Mobile phone contract-manufacturing outsourcing decelerates as demand lags

Nokia and other mobile phone OEMs recall some manufacturing from EMS providers as the mobile phone market shrinks and vertically integrated EMS companies react to the waning business.

By Gail Flower, Contributing Editor -- Electronic Business, 4/28/2009

Decelerating demand in the mobile phone sector has changed the game for OEMs and EMS (electronic manufacturing service) providers, according to iSuppli.

Handset OEMs Nokia and Motorola have recently enacted rounds of layoffs, restructuring and refocusing on core competencies. In turn, tier-one EMS providers such as Foxconn International Holdings and Flextronics  and ODMs (original design manufacturers) such as Compal Communications Inc and Arima Communications have watched as handset shipments have dropped and revenues declined.

“Until recently, the contract manufacturing industry yielded consistent double-digit year-over-year growth rates in mobile handset outsourcing,” said Jeffrey Wu, iSuppli's senior analyst for EMS/ODM, in a statement.

However, uncertainty in the marketplace is forcing some OEMs to not only decelerate outsourcing, but also to reclaim production by moving it in-house, Wu said, giving Nokia as an example. In 2008 Nokia decreased outsourced manufacturing volume to 17.1%, down from 21.5% in 2007 (see chart below). With economies of scale and efficiencies in the electronics supply chain, Nokia found that it could build and assemble mobile handsets as inexpensively as an EMS provider. Smaller OEMs may not have this capability, iSuppli reported.

“This reflects a larger trend in the mobile handset supply chain," Wu said. "Decelerating and decreasing outsourced manufacturing by those OEMs that are still operationally competent will hurt the growth prospects of contract manufacturers."

Foxconn’s vertical integration in the electronics supply chain was thought to be a boon to its success; however, even this large EMS provider has been hit by the industry downturn. Foxconn’s 20008 revenue decreased to $9.3 billion, down from $10.7 billion in 2007, with net profits falling to an estimated $121.1 billion in 2008, down from $721.4 million in 2007, for a steep 83% drop.

“When the economy is going strong and market demand is vibrant, the vertically integrated model can help an EMS provider grow because the economies of scale can be leveraged internally and the manufacturing business and the component business can subsidize each other,” Wu said. 

But when orders slow down, the model doesn’t allow for the manufacturing arm to source to external component suppliers easily.