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Five Sources of Risk in 2011

The Charlie Barnhart & Associates Composite Risk Index continues to climb, indicating accelerating risk for the electronics manufacturing industry. However, with the announcements of a return to growth, and most analysts saying there's no danger of a double-dip recession, where does the risk come from? Our latest analysis indicates these five sources of risk:

  1. Cost of labor.
  2. Prices for both EMS and ODM services in China have increased and are forecast to continue to increase at a rate of approximately 1 percent per month for at least the next six quarters for an aggregate of at least 20 percent. This is without taking into account {complink 2125|Foxconn Electronics Inc.}'s announced raises (unlikely) and the Chinese government agreeing to ease currency protections (also unlikely).

  3. Risk of failure in Tier 1 EMS.
  4. Recent actions at the Tier 1 EMS level have virtually guaranteed some type of catastrophic event at the “Goliath fringe.” In the 1990s and early 2000s, Solectron Corp.'s strategy of top-line growth at the expense of profits led to its eventual demise and acquisition by {complink 2085|Flextronics Corp.}; we see similar behavior among Tier 1 EMS and global OEM customers. A failure at this level will have repercussions throughout the supply base.

  5. Abrupt slowdown in government spending.
  6. Companies selling to the military and government markets are facing uncertainty as stimulus money runs out and austerity measures kick in across the developed economies. In the US, the day of reckoning for state budgets, combined with eventual defense budget cuts, will bring many programs to a halt, sometimes without warning. This is already reflected in some earnings guidance. For instance, {complink 1131|Cisco Systems Inc.}'s surprising announcement of a lower than expected annual sales forecast are attributed by TheStreet.com in part to cuts in capital spending by state governments.

  7. Global market rebalancing.
  8. Lip service is being paid to the need for emerging economies to open their markets to slower-growth, developed economies. Overall, this is good for everybody, because emerging markets need to become less export dependent and their citizens need access to the world's goods and services. Developed economies, on the other hand, need to find new markets for their products. However, making this happen will require a level of global cooperation that seems unlikely.

  9. Global complexity beyond the ken of C-suite decision-makers.
  10. Currency and tax issues, the challenges of global emerging markets, the unique history and challenge of outsourcing electronics manufacturing, and rapid changes in technology have created a perfect storm situation for C-level executives in OEM corporate boardrooms. Engineering and technology are no longer the main drivers for strategic planning, and the potholes and pitfalls are much more difficult to navigate than they were in the past. Operations and supply chain managers are cautioned to manage this carefully, as they will see potential supply disruptions before the top executives do.

Note: The CBA Composite Business Risk indicator is an estimate of the overall supply risk in the global EMS sector and is related to the Geographic Constant in the Global Risk Module (GRM) tool of the Outsourcing Navigator Series. It also includes factors related to monetary exchange, economic forecasts, infrastructure scalability, cost and availability of resources (including energy), outstanding regulatory and geo-political issues, status of down-slope supply-chain, availability of up-slope services, cost and availability of capital, fixed asset utilization rates, book-to-bill ratios, current delivery trends, lead-time projections, and a quality rating factor.

4 comments on “Five Sources of Risk in 2011

  1. Barbara Jorgensen
    November 15, 2010

    Hi Jennifer–good stuff. There's always risk in business but you can't always see where it is coming from. I think CBA's point about the shifting global economy will have more of an impact than anyone expects it will. As Bolaji points out, everyone is circling the wagons but reaching developing economies is going to be crucial long-term for the more devloped nations.

  2. elctrnx_lyf
    November 16, 2010

    I think it is very clear that developed nations has to reach the emerging countries to generate revenue. With most of the consumer electronics are already making huge amounts of profict for the companies by seeling their products in the emerging countries, now the bigger companies should lead in the front and to work along with the governments of developing nations to define the strategies for growth and to market their products and services.

  3. SP
    November 23, 2010

    Nice article. Cost of labor is definitely going to increase in Asian countries.

  4. eemom
    November 24, 2010

    I agree.  While labor cost will increase and perhaps the cost of doing business in general will increase, OEMs need to be more creative about how they plan to grow their business in 2011 and beyond.  Government stimulus money will not last forever and companies have to re-adjust their internal costs accordingly.  Perhaps developing the strategy to market to developing countries to increase revenue is the answer.

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