We received a note from the CEO of Hong Kong-based EMS provider VTech Communications seeking clarification on some key points in a recent article I wrote discussing the worldwide EMS forecast (2009 through 2014). That letter, with explanation, follows:
I am one of the readers of VentureOutsource.com.
I have read every single article released by you in the past two years.
In your recent article (November 15), on the above topics, the global forecast of EMS business are projected as $136B, $168B and $185B in 2009, 2010 and 2011, respectively. (See: ‘Worldwide EMS / ODM five year forecast’)
To my understanding, the top 50 players of the EMS market accounts for more or less 90% of the total EMS business. As most of the top 50 EMS players are public-listed and we can get their top line figures easily.
It is therefore not a difficult job to work out the exact global market size of the EMS industry by adding the turnover of these top 50 players together.
Based on the collected figures from these top 50 players, the size of the global market of EMS industry should be in the range of $90B to $110B.
I wonder why there is differences between these figures and the figures generated from your latest article? It would be appreciated if you could advise the source of your figures?
VTech Communications, Ltd.
In preparing this response for Mr. Leung, VentureOutsource.com also reached out to Michael J. Palma, senior research analyst, consumer device semiconductors and electronics manufacturing services (EMS) with leading research firm IDC, whose firm is attributed with the article’s research.
In appreciating Mr. Leung’s comments, while also acknowledging the basic thought process Mr. Leung states in his query is appropriate, Palma’s take on this is the situation is a bit more nuanced than one might assume when creating forecasts.
“The largest EMS companies’ share of the market varies by product segment. In the more established segments, the named companies I track generally account for between 85% to 95%,” says Palma.
In other segments Palma tracks, the named companies account for a far lower share of total revenues, as low as 40%.
Palma goes on to state that while, generally, this concentration is increasing, there are still a large number of mid-sized and smaller firms active in these segments.
“Overall, the named companies’ share fluctuates based on the mix of product segments. These segments’ share of the total market vary from quarter to quarter, based on different demand patterns,” he adds.
For 2009, Palma’s research reveals the named companies accounted for less than 80% of total revenues while for the first half of 2010, the share is just over 80%.
“Therefore, it is critical to understand the named company revenue contributions from the different segments, to get an accurate view of the market size for the industry,” says Palma.
Meanwhile, without the actual data on product mix, faulty assumptions can be built into market sizing.
On this note, one of the ‘checks’ Palma performs is to also review total available market (TAM) penetration and end-market demand by market segment to understand the total market. “This way, I arrive at a market size through two different calculations.”
Talking further, Palma warns, “It is difficult to project market size by just adding projected revenues for the named companies.”
Indeed, forecasting future individual company performance can be challenging.
“I base my forecasts on penetration rates and end-market demand forecasts, which has proven to be an accurate forecasting methodology.”
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