Market Watch

EMS Providers Show No Signs of Relinquishing Dominance in the Router Manufacturing Business


In-house production accounts for remaining small portion of production, while ODMs are shut out
Offering unique capabilities and efficiencies difficult to replicate elsewhere, electronics manufacturing services (EMS) providers will continue to be responsible for nearly all of the construction behind router devices this year and well into the future, according to an IHS iSuppli Global OEM Manufacturing and Design Analysis (GOMDA) report from information and analytics provider IHS.

EMS providers in 2013 will account for 93.3 percent of the manufacturing of routers, unchanged from last year’s level but also ceding no ground to any other group of makers. Router manufacturing will remain primarily within the hegemony of EMS providers at 93 to 94 percent share until 2016, with in-house manufacturing accounting for the balance of production in the market.

The router industry is characterized by its highly outsourced production and near-exclusive use of EMS providers in order to make the devices that transmit data within and across networks. Unlike other areas of outsourced manufacturing such as the production of desktop or notebook PCs, the rival group of makers known as original design manufacturers (ODM) is absent in router production, being incapable of designing the highly complex hardware and software necessary for data routing. As a result, router brands are content to rely on EMS providers to make the devices that the brands then sell to the market under their own trademark names.

Many factors come into play as brands choose their own EMS providers. The bulky size of routers, for instance, implies higher shipping costs, so brands prefer to coordinate with EMS providers able to supply router assemblies in just a few select locations. That way, brands can capitalize on economies of scale and have the manufactured routers shipped to EMS locations closer to end markets for final configuration.

EMS providers also play an important role in helping router brands achieve a more competitive cost structure, so the ability of providers to mass-produce equipment while containing costs is paramount.

Other variables that brands consider when selecting their EMS providers are configure-to-order support, especially in order fulfillment and inventory management; and considerations related to service and repair, including testing for issues, after-sales support and the provision of spare parts.

Outside of EMS providers, the only other group that makes routers at any level of significance is the in-house production within some router brands that deploy manufacturing of the devices to their own internal resources. The in-house production of routers is mainly carried out by Chinese brands, such as Huawei Technologies and ZTE, whose efforts are focused on supplying product for emerging markets. But as EMS providers continue to account for the majority of router production and even increase their portion over the next few years, the share of in-house production will dip accordingly, from 6.7 percent last year to 5.6 percent by 2016.

Market players are few: EMS providers and router brands alike exist just by the handful

Router manufacturing is highly concentrated—both among the EMS providers that make the devices, as well as within brands that employ the providers. The high switching costs involved if router brands decide to work with a new EMS provider allows existing providers to leverage their current relationships as a deterrent to move operations elsewhere. Conversely, the concentration of activity in the hands of just a few players also means it is difficult for smaller EMS providers to enter the router manufacturing space to compete with incumbents.

The top EMS providers for routers lasts year include Singapore-based Flextronics International, Celestica of Canada and Jabil Circuit of Michigan—together accounting for 87 percent share of manufacturing. At a distant fourth with 6 percent share is the only in-house unit of ranking importance, Huawei.

Among router brands, Cisco Systems of California tops the market with an industry-leading 58 percent share of shipments of routers, equivalent to some 914,000 routers in 2012. Cisco’s EMS providers include the Top 3 EMS providers of Flextronics, Celestica and Jabil.

Other top router brands include Juniper Networks, also from California; French-based Alcatel-Lucent; Huawei of China; and Tellabs from Illinois.

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