CEMs Face Challenges
of Double Digit Growth
Top Tier Contract Manufacturers at
the "Bleeding Edge" of Innovation

By Jennifer Read

Technology Forecasters, Inc., (TFI) an Alameda, California-based
market research firm, has been tracking the global contract manufacturing
industry for many years, chronicling the industry's unprecedented growth.
Their latest report predicts the total market to grow at 20% this year.
Wiring Harness News interviewed Charlie Mullen, PhD, chief research
analyst for the study, for his latest observations on this volatile industry.

Growth is not universal

One trend Dr. Mullen believes will become increasingly significant is
the overall stratification of the industry. The largest companies are growing
very fast, but those companies that fall mid-tier are just keeping up and the
smaller ones are growing at a rate that is far below the average for the electronics
industry as a whole. According to TFI's latest analysis, the top tier companies,
which account for 40% of the total market, are growing at a rate of 35% a year.
The mid-tier companies, which account for

25-30% of the total market, are growing at 10% per year. The smaller companies,
which TFI counts as anything under $100 million in revenue, are growing at a much
slower rate — they are either completely stagnant or growing at only 2% per year.
That means we can expect the industry consolidation to continue. "The big companies
are getting bigger through acquisition," observed Mullen, "and the mid-tiers are the targets."

Worldwide Electronics Contract Manufacturing Growth Rates by Company size
(Technology Forecasters, Inc.)

The majority of outsourcing occurs among companies in the computer, peripheral,
and telecom (defined as networking, voice and data) industries. "These are industries
comprised of lots of startup companies. Whatever industries are growing very fast,
where there are a lot of new companies, that's where outsourcing is taking over.
The start-ups are not building factories — they outsource manufacturing," Mullen explained.

Other more established industries, like the automotive industry, have outsourced
manufacturing for a long time, but not all that has been to CEMs. For example,
Ford spun off Delco and then bought all they make back from them. "There was a
time when Ford made everything themselves — from the steel to the upholstery.
But not anymore. This has been going on for a long time. There are more electronics
in autos than ever before, but not a lot of new companies." Consequently, the automotive
industry is not a likely candidate for outsourcing of manufacturing.

Supply-Chain Management Issues

Top-tier contract manufacturers are among the leaders in implementing the latest
supply-chain strategies. They are investing in information technology and establishing
partnerships and alliances to integrate their suppliers and distributors. "Obviously,
when you are in an industry with fairly low profit margins, the more efficient you can
make your supply chain, the higher the profits. That's why CEMs are investing in SCM.
OEMs look for flexibility, price, and quality when selecting a contract manufacturer.
SCM affects the first two, especially," according to TFI's Mullen.

E-commerce tools give companies in the supply chain the opportunity to eliminate
some of the paper invoices, faxes, e-mails, and phone calls that typically are such a time
consuming part of the product development cycle. In industries where the technology is
changing rapidly, product life cycles are very short, and time-to-market is a critical
measurement. If a contract manufacturer can leverage IT and e-commerce tools to
streamline the new product introduction process, that gives the CEM a competitive advantage.

"Successful CEMs are developing IT tools and new software platforms. They are
looking at new shop flow data management systems, for example," he explained.
"Companies are developing products to solve these problems. One company we have
observed entering this market is 'Datasweep.' They started marketing products to
enable shop floor data management for the build-to-order, configure-to-order
manufacturing models. This product allows CEMs to communicate with vendors,
integrate the supply chain and collaborate more effectively."

Business-to-business e-commerce is expected to explode in the coming years.
More and more "back-end" supply-chain activity will be conducted by way of
the Internet. GartnerGroup expects the volume of non-financial goods and
services sold through business-to-business e-commerce to reach $7.29 trillion
worldwide in 2004, or 7 percent of the forecast total global economy of $105 trillion.
GartnerGroup defines business-to-business

e-commerce revenues as goods and services for which the order-taking process
was completed via the Internet. This includes purchases via Internet EDI,
e-marketplaces, extranets and other sell-side activity, but excludes activity over
proprietary networks. Companies that take advantage of the opportunities that
present themselves from this fundamental change in business practices will prosper.

Now clearly, this virtual market is not an altogether new market. The internet is
primarily a new way to communicate; right now electronic manufacturing customers
like to use websites and portals primarily for product information and order status
rather than for ordering products, according to a poll done by CMP Publication's
Electronic Buyers' News. Standards do not exist to allow system integration
across company boundaries in the supply chain, preventing the realization of
some of the promises of the technology.

Globalization -- For the Top Tier, a Fact of Life.

Top-tier CEMs are aggressively globalizing their manufacturing operations.
But are they operationally prepared to move manufacturing all over the world
at the drop of an OEM's hat? Not necessarily. Dr. Mullen explained: "Just
because a CEM says they are global doesn't mean they can do the same thing
in Hungary that they can do in San Jose. Top-tier CEMs are struggling to gain
some consistency in their facilities around the world. You really can't make
generalizations, though. You have to do a site by site comparison to find out if
a facility can perform a particular function."

Integrating acquisitions is a very difficult process and global facilities differ radically.
OEMS want to move products around the world based on their end customers, not
necessarily based on the advantages of a location arising from low labor rates or
available suppliers. Difficulties arise when suppliers are not able to support a product
everywhere with the same pricing structure and value added capabilities. And of course
there are different tax and logistics considerations for each country. "CEMs will get there,
but it will take some time and a lot of effort. When you are acquiring 10-15 facilities a
year, it takes time to integrate them," Mullen concluded.

For further information contact Technology Forecasters, Inc. 1420 Harbor Bay Parkway,
Suite 295, Alameda, CA 94502-7083. Phone (510) 747-1900 or Fax (510) 747-1909.
E-mail: TFIconsulting@techforecasters.com or visit Internet: http://www.techforecasters.com.