Contract Manufacturing Will Boom Despite Slower Electronics Growth
James Carbone, Purchasing -- Semiconductor International, 5/1/2001
The slowdown in the economy is being felt by most electronics companies. OEMs report fewer orders for their products. In turn, component manufacturers and electronics distributors report sluggish demand for parts. Lead times are shortening, inventories are building, and prices are falling. However, contract manufacturers (CMs) are reporting no such softening in demand for services, according to Purchasing magazine. In fact, CMs say interest in electronics manufacturing services (EMS) is growing from OEMs that have never outsourced before or outsourced very little. That's because, when electronics OEMs hit hard times, they often turn to contract manufacturers to help them reduce costs."We will go through a boom in outsourcing in 2001," said Gene Richter, formerly chief procurement officer for IBM and now head of his own consulting firm, Richter Katonah Inc. "We seem to go through an outsourcing boom in every recession. It's one of the ways OEMs reduce their overhead, their ongoing fixed costs."
Market researcher Technology Forecasters agrees with Richter's assessment. Though semiconductor and end-equipment shipments may see only single-digit growth this year, contract manufacturing will grow by about 28% to $130B. Much of that growth will come from OEMs that may have been on the fence about outsourcing. The downturn will push them to the outsourcing model.
One OEM that will contribute to the growth of contract manufacturing is Lucent Technologies (Murray Hill, N.J.). Lucent's business is changing, and the company is moving more toward an outsourcing model. "We have internal sensitivities about this, but the strategy is clear," said Jose Mejia, Lucent's chief supply officer. Mejia has set up a virtual manufacturing organization to manage contract manufacturers as the company outsources more. "Lucent does a significant amount of outsourcing already. Over 50% of our output is outsourced; two years ago it was 10%. People don't realize how much we already do. We know clearly what we want to do. We are moving new products into that zone."
The decision to outsource can be a painful one for many OEMs because it often means closing down plants and laying off employees. Richter says the least painful solution when an OEM decides to outsource is a deal in which the contract manufacturer agrees to take over an OEM's facility. "A lot of contract manufacturers, as part of their offer package, will take over the OEM's plant and give jobs to all OEM employees willing to work for the contract manufacturer," he explained.
