The apparantly invulnerable CEMs also facing the downturn

Finally, the slowdown is gripping the contract electronic manufacturers (CEMs). Once they were supposedly bullet proof. Now compound growth rates of up to 50% per annum are a thing of the past. Two of the biggies, SCI and Sanmina, will merge and diversify their customer base to challenge the leader Solectron. With $11bn in combined revenues, they will be number two. The mid-tier players, on the other hand, have cashflow problems or they are sinking into debt as large OEMs are thinning their supplier base. The European highflier Elcoteq is affected as well: after loosing Ericsson as a major customer earlier this year, Elcoteq is bleeding red ink. About 3000 employees are on the move out. Only Flextronics seems to have escaped the turmoil, reporting a 16% growth in revenue (and 14% gain in profit margins) for the quarter ending June 30th. But does that contain the loss of Motorola’s cell phone business announced on July 2?

The CEM industry enters a new era of consolidation and diversification as it slips from inventory overhang to a downturn that is driven by lack of demand. Price competition and cost cutting is now the rule of the game. Mergers and buyouts should bring back financial clout and stability. However, they also bring problems: integrating – or abandoning – the acquired legacy systems in their supply chain management. CEMs also attempt to shift their monoculture focus from PCs and cell phones of yesteryear to more rewarding infrastructure products. And they again saddle the horses and man the wagons to move out to greener pastures. Case in point: the merger of Sanmina and SCI. About 15% of their North American fab base will be shuttered as their CEM action moves to mainland China. The next manufacturing frontier is open for business. Werner Schulz