Rough road ahead for ODMs

Editor’s Note: This article is an excerpt from RCR Wireless News’ May Special Edition, “Enabling the Mobile Revolution: Mobile Chips, Devices and Accessories.” The 80-page special edition is available here.
Even though the wireless handset market is set to rebound this year, the world’s top 10 contract manufacturers will continue to struggle as they try to recover from a disastrous 2009, according to research from iSuppli.
Cellphone shipments for the largest original development manufacturers and electronic manufacturing services providers will increase by 3.4% this year, up from 197.5 million in 2009, said Jeffrey Wu, senior analyst for EMS & ODM at iSuppli.
“The relatively flat growth anticipated in 2010 by the top contract manufacturers for wireless handsets is unimpressive when juxtaposed against the steep 30% plunge recorded by the group last year,” Wu said.
Last year’s economic crisis caused the top handset manufacturers to change their business models, severely impacting the ODM and EMS segment, Wu noted.
“Among OEMs using the services of the contract manufacturers – outsourcing strategies are being adjusted in the face of the recession, and OEMs remain cautious about re-engaging contract manufacturers in case the market does not recover as quickly as expected,” according to iSuppli.
Among leading contract manufacturers, iSuppli estimated that Elcoteq saw more than 62% fewer shipments in 2009 vs. 2008; Compal Communications Inc. saw a 57.6% decline; Foxconn International Holdings’ shipments dropped nearly 52% and Flextronics shipped 47% fewer devices.
Several factors contributed to the meltdown, including Nokia’s decision to take its manufacturing in-house.
“iSuppli estimates that Nokia’s overhaul of its old business model translated into revenue losses among contract manufacturers reaching up to $5 billion,” the firm noted. “Sharing similar concerns about internal capacity utilization, other OEMs contemplating a ramp-up in contract manufacturing services then either reduced the size of their outsourcing programs or halted outsourcing considerations altogether.”
Meanwhile, increased smartphone sales could not offset the overall market declines, and companies like Motorola Inc. and Sony Ericsson, which relied heavily on contract manufacturing, lost market share in 2009, further impacted the contract manufacturing business.
There is good news going forward, however. iSuppli predicts the wireless handset space will rebound in 2010, growing 12.8% to 1.5 billion units, and continue to grow at a compound annual growth rate of 6.8% through 2014, “suggesting that recovery could be around the corner even for the top 10.”