Interpreting the four phases of the EMS economic cycle

A recent EMS industry report discusses the 'four phases' of the EMS economic cycle.

Over the past 10 years, one particular investment bank has written extensively about these four phases and has followed their work closely. Their latest report released by Jim Suva’s team at Citi states the fundamentals across the EMS industry will not stabilize until the sector reaches the third phase of the EMS economic cycle.

The problem is we’re currently back to phase one.

The report begins that in late 2011 we moved back to phase one as several OEMs had been reducing orders which will result in sales and margin pressure for EMS companies – which we are now seeing. (Read: EMS / ODM worry about future profitability)

Its important to note, the report states, that during 2009 to early 2011 the EMS sector experienced [the] favorable phase three of incremental increased outsourcing and margin improvement with many EMS providers reaching historical peak operating

However, Citi states the global economic slowdown has since dramatically reduced demand evidenced by several global downward GDP revisions.

The report goes on to explain the ‘Four Phase’ framework to the EMS economic cycle as:

Phase One
[We are currently in phase one given that…] OEMs are reducing orders due to lower demand combined with several recent downward global GDP revisions.

Phase Two
OEMs in-source production (i.e., shift production and manufacturing away from EMS provider) in the initial stages of a downturn in hopes of increasing utilization rates at OEM company-owned factories.

Citi estimates this phase has cost the EMS industry $7 billion to $10 billion in annual revenues since the macro recession began in late 2007. (See: Top 10 EMS / ODM Company rankings)

So, since we’re in phase one, we could see more in-sourcing by OEMs in the near future.

Phase Three
In the third stage of the economic cycle OEMs typically engage in restructuring efforts during which they begin to incrementally outsource more production and / or try to sell assets to EMS providers in return for the promise of future business for the EMS provider(s).

Citi states this phase occurred in 2010 / 2011 given asset acquisition transactions such as Sanmina-SCI’s purchase of JDSU assets and Hon Hai’s co-investment with HP for PC manufacturing capabilities.

The bank supports its thesis on this phase occurring during this time in that the EMS industry had started to see new outsourcing for notebooks from HP to Flextronics and Hon Hai, as well as from Research in Motion for smartphones to Jabil, Flextronics and Celestica plus several LCD TV-makers outsourcing their production (occurring in early 2011) but which has since come to an abrupt slow down. The EMS sector experienced this favorable phase from 2009 to early 2011.

Phase Four
In this last phase, economic recovery begins and OEMs find themselves with capacity shortages – thus pushing OEMs to increase their outsourcing efforts.

In Citi’s view, this is the most profitable phase for EMS providers as pure incremental outsourcing wins (without asset purchases) push capacity utilization rates and margins higher across the EMS industry.


The report contains additional information regarding industry mergers and acquisitions, supply chain inventories, demand seasonalities, implications from Japan and Thailand, among other topics.

Private message OEM peers. Access all content.

For electronic OEM professionals working in OEM companies. Connect with OEM peers and access exclusive content.

Add your comment


Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

TIP: Anyone can post article comments whether or not you are registered. But, if you register or log in you can attribute your posts to your user profile in GlobalNet Community.

Your email address will not be published. Required fields are marked *



You might also like:

OEM Checklist for EMS Manufacturing Quotes

Provider spotlight

About is the leading online destination helping electronics OEM decision makers make more informed decisions and reduce risk. We offer educational Webinars, thousands of original articles and helpful tools, a community of influencers who understand the challenges facing your company today, and a comprehensive directory of electronics provider services.

Copyright Venture Outsource, LLC. All Rights Reserved
The material on this site is for informational purposes only and is not a substitute for legal, financial or professional advice. Distribution and use of this material are governed by our User Terms Agreement and by copyright law. By using our Website you agree to site Terms and Privacy policies. For questions please contact at 1-888-860-1193 or visit