Competition Heats Up Between EMS Providers

Rivalry between the world's top two companies in the field of electronics manufacturing services (EMS) is becoming white hot. Michael Marks, chairman and chief executive officer of Singapore-based Flextronics International, arrived in Taiwan on June 20 to bolster his company's leadership by visiting domestic ODM (original design manufacturer) suppliers and allying with them in its rivalry with close competitor Hon Hai Precision Industry.

Flextronics chalked up total revenue of US$15.9 billion in the year ending in March 2005. This was more than the US$13.3 billion that Hon Hai took in last year, but the Singapore expects to be surpassed this year. Its fiscal 2006 (ending in March 2006) revenue is projected at US$17 billion to US$17.5 billion, while Hon Hai expects to rake in around US$19.3 billion this year.

The two companies compete most fiercely in the outsourced-handset market, which is worth an estimated US$65 billion a year. Hon Hai predicts that its handset-production revenue will grow from NT$108 billion (US$3.48 billion at US$1:NT$31) last year to NT$180 billion (US$5.8 billion) in 2005, making handsets account for nearly 30% of its total revenue, up from 20% in 2004. Flextronics' revenue from this field has remained steady at around US$5 billion for each of the past few years, accounting for more than 30% of its total revenue.

After a consultation between Marks and executives from Taiwan's Kinpo Electronics and Asustek Computer, Kinpo disclosed that it would form a joint venture with Flextronics for the production of notebook-computer parts and the forging of molds and handset cases. (Marks himself declined to comment on this report.) Asustek is reported to be interested as well.

Flextronics became involved in the ODM business three years ago when it acquired design-capable wireless phone system supplier Microcell of Finland, along with some Indian software developers.

Acquisition Binge

Hon Hai became involved in the same way. In May this year it acquired a 56.48% stake in Chi Mei Communication Systems, a Taiwanese mobile-phone supplier that designs its own products, and Finland's Eimo Group, which designs and produces precision plastic parts for mobile communication systems.

Hon Hai's chairman, Terry Guo, announced early this year that his company would acquire more connector, desktop computer, and communications companies this year, suggesting plans to further strengthen the firm's ODM capability.

Taiwanese industry watchers note that falling profits have inspired pure manufacturers like EMS providers to embrace the ODM business, which commands higher profits. At the same time, ODM suppliers have become a threat to EMS providers because more and more brand-name suppliers are choosing them instead of EMS providers to manufacture their products.

According to the International Data Corp. (IDC), a market research company, the global ODM electronics industry will likely post a 38% revenue gain this year, while revenues in the EMS industry will grow by only 13%.

Taiwan is a world leader in the supply of ODM electronics equipment, with its top three suppliers in the field—the Quanta Group, Kinpo Group, and Lite-On Group—bagging 24%, 15%, and 12%, respectively of the global market, respectively.

With the single exception of Hon Hai, all international EMS providers suffered declining sales or slow growth this year, a situation that industry watchers attributed to lukewarm demand for mobile phones worldwide and, especially, to a switch in orders to ODM suppliers.

Besides allying itself with Taiwanese suppliers, Flextronics recently announced a plan to carry out a vertical integration of resources with the aim of becoming more competitive. Following the announcement, the firm sold its semiconductor business to Telavie AS of Norway, along with a 70% stake in Flextronics Network Services, which installs and maintains data and telecoms networks for fixed and mobile operators.

Another leading EMS supplier, the Solectron Corp., has responded to the difficult times by cutting 3,500 jobs, or 6% of its global workforce, as part of a plan to integrate its North American and European production lines. Sanmina-SCI has taken a different tack, moving its production to low-cost China and launching a company-wide restructuring program.

Unmatched Advantages

Despite their recent problems, EMS providers offer a number of advantages over their ODM rivals. They have unmatched manufacturing capacity spread throughout the world, while Taiwan's ODM suppliers have concentrated their capacity mostly in mainland China and Taiwan itself. This means that it is easier for EMS providers to deliver products quickly to customers in nearby markets.

Flextronics has dozens of factories around the world, and Marks used this advantage as a bargaining chip in his talks with Taiwanese ODM suppliers. He told them that building their own factories might not be good for them; and that, since the recent oil price hikes have been followed by higher shipping costs, shipping products from Taiwanese and mainland Chinese factories to markets elsewhere has become more expensive.

Marks pointed out that cooperation between his company and ODM suppliers in Taiwan has become closer than ever, with revenue derived from cooperative ventures expected to soar from US$15 million in 2004 to US$100 million this year and US$400 million in 2006.

Now is a good time for ODM suppliers to work with EMS providers, Marks told the Taiwanese suppliers, because the profit from contracts with brand-name suppliers has declined as a result of a shrinkage in the space available for price negotiation. And that unhappy situation has come about, he explained, because a smaller number of brand-name suppliers is controlling a bigger share of the brand-name market.

Hon Hai's Guo responded to the Flextronics onslaught by griping that international EMS providers are trying to squeeze Taiwanese manufacturing industries by persuading producers to give up their manufacturing capability. Some local electronics product makers say that once the island's ODM companies begin cooperating with EMS providers, they will lose their manufacturing advantage.

Hon Hai itself, however, is trying to squeeze the island's ODM suppliers by muscling into their areas of business; for example, it has lured Sony's orders for notebook computers away from Asustek.