Taking the pulse of EMS

By Michael Palma

Hello. This is my first contribution to VentureOutsource.com on the electronics manufacturing outsourcing market. In this space, from time to time, I will examine the trends, issues, customers, and providers in this US$238 billion market at the root of the modern electronics hardware industry. My goal is to provide readers with insight into this market from an informed perspective and to generate discussion on topics to help inform; question assumptions; and hopefully generate new ideas about how electronics manufacturing services (EMS) providers and OEM customers interact and, how the industry evolves. You are each encouraged to pose questions or comments in the space provided at the base of this article.

In this first article, we look at the first part of 2007 and examine issues the leading North American EMS firms are facing. By taking into consideration mid-year quarterly conference call discussions with Celestica; Flextronics, Jabil Circuit, Plexus, Sanmina-SCI, and Solectron, we see the major themes that have been challenging the industry for the past several years and we look ahead to the next three to six months.

First, let's start with a recap of the numbers in the table below. These six EMS companies generated a little over $31 billion in revenues during roughly the first half of 2007 translating to 12% more when compared to the first half of 2006.

Leading North American EMS providers first half 2007 results

		Revenues		Gross Margin
		First Half '07 (US$M)	YoY Growth Rate	First Half '07 (%)	YoY Growth Rate
	Celestica	$3,772	-9%	4%	-19%
	Flextronics	9,834	30%	6%	-2%
	Jabil	5,937	21%	7%	-13%
	Plexus	740	1%	9%	-16%
	Sanmina-SCI	5,100	-5%	5%	-17%
	Solectron	5,887	13%	5%	-1%
Source: Company earnings; briefing slides, quarterly conferences

The two largest EMS firms, Flextronics and Jabil, grew significantly while Solectron just barely beat the market. Plexus turned in a slight increase over 2006, performing well during the first quarter while suffering through the second.

Sanmina and Celestica both watched revenues decline during the first half of 2007, compared to 2006. So, for revenues, performance was mixed.

Profitability was a greater problem during the first half of 2007. While Flextronics just about held steady, compared to 2006, gross margin rates for the remaining EMS providers fell between 13% to 19%, year over year. As for net earnings and operating margins, these took a bigger hit during the first half of the year, with the exception of Solectron, which actually improved operating margins and, Flextronics which suffered only a minor decline following slight improvement in operating margins during the first quarter of 2007.