Contract Manufacturing Growth Slows

Forbes has an excellent piece on the slow down in the contract manufacturing sector and speculates this will lead to consolidation in the industry. Forbes writes:

A shake-out is brewing among the world's top manufacturers that toil anonymously to make the latest cellphones, iPods and other gadgets for big names such as Nokia and Apple.

The end game could see some of the unsung contract manufacturing industry's biggest names, such as Singapore's Flextronics and Taiwan's Hon Hai, driving a wave of consolidation that will boost their top customers while squeezing some of the smaller ones.

Contract manufacturers produce much of the world's electronics, with collective revenue of $306 billion last year, making everything from PlayStations for Sony to notebook PCs for Dell, according to research firm iSuppli.

But growth is expected to dip into single-digits this year, and companies such as Celestica, Sanmina and Elcoteq saw revenues contract last year as margins erode all around.

"The competition is becoming more intense," said Calvin Huang of the Daiwa Institute. "We will see another round of consolidation among these (contract) providers."

Forbes continues noting the slowdown in the industry is exemplified by Hon Hai. Forbes observes:

The company's revenue is forecast to grow 20 percent this year to T$2.05 trillion ($65 billion), according to Reuters Estimates, down from 75 percent growth three years ago. Margins have dropped to 9.7 percent last year from 25.2 percent in 1999.

While Hon Hai has been quiet on the M&A front, Flextronics has been more active, making a number of purchases including its landmark $3.6 billion acquisition of Solectron last year. That deal helped Flextronics, whose revenue actually shrank in 2006, notch 46 percent growth last year.

Hon Hai and Flextronics shares are both down more than 20 percent this year as their growth slows, though many mid-tier players are up on hopes they could become acquisition targets.

Perhaps this slowdown is a reflection of the economy as a whole. Declining demand for computer products and reduced average selling prices accross the broad spectrum of devices will inevitably impact these companies. Many smaller manufacturers are unable to compete on scope or scale with Hon Hai and Flextronics and will therefore have few alternatives but to get bought out if the offer arrives. Of course this consolidation will meant entry barriers will increase and reduce the attractiveness of the market as a whole. This means there is less likely to be any new competitors entering the market.

Hon Hai and Felxtronics will still be around in a few years but, if the above is true, the contract manufacturing landscape is about to change. Anyway, enjoy the article.

Forbes: ANALYSIS-Shake-out looms for world's unsung gadget makers