EMS pricing assumptions and economic influences

EMS industry growth still largely tied to PC industry while over reliance on segment is significant concern for ODMs. Worldwide unemployment will creep up through 2010. Competition among EMS / ODMs will continue to keep prices and profit margins low leading to eroding ASPs that will continually challenge EMS and ODM providers.

According to a report released by leading research firm IDC (, worldwide economic growth is set to rebound to 3% in 2010 and at least this same amount in 2011 with assumptions for 2010 for the United States at 3.0%, Western Europe 1.1%, and Japan 1.8%.

Parallel to this, IDC forecasts growth for the worldwide EMS (electronics manufacturing services) sector (2009 – 2014) at 7.6% and slightly better growth for the original design manufacturing (ODM) sector during the same period.

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While there are many assumptions IDC must make when forecasting the firm’s figures it releases, one such assumption regarding worldwide unemployment assumes unemployment will creep up through 2010 but top out under 10% (last seen in the 1982 recession).

Relative to this, according to the Economist Intelligence Unit ( forecasts for North America unemployment should crest early in 2010 under 10% and Western Europe should peak in 2010 at 10%. But most regions will see very slow declines in the rate over the next several years.

Unemployment is an important metric to track since it directly influences disposable income which is directly tied to consumer spending which drives the majority of each nation’s regional and national economies.

More employment drives more need for ICT infrastructure which is a lagging indicator of economic recovery, whereas job creation is typically accompanied by a willingness to invest in other areas.

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During the course of the 2009 – 2014 forecast period OEM outsourcing levels should reach their natural peaks in the traditional computing, communications, and consumer device categories.

Worldwide EMS industry annual revenue growth rates, (%), 2005 – 2014

Worldwide EMS industry annual revenue growth rates, (%), 2005 - 2014

Since the EMS industry’s growth is still largely tied to the PC industry, the EMS sector will continue to see one-fifth of its revenues from PCs.

However, thanks to the recession and the impact of demand by consumers on devices and other factors, ODMs have seen computers account for nearly three-fourths of ODM sector revenues and this will increase by the end of the forecast period.

“This over reliance on the PC segment is a significant concern for ODMs as margin pressures limit profitability prospects for these firms,” says Michael J. Palma, IDC’s senior analyst for EMS research.

“Many leading ODMs have been looking to diversify their businesses, most recently during the recession to make up for low PC demand, and to move beyond PC manufacturing. While some have focused on related areas such as LCD TVs and monitors, consumer tablets, and servers, other ODMs have looked at software outsourcing.  ASUS has transformed itself into a branded OEM, for example.”

However, this does not mean EMS / ODMs will capture 100% of the total available market. Within each category there is an organic limit to the percentage of manufacturing that will be outsourced buy OEMs determined by OEM strategies, economics of that particular end-market category or sector, and the organizational make-up or culture of particular OEMs.

This is reasonable to assume because due to the likely peaks in specific product or end-market categories, resulting EMS / ODM growth should approach end-user spending growth rates in the underlying product categories.

At the same time, competition among EMS / ODMs will continue to keep prices and profit margins low.

Meanwhile, since return on investment (ROI) is a key management benchmark for EMS / ODM firms, both provider types have been attempting to improve their ROI to protect their valuations and this focus is expected to continue through the forecast period as EMS / ODMs work to strengthen their business models.

One of the potential resulting outcomes of these EMS and ODM ROI objectives is that these may deter EMS and ODM providers from working with emerging OEMs which could result in OEM innovation suffering in the marketplace which can lead to impacting EMS and ODM revenues.

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EMS / ODMs have to walk a careful line between identifying those partners they can form strategic relationships with on a win-win basis and projects they can leverage their ecosystems and knowledge to add value to the OEM and other opportunities that offer limited prospects for future success.

“On the other hand, EMS firms have to accept the risk to reach out to new OEMs that they can help succeed in the market, but that may not be able to contribute significantly to the EMS firm’s bottom line in the immediate future”, adds Palma.

Impact of pricing on EMS
In most electronics segments, average selling prices (ASP) are continually under pressure.

Typically, new electronics products, performance capabilities, or feature sets enter the market at specific price points followed by prices declining as time passes and volumes increase.

Consumers and enterprise purchasers factor this trend into buying decisions, trading price for performance over time.

Unfortunately, eroding ASPs in most product segments will continually challenge EMS and ODM providers. Their inability to stave off dropping ASPs limits their revenue growth rates as they strive to find efficiencies in their operations to keep OEM customers.

“EMS / ODMs need find a way to shift their relationships with OEMs from a transactional basis to that of a strategic partner for the OEM,” said Palma.

“This focus on the value EMS / ODMs can provide, beyond assembly, will ensure this industry will maintain its pivotal role in the market.”

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