by 
The 2012 growth outlook for the outsourced manufacturing industry has vacillated since the year began. Earlier in the year, business activity was upbeat and companies were generally optimistic about growth prospects for the second half. While IHS Corp. still forecasts the industry will post modest growth by year-end, the outlook for outsourced manufacturers has changed dramatically.
All the strength in the market now is concentrated among a small number of leading outsourced manufacturers, which are showing most of their growth with an even smaller number of major customers. For much of the rest of the industry, business is actually contracting as global growth has slowed amid a host of unfavorable elements, including the sovereign debt crisis in Europe, slowing expansion in China, and a near stall in the US economy.
IHS now estimates global outsourced manufacturing revenue will rise to $389 billion in 2012, up 5.4 percent from $369 billion in 2011. This represents a downgrade from our most recent forecast issued in June 2012 of nearly 10 percent growth in 2012.
On the positive side, new business activity is generally higher as OEM customers look to outsourcing in order to reduce costs as well as to accelerate their supply chains. Even so, in numerous conference calls over the past few months in which trends in the underlying electronics business were discussed, companies have sounded a cautious note. The phrases “stable,” “modest,” and “hopefully it gets better in the second half” were often heard.
Global economic weakness remains the major stumbling block for the electronics industry. In fact, many of the companies that IHS has spoken with recently have shifted their outlook from stable to lower. In many cases, future sales prospects are contracting as overall global growth has slowed amid economic challenges in Europe, China, and the United States. And with economic growth slowing, most outsourced manufacturers may lower their earnings expectations for the rest of 2012.
Much of the strong industry growth in the first half was highly geared to one company: Hon Hai, a.k.a. {complink 2125|Foxconn Electronics Inc.}, which owes a significant portion of its growth to just a small number of customers, including its largest client, {complink 379|Apple Inc.}. As Hon Hai is now the largest outsourced manufacturing provider by a factor of nearly four compared to its closest competitor, the direction of the IHS outsourced manufacturing industry forecast is highly correlated to Hon Hai and to its largest customers such as Apple. Aside from the key customers that are still reporting very strong growth, there’s a high likelihood the market is entering a slowdown.
In the face of economic headwinds and concerns about overdependence on a limited number of large customers to drive growth, IHS advises outsourced manufacturers to take three courses of action. First, sharpen the focus on winning new sales as well as accelerating the time-to-volume for previously won business.
Second, get the financial house in order, as low rates make it both accretive to rework the capital structure as well as easier to negotiate better inventory terms with customers. Finally, prepare for an upcoming decrease in demand and a protracted period of very modest sales. Outsourced manufacturers should work to control whatever factors they can, including expenses, hiring, and capital spending.
Many companies are already addressing this slowdown head-on by undertaking such actions. Because of this, as well as the memories from the Great Recession fresh in the minds of companies across the industry, IHS believes the industry will likely exit this period of sluggish growth in better shape.
The Apple-Foxconn partnership has benefitted both parties immensely but one of the two parties is more dependent on the other. What is Foxconn without Apple? Another piddling EMS provider!
Does Apple has new CM in Taiwan? Foxconn should be careful of this. Also, Apple may have downturn in near future and it will have significant affect on Foxconn.
Why do you think they will experience a downturn??
All these economic slow down factors are equally applicable on normal manufacturers therefore I don't feel that in particular contract manufacturing industry is likely to suffer. Despite that, concentration of contract manufacturing in the hands of few big players is not a positive.sign.
@ Bolaji True. Foxconn might be vulnerable without Apple's contract. It is the nature of this contract manufacturing industry that they have to be dependant on the decisions of their clients far more than a manufacturer is dependant on its clients.
The old 80/20 rule applies here…but in the apple/ foxconn case it is more like a 99/1 rule…………..that is foxconn gets 99% of their biz from 1 client; apple……..it would hurt them if apple went elsewhere…..
Ken: PricewaterhouseCoopers analyst Jim Forbes presented at ECIA on a related topic and came to the same conclusion. In terms of preparing for REES, electronics is better prepared than most industries but overall, businesses aren't aware of this issue. I think the same can be said of conflict minerals: electronics companies defintiely have a handle on things, but they are going to have to get the word out to business in general to have any kind of impact. Kudos to electronics for being leaders in these efforts, but it's time to spread the word. The origin and nature of these minerals aren't just in the domain of electronics — it's everybody's concern.
Agree that the 90 percent headlines were a bit deceptive. More progress is being made than they suggest Barbara and Ken.
“With only about 21 months remaining until publicly-traded U.S. component manufacturers must disclose their usage of conflict minerals to the federal government, the industry appears to be unprepared, given that about 90 percent of firms so far have not produced the data, declarations, or documentation that will help fulfill regulatory requirements detailing the presence of such minerals in their supply chains.”
That does sound bad but there are more areas than just the paperwork which hopefully will be in order when the time comes.
“As of August, the percentage of electronics component manufacturers with available conflict minerals information amounted to only 11.3 percent of the peer group, according to the IHS Parts Management Service at information and analytics provider IHS (NYSE: IHS). These companies account for 17.1 percent of active electronic components on the market, as presented in the figure below.”
Suddenly dos not sound so bad with the jump to 17.1 percent of active components. Interesting that was a jump in the graph from November 2011 when the first company rankings came out.
http://press.ihs.com/sites/ihs.newshq.businesswire.com/files/2012-10-25_counterfeit.jpg
http://www.enoughproject.org/blogs/greenpeace-teams-enough-conflict-minerals-standards
Utilization of conflict minerals is widespread in the electronics market, employed in all kinds of products, from cellphones to hearing aids, to pacemakers and jet engines. For example, IHS estimates that $0.15 worth of tantalum-a conflict material- was contained in every smartphone shipped when Dodd-Frank was originally signed in 2010. In 2012, this would amount to $93 million worth of tantalum in smartphones alone.
Things are not as bleak as they were on the tantalum front with AVX leading the way.
http://www.avx.com/wsnw_PressReleaseDetail.asp?id=544&s=0
http://www.avx.com/wsnw_PressReleaseDetail.asp?id=512&s=1
http://www.avx.com/wsnw_PressReleaseDetail.asp?id=498&s=0
Not all progress though as there are plenty of firms that are making no effort or think they can just post up a bit on their website saying they do not agree with conflict minerals and it is job done. Classic case is Nintendo.
http://www.cnn.co.uk/2012/08/16/tech/gaming-gadgets/congo-blood-phones-report/index.html
http://www.huffingtonpost.com/2012/08/15/intel-apple-conflict-minerals-nintendo_n_1785885.html
http://www.polygon.com/gaming/2012/9/12/3323548/nintendo-conflict-minerals-protest-wii-u
http://www.polygon.com/gaming/2012/9/12/3324384/Wii-u-conflict-minerals-nintendo
Overall though i think progress is being made just not fast enough when there is a war in the DRC.
The Enough Project says the results are already apparent on the ground in the Congo. The amount of money armed groups make off three of the main conflict minerals (tin, tantalum and tungsten) has dropped 65% over the past two years, according to a report released earlier this month, which attributes the decrease both to the efforts of the tech industry and to new legislation.
Companies once were “turning a blind eye to where they're getting their materials from,” said Lezhnev. But after considerable pressure from advocacy groups and college students, more of them have become aware of the issue.
“Sunshine,” he said, “is the best disinfectant.”
http://www.enoughproject.org/blogs/new-enough-report-dodd-frank-decrease-conflict-minerals-trade-congo-smuggling
http://www.enoughproject.org/blogs/us-companies-making-strides-be-conflict-free-congo-despite-industry-lawsuit
Trouble is this lawsuit could seriously drag things out when activists would be happier moving some of the pressure onto other sectors of the supply chain to get them to follow the Tech sectors example and getting other countries to follow Americas lead and bring in their own laws.
The lawsuit is actually disadvantaging American manufacturers who could be benefiting more from their greater knowledge of the issues and actions already taken.
Journey to compliance
Even after the SEC deadline arrives, the task of reducing or eliminating conflict mineral usage will continue.
“Compliance with the conflict mineral rule is about the journey, rather than the destination,” King noted. “Companies will have to arm themselves with information, tools and procedures to continually monitor their supply chains for conflict minerals.”
Think we all agree with that anyway.
http://www.raisehopeforcongo.org/companyrankings
http://www.enoughproject.org/blogs/new-evidence-links-rwanda-and-uganda-congo-rebels-whats-impact
It is a daunting task to determine where materials are sourced. A lot of trust will need to placed on one's suppliers to make sure they are complying and being honest with you in their reporting.
You're right! Electronics companies have enough time to comply, but a lot of trust will need to be put on one's suppliers.
The electronics supply chain has many layers. Mines extract ore, send it to a smelter to produce a rough (60-65 % pure) material, then smelters send it to local refiners who produce a high purity material, that refiners sell to manufacturers. Once smelted there is no practical way to test to determine mine or country of origin.
Each layer of the supply chain has to conduct its' own conflict minerals due diligence. Smelters must confirm mines of origin. Refineries must rely on smelter declarations. Manufacturers must rely on refinery declarations. Customers must rely on supplier/vendor declarations.
Companies need to start asking suppliers for conflict minerals declarations. They need to document all responses. They also need to review the information they receive and address any inconsistencies in supplier responses.