Taipei / Singapore: 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 Corp. and Apple Inc.
The endgame could see some of the unsung contract manufacturing industry’s biggest names, such as Singapore’s Flextronics International Ltd and Taiwan’s Hon Hai Precision Industry Co. Ltd, driving a wave of consolidation that will boost their big customers while squeezing some of the smaller ones.
Contract manufacturers produce much of the world’s electronics, with collective revenue of $306 billion (Rs13.37 trillion today) last year, making everything from PlayStations for Sony to notebook PCs forDell Inc., according to research firm iSuppli Corp. But companies such as Celestica Inc., Sanmina-SCI Corp. and Elcoteq SE saw revenues contract last year as margins erode all around. Growth is expected to dip into single-digits this year. “The competition is becoming more intense,” said Calvin Huang of the Daiwa Institute of Research Ltd. “We will see another round of consolidation among these (contract) providers.”
SHRINKING CONTRACTS (Graphic)
The looming consolidation could prove a boon to major brands such asMotorola Inc., Nokia and Sony Corp., whose big spending outlays are attractive to mega-manufacturers, analysts said.
While the bigger contract manufacturers will struggle to sustain double-digit growth, the mid- to lower-tier players will face buyout pressures, find new niche areas, or be forced out of business.
Also, gadget sellers that rely on the big contract manufacturers to churn out their wares are starting to worry they could get squeezed in the upcoming consolidation, said Adam Pick, an analyst at iSuppli.
Taiwan’s Hon Hai exemplifies the sector’s slowdown. The company’s revenue is forecast to grow 20% this year to $65 billion, according to Reuters estimates, down from 75% growth three years ago. Margins have dropped to 9.7% last year, from 25.2% in 1999.
While Hon Hai has been quiet on the merger and acquisitions front, Flextronics has been more active, making a number of purchases, including its landmark $3.6 billion buyout of Solectron last year. That deal helped Flextronics notch 46% growth last year.
Shares of Hon Hai and Flextronics are both down more than 20% this year as their growth slows, though many mid-tier players are up on hopes they could become acquisition targets.
Top firms with good growth prospects such as Hon Hai’s Foxconn International Holdings Ltd and Chinese telecom giants Huawei Technologies Co. Ltd and ZTE Corp. should drive the consolidation, said Neil Mawston, an analyst at Strategy Analytics.
But even the best prospects aren’t immune to global economic cycles, as Foxconn showed earlier this week when it forecast a profit shortfall that sent its stock plunging 20%.
Potential targets would be niche players such as Taiwan smartphone maker HTC Corp.’s contract manufacturing business, or smaller firms with potential, he added.
Singapore’s Venture Corp. Ltd makes no secret of its ambitions. “We have a couple of targets on our radar, including medical, aerospace and other niche areas,” chief executive Wong Ngit Liong said last week after the firm posted a 17% drop in second quarter profit.
As consolidation occurs among the largest and second-tier players, smaller ones may be able to find refuge in high-margin niche areas such as medical and automotive devices. One area likely to avoid the crunch is the notebook PC-making sector, led by Taiwan’s Quanta Computer Inc., Compal Electronics Inc., Asustek Computer Inc. and Wistron Corp.
While other sectors mature, notebook PCs are still expanding rapidly. Unit growth this year is expected to reach about 25%, according to various estimates.
“Maybe in some mature industries we’ll begin to see this consolidation happening,” said Daiwa Institute’s Huang. “But for the notebook PC industry, it’s not likely just yet as it’s still growing fast.” REUTERS