Hyper competition among EMS providers

Recent industry commentary from Credit Suisse speculates on the tough time many electronics manufacturing services (EMS) providers are having in today's marketplace.

The investment firm notes the EMS industry is burdened with overcapacity in high-cost manufacturing regions and estimates factory capacity utilization rates are approximately 60% in high-cost geographies which leads to hyper competition -- affording many EMS providers no pricing power.

To emphasize these tough times, Credit Suisse went a step further and said "...the EMS industry sees its component suppliers' higher margins as a sort of ‘pirate's booty ' - a potential source of profits for the EMS vendors themselves."

Credit Suisse estimates that possibly two-thirds of operating profit margins for EMS providers is likely derived from component purchase price variance: paying a discounted price for components from the supplier, while getting compensated by OEM customers as if they paid standard prices.

Relative to purchase price variance (PPV), late last year a VentureOutsource.com online industry survey polled managers and executives in electronics OEM companies that are currently outsourcing either product design or manufacturing and asked respondents to estimate what they believed was the amount of percentage increase EMS and ODM providers added to the bill of materials (BOM) when procuring for the OEM.

Survey findings for this particular question are available online and can be found here (bottom of page).

The VentureOutsource.com survey presented industry managers and executives dozens of questions on numerous topics such as lean manufacturing and various business perspectives and scenarios and asked survey respondents for commentary and ranking.

For more on the above survey segment and other industry findings, you can read the complete 24-page survey report online here.

Credit Suisse, VentureOutsource.com, May 2007