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Mobile handset ODMs squeezed by EMS providers and Motorola's disappointing performance

By Jeffrey Wu - iSuppli Corp.

Mar 14, 2008

Original Design Manufacturers (ODMs), which have dominated the market for outsourced production of mobile handsets, are facing rising competition from their contract-manufacturing cousins in the Electronics Manufacturing Services (EMS) business, causing ODM shipments of such products to decline in 2007. 

ODMs' aggregate worldwide wireless handset shipments decreased by a sharp 18.5 percent to 103.8 million units in 2007, down from 127.3 million units in 2006, according to iSuppli Corp. Because of this, the percentage of the wireless handsets manufactured by ODMs decreased to 9 percent in 2007, down from 12.9 percent in 2006. Figure 1 presents the percentages of in-house versus outsourced mobile handset manufacturing in 2007. 


In contrast, EMS providers as a whole accounted for 21.1 percent of worldwide mobile phone shipments in 2007, up from 16.6 percent in 2006. In other words, the ODMs' influence in the mobile handset business dipped in 2007 and ODMs yielded manufacturing share to the EMS providers.

What caused this decline, and what will happen to the ODMs' mobile-handset business in the future?

OEMs' performance and outsourcing strategies impact ODMs
The ODMs' shipment decline can largely be attributed to Motorola Inc.'s disappointing performance in the mobile-handset market. Taiwan-based Compal Communications Inc. (CCI) became the largest mobile phone ODM in the world soon after it entered into partnership with Motorola in 2004. During the last two years, CCI supplied more than 25 percent of Motorola's global wireless handset shipments.

Motorola has been CCI's largest OEM customer and accounted for 91.3 percent of CCI's annual mobile phone shipments in 2007, despite CCI's effort to diversify its customer portfolio. Figure 2 presents CCI's primary wireless handset OEM customers in 2007.

In 2007, CCI revised its shipment estimates downward - and downward again - throughout the year. In the end, CCI shipped 48.7 million wireless handsets, 30.5 percent less than its 2006 shipments of 68.8 million units and 34.7 percent lower than its original 2007 target of 75 million units - largely due to Motorola's reduced orders.

In the wireless handset ODM market, a situation of heavy reliance on a single customer is not unique to CCI. Nonetheless, CCI's failure to meet its originally projected shipment target was definitely a blow to wireless handset ODMs as a whole.

Increased competition from EMS providers
On the other hand, ODMs also encountered fierce competitive threats from EMS providers in 2007. EMS companies such as Foxconn and Flextronics have extended their capabilities to include ODM offerings during the last few years through strategic acquisitions. These companies now are winning programs from ODMs by leveraging the benefits of these EMS providers' extensive global footprints and vertically-integrated supply chains.

Diversification is key
The ODMs' setback in 2007 revealed the problems of the business model they now commonly employ. iSuppli suggests that only through diversification in customers and by adding higher-value design provisions can ODMs improve their business prospects. 

iSuppli recommends:

-- ODMs should focus on telecommunications operators in emerging markets such as China, India and Brazil because these operators enjoy high channel power represented by increasing consumer demand.
-- ODMs should concentrate on currently underserved product categories (such as CDMA phones, smart phones and GPS phones) to enhance their value proposition.

Jeffery Wu is a senior analyst for EMS and ODM services at iSuppli Corp. For media inquiries on this article, please contact Jonathan Cassell, editorial director and manager, public relations, at jcassell@isuppli.com  For non-media inquiries please contact analystinquiry@isuppli.com  

A more detailed analysis of the wireless handset value chain (including OEM outsourcing strategies, OEM-EMS-ODM relationship maps, rising independent design houses and contract manufacturer deployments) can be found in iSuppli's recently released report, Global OEM Manufacturing and Design Analysis (GOMDA) – Wireless Handset Module. For more information on this report and the GOMDA service, please visit: http://www.isuppli.com/catalog/L2_goma.asp

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