Article Excerpt:
TWST: Looking kind of at the big picture, what's going on in the EMS space at this point?Mr. Walker: It has been a tough slog. The industry had a moment of brilliance back in 2003 when demand finally recovered from the burst bubble, but since then, it has been a tough environment. Demand has been fine; I think it's important to realize it has been pretty stable, but the benefits have been distributed unevenly. Revenues for the EMS industry as a whole have grown in the high-single to low-double digits, reflecting relatively stable demand as well as the increased use of outsourcing, but the tier-one EMS players that a lot of US investors focus on have really struggled. I think the first important point that people often miss is that when you look at the tier-one guys ' Flextronics (FLEX), Solectron (SLR), Sanmina-SCI (SANM), Celestica (CLS), Jabil (JBL) ' that's really a pretty small and unrepresentative slice of the industry. If instead, you expand your viewpoint to the top 25 or even just the top 10 providers, it's actually a much more positive story. That includes Hon Hai, which is now the largest EMS company in the world and grew north of 40% last year. So it has been a story of two sectors within the broader industry, one of them doing well, but the other experiencing particularly fierce pricing competition, which has pressured margins. Outside of Jabil and Hon Hai, revenues have been flattish, but the margins have been even worse.
TWST: Is that self-inflected pain or is this just the demands on the
marketplace?
Mr. Walker: It's both. The self-inflected pain is certainly a factor and
that derives from the industry overacquiring poorly conceived factory
assets during the bubble, at a time when people thought demand was going
to the moon. Many EMS companies bought every plant they could lay their
hands on, a lot of them in pretty unstrategic locations like Western
Europe and North America. As a result, they've had to restructure their
way out of that capacity and it has proved to be a very onerous process.
It's not just the matter of closing down factories; it's also a matter
of moving customers around from factory to factory. There has been a lot
of collateral damage on the customer front from having moved customers
around a lot, and I think you've seen a lot of those customers defect
essentially to Jabil stateside or some of the smaller guys like
Benchmark (BHE) and Plexus (PLXS), or to Asia. But the other aspect is
just that there are a lot of players and it's an industry that is really
ripe for consolidation. If Lucent, let's say, wants to outsource a piece
of wireless business, there are arguably 10 different companies that
have the capacity and the financial flexibility to do it, and that
creates a lot of pricing competition. So I think it's probably not very
long before you will see some of the struggling players having to find
an option strategically, to allow the pricing environment to get a
little bit more positive.
Tickers included in this excerpt: BHE, CLS, FLEX, JBL, PLXS, SANM, SLR, VARI
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