Tea Time

Consultant/gadfly Charlie Barnhart today said his model suggests higher near-term risk for certain sectors of the EMS industry.

“It won’t be a catastrophic, ‘off the cliff’ event, but certain areas are substantially more at risk than others,” he wrote in his weekly blog, singling out military and aerospace for “significant demand dropoff this year.”

Contrast Charlie’s tea leaves with the longer-view held by iSuppli and Global Industry Analysts.

The former is forecasting revenues to rise 8.5% this year, to $347 billion, building on 2010’s ridiculous jump of 33.5%.

The latter asserts the market is much smaller, projecting it to reach $231.4 billion by 2015. That’s roughly $30 billion less than what iSuppli says the market for outsourced electronics was in 2009.

Without insight into iSuppli’s and GIA’s respective methodologies, it’s impossible to know why such a large discrepancy exists. This I will say, however: If I had to bet on which model is right, I’d take Charlie’s.

Bracing for the Parts Shortage

As Jabil, Sanmina-SCI, Flextronics and others have noted, component shortages are becoming more prevalent as the recovery takes shape.

Worse, the pain is expected to increase as demand picks up. Some EMS companies are now using the dreaded “A” word — allocation. Others say they have been cut off by their distributors: orders placed weeks ago have simply been canceled.

For most of their history, semiconductor manufacturers made capacity expansion decisions outside the normal cyclical swings. In 2009, however, expansion effectively stopped. We will now pay the price — literally.

Memory, which has been in a glut for years, will suddenly become hard to come by. The December quarter was the best since the first quarter of 2007, as DRAM makers topped $8 billion in revenues. And as iSuppli noted last week, an explosion in smartphones is straining NAND-type ?ash. According to the research firm, each iPhone — the largest application for NAND — uses an average of 35.2 Gb of NAND. “This huge growth is likely to lead to some periods of undersupply for the year,” the firm says.

We could have seen this coming. This situation was set in motion following the drastic tech meltdown of 2001-02, when some companies were quoting material lead-times of up to six months! Since then, the supply chain has considerably tightened, and inventories have been kept low — too low, in fact, according to the Institute for Supply Management.

But not to me. I would rather see a constant capacity crunch than the wild swings of yesteryear. What companies must now resist is the inclination to take parts from wherever they can (thus increasing the risk of counterfeits) and the pull to bring on so much new capacity that they turn the tide and set in motion future oversupply conditions.

90K and Counting

During iSuppli’s EMS webinar yesterday, an interesting data point was revealed: 90,000.

That’s the number of workers the EMS/ODM sector has laid off during the current recession. That’s an astounding figure (and assuredly does not include the reported 100,000 Hon Hai purportedly was letting go).

Even scarier than the number itself is the unmeasurable amount of experience and brain power that has been drained away, much of it likely for good. Talented engineers and technicians don’t stay on the sidelines long; they find other jobs — often in other industries.

When all is said and done, that may be a legacy we as an industry will be coming to grips with long after the order books have filled again.

Relisted

Research firm iSuppli’s Top 10 Global EMS firms list, which came out today, differs in several respects from Circuits Assembly’s findings.

Why? It may be that the iSuppli data for Foxconn take into account non-EMS related sales (the company also produces bare boards and connectors, among other things). Even so, Foxconn itself last week reported 2008 revenues of $42.3 billion.

iSuppli also excludes Cal-Comp Electronics/Kinpo Electronics from its list, despite that company’s contract manufacturing revenues of $3.2 billion last year, which would place it seventh overall.

Finally, iSuppli includes Universal Scientific in its ranking, although the Taiwanese company reports EMS sales of just $490 million in 2008.

top-10-ems-206-2012_1

iSuppli Ups the Ante

iSuppli is on to something, and it’s about time.

The research firm today distributed its estimates for the smartphone market in 2009. But instead of forecasting a single number, the company provided a range based on the best- (new options compel new purchases) and worst-case (customers sit on their wallets) scenarios.

This is a much wiser, useful way to approach forecasting. Whereas some may call it a copout — by providing a range, iSuppli gives itself a greater chance of being “right” — I see it as a long overdue move into what is standard practice elsewhere. Indeed, providing a range is a method many researchers in other fields use to describe what might actually happen.

The next step would be to offer probabilities for the different scenarios; in other words, 50% of the time, sales will be up by X%; 75% of the time, sales will be up by Y%, and so on. But I’ll settle for other research firms picking up on what iSuppli has started. Kudos!