Will automotive save the day for EMS?

A report just out from Deutsche Bank Securities has led to the downgrading of shares of six EMS companies: Jabil, Solectron, Plexus, Sanmina-SCI, Flextronics and Celestica.The report put the sector’s woes down to a glut of capacity, with plant utilization in 2002 down to as low as 44%, in an overall electronics sector that is forecast to see capacity utilization levels at around 65%. The bad news for the industry’s players is expected to be compounded by the fact that additional low-cost capacity is coming online in China.While companies expect to be well-placed by this move in the long term, it makes the current situation extremely difficult, and given the fact that spending in the IT, infrastructure and consumer markets is unlikely to see any major upswing this year, only those who have some fat built into their company structures will be able to play the waiting game, say most analysts.Not all are so gray in their outlook, however: Alexander Blanton of Ingalls & Snyder says that automotive will prove to be the fortune of the EMS sector. Indeed, he cites Solectron’s November quarter revenues, doubled from the year previous to $95 million, and Jabil’s reports of contracts to build similar products rising to $104 million in the last quarter, compared with $68 million the previous year. Blanton is optimistic that this higher margin sector holds a great deal of potential for EMS: the cost of goods sold in automotive electronics is about $50 billion, he says, but only about $1 billion a year is outsourced – on the basis of this, he expects capacity utilization to improve this year.He would be in agreement with those industry voices and observers that have always held that the way forward for Europe’s and the US’ Electronics manufacturers is to invest in high margin advanced electronics.