By outsourcing their handset and network equipment production, major vendors may be unwittingly yielding enormous influence to contract electronics manufacturers that could acquire enough expertise and experience to develop their own brands and technologies.
Two reports, one by market research firm Bear Stearns and the other by Strategy Analytics, demonstrate that more original equipment manufacturers are outsourcing their manufacturing to concentrate on product design, development, marketing and distribution.
“Potential loss of company secrets is a possibility and CEMs could learn skills transferred from customer to customer,” remarked Neil Mawston, industry analyst, wireless devices strategies, for Strategy Analytics, who authored the study, “Contract Electronics Manufacturers Explode.”
Mawton observed that in other electronics sectors, CEMs have developed brands and technologies acquired from experience with OEMs.
He said the CEMs, which grew into a $112 billion industry in 2000 and $150 billion in 2001, are probably on pace to acquire larger research and development budgets, which could make them develop their own brands and technologies.
Of all the major vendors, the only one playing down outsourcing, especially of handsets, is Nokia Corp., which has indicated that it will not exceed 20 percent of its handset outsourcing, although the company outsources more than half of its networks.
Strategy Analytics predicted that 70 percent of handset production by 2006 may be in the hands of the CEMs.
Swedish manufacturer L.M. Ericsson outsources 90 percent of its handset business. Motorola Inc. has outsourced 20 percent and intends to outsource more.
The major CEMs include Selectron Corp., Flextronics International, Celestica Inc., SCI Systems Inc., Jabil Circuit and Sanmina Corp.
Mawton says the relationship between both CEMs and OEMs are 50-50, “although Nokia would not agree with that.” He added that by ramping up more expertise, the CEMs may outflank the OEMs “by natural progression, not sinister progression.”
He said close integration between the organizational and national coaches of both CEMs and OEMs was essential for effective synergy, predicting that consolidation between them could reduce the risk of CEMs overtaking the OEMs in the future.
Mawton noted that most of the outsourced contracts are for second-generation equipment, while both parties partner on 3G projects.
Bear Stearns says 61 percent of OEMs say their primary reason for outsourcing was to reduce costs, including labor, fixed overhead and capital expenditures. Capacity constraints and time-to-market were the other reasons identified by the market research firm.
Selectron is the largest CEM, although Flextronics is growing into the most influential handset CEM, with a market share of 10 percent from almost nothing in 1999.
Selectron grew in the Silicon Valley in 1977 with startups like Cisco Systems Inc. and Nortel Networks Corp. According to Bear Stearns, it has 15 percent of Cisco’s contract, 13.2 percent of Ericsson’s and 12 percent of Nortel’s. It has 55 plants located around the world.
Flextronics’ key customers include Cisco, Ericsson, Philips, Siemens AG and Motorola Inc. It has 94 plants around the world, accounting for 17 million square feet of manufacturing capacity, according to Bear Stearns. Celestica, which had 9.7 percent market share at the end of 2000, has 38 plants around the world. Its customers include Sun Microsystems Inc., IBM Corp., Hewlett-Packard Co., Cisco, EMC, Nortel, Lucent Technologies Inc. and Dell Computing.
Although SCI is the fourth-largest CEM, it is the pioneer of the industry. SCI was spun off from NASA and dedicated to contract manufacturing. It has 54 plants in the world with 9.1 percent market share. Its key customers include Hewlett Packard, Nortel, Dell, Nokia and Compaq. With 33 plants around the world and 4.1 percent market share, Jabil Circuit’s main customer is Cisco, accounting for 20 percent of its revenues. Others are Lucent, Dell and Hewlett Packard. Sanmina has 3.5 percent market share with 56 plants worldwide. Bear Stearns identified its key customers as Nortel, Lucent, Cisco, Motorola, Alcatel, Ciena, EMC and Sun.
Philip Fok, vice president of corporate administration at Selectron, said CEMs like his are located around the world to meet the demands of OEMs that cannot cope with capacity and shipping simultaneously. The CEMs, he explained, can manufacture for Sony Corp.’s needs in Romania, for example, thereby saving the Japanese phone maker the burden of worrying about the cost of shipping after production.
The CEMs also work 24 hours, seven days a week and can handle several contracts from different vendors at the same time, a thing that could cost the companies if they executed the tasks themselves.
“The market is competitive, so we concentrate on our core competencies and ask them to do what we used to do internally,” said Bjorn Bostrom, senior vice president for supply and IT at Ericsson. Ericsson outsources handsets to Flextronics, Selectron, SCI and Elcopeq.
Mawton remarked that the outsourcing also creates cultural and communications problems in that the OEMs compromise certain corporate aspects and national culture in these contracts.
