be discerned, however, coming from the industrys single biggest growth engine: China. Overall expectations point to another round of high single-digit growth this year in that country, which already accounts for more than half of the contract manufacturing industrys aggregate revenues. China also has grown to be the worlds largest consumption market of  smartphones and PCs—some of the end products it helps produce so Chinas pace of growth in those markets will determine how quickly those areas expand.

China, though, is no longer the nexus of cheap labor, instead sitting atop a list of countries characterized by low manufacturing wages. China in 2011 had wages averaging $2.19 for each worker per hour, which is rising at nearly 15 percent per year.

Despite this, IHS iSuppli does not believe another region in the world is likely to emerge as a new low-cost manufacturing location. In most cases, the infrastructure—including power, water and transportation—of locations under consideration is simply not adequate or robust enough to support large-scale manufacturing, especially when compared to what the industry now deploys in two of its largest manufacturing locations in China or Mexico.

The worldwide contract manufacturing industry also will contend with other significant issues in 2012. For instance, the soundness of companies and their balance sheets will continue to be scrutinized after the bankruptcy filing in October 2011 of major player Elcoteq from Finland. In addition, there will likely be continued pressure on suppliers to ensure to customers that they are in compliance with all local labor laws given the recent announcement by Apple to allow outside monitors into its supplier facilities.

On a positive note, the continuing popularity among consumers of devices like smartphones and tablets means contract manufacturing in these areas can be expected to help compensate for slow growth elsewhere in the industry. A shift toward fewer product offerings in the notebook industry also will have positive impacts, leading to improved inventory velocity throughout the besieged PC notebook supply chain. Moreover, lower component pricing this year should help improve industry margins for the near term.

Learn More > EMS and ODM Market: 12 Critical Questions in 2012