The EMS business forecast – A tale of two scenarios

Michael Palma, IDC

Yet, we are starting to see first quarter retail sales below expectations; the health of financial institutions being increasingly questioned; and continued instability in credit markets. In a reverse from its previous survey, Wall Street Journal’s March 13th economist survey shows most respondents feel the U.S. has slipped into recession.

For EMS firms, the most immediate risk is consumer spending on computers and consumer electronics since these two segments represent roughly two-thirds of the market. Capital spending is also at risk, from both the credit crunch and a slowing economy.

Enterprises were already looking at decreased spending on servers, but now spending on networking and telecommunications is under threat. On the other hand, OEMs in the emerging segments may be spurred to increase their outsourcing rates to eliminate costs from their business models.

If the U.S. does move into a recession, how fast and far will it spread?

European IT spending is at risk because of their exposure to the credit crunch underway in the U.S. Recession in the Euro zone means the two largest regional consumers of technology and other capital goods will be suffering. Such a disruption would then place many emerging economies at risk.

These nations are dependent on exporting manufactured goods. If these economies slow, their consumption and capital spending for IT would also be undermined. China, especially, has based its economic model on exporting goods to the US. For EMS / ODMs, not only would their top line results suffer, but also the geographies where they have located the majority of their operations will undergo severe economic and social stresses, endangering their investments.

Growth in the EMS industry over the next couple of years could be cut by as much as fifty percent, resulting in mid-single digit growth through 2012, if our primary scenario is discarded due to a worsening economy.

For decision-makers, the key issues to monitor include how the PC market performs over the next two quarters. This will likely be the key harbinger for EMS / ODMs. If shipments surge in the third quarter with the arrival of new components plus the start of traditional shopping periods, outsourcers will likely weather the current economic storms. How the stock market performs will also be a good indicator for enterprise spending in the short-term and for an overall view of the credit market.

In any case, EMS / ODMs need to carefully watch how the U.S. economy progresses to better understand the near- and long-term impact on their business.

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