No one should be surprised by yesterday's IHS forecast for a slight decline in EMS and ODM revenue in 2012. The only real question: Why so optimistic?
IHS expects the EMS sector's top line to rise a negligible 0.3 percent from $206.8 billion in 2011 to $207.5 billion in 2012. The ODM sector will contract 2.3 percent from $153 billion to $150 billion.
The forecast is predicated on Europe having a tough year as a consequence of the sovereign debt crisis. All eyes are watching Greece to see if its plan to reduce long-term debt will satisfy creditors and restore investor confidence. The country's next bond repayment is due in March. A default would likely send Europe into a recession that would jeopardize the fragile US recovery.
The EU's share of the global electronics market is about 30 percent, and the US share is slightly smaller. If both the EU and the US suffered slower or negative economic growth, that would be a serious blow to corporate and consumer electronics spending worldwide. It goes without saying that the EMS and ODM sectors would feel the full force of that.
The saving grace is China, which IHS expects to post high single-digit economic growth for the year. China is the world's largest consumer of smartphones and PCs, so the forecast bodes well for keeping EMS and ODM factories humming. But China faces its own economic challenges, including an export market that would falter if Europe and the US headed south. Then there's a housing bubble reminiscent of the US one in the middle of the previous decade. If China's bubble burst, then forecasters would ratchet down their economic projections for the country. And companies like IHS would ratchet down their forecasts for the EMS and ODM sectors.
Right now, ODMs are projecting total output of around 180 million units for 2012, according to Thomas Dinges, senior principal analyst for the EMS and ODM sectors at IHS and the man responsible for the latest forecast. At this time last year, ODMs were projecting 200 million units, he said, but over the course of the year, that figure declined 22 percent to about 155 million, give or take a few million.
So there's no guarantee that the 180 million figure being projected for 2012 will remain solid. In fact, given all that could happen, it's likely that number will be lowered.
Dinges sees one reason the figure could remain relatively strong: Apple Inc. (Nasdaq: AAPL). That company's largest ODM is Foxconn Electronics Inc. , which accounts for about 50 percent of the total ODM output. If Apple has a good 2012 -- and its fourth-quarter earnings offer no reason to suspect it won't -- then the ODM sector might be OK.
So if the EU manages to navigate its way through its debt problems, the US builds on the momentum of its recently reported 2.8 percent GDP growth for the fourth quarter, and China can maintain its GDP growth at 8 or 9 percent, then all will be well in the EMS and ODM sectors.
Those are some mighty big "ifs."