Hon Hai’s Huge Size Redefines EMS Hierarchy

The electronic manufacturing services (EMS) industry historically has long segmented itself into tiers, with companies classified into the first, second, and third levels based on their annual revenues. However, with Hon Hai Precision Industries Ltd. alone now commanding more than 50 percent of industry sales, the question now arises whether the tier system still represents a meaningful description of EMS company status.

OEMs often utilize {complink 7427|iSuppli Corp.}'s outsourcing consulting practice when evaluating their contract manufacturing strategies for particular products or product families. As one would expect, there is always a not-so-short list of required qualifications. One of these is specifying the relative tier of EMS provider they want to target.

Historically, the industry has used revenue as the primary gauge of stratifying companies into tiers. Based on anecdotal research, these tier breakpoints haven’t really changed much during the past decade.

EMS companies in the $1 billion to $2 billion in annual revenues and higher range were classified as Tier 1. Those companies with at least $500 million, but not up to $1 billion, were Tier 2. Companies in the sub-$500 million range were classified as Tier 3. Some OEMs go even further by taking the sub-$100 million level and adding a Tier 4 category.

However, given the near-term trends across the industry, is the tier approach still a valid way to describe companies? In the latest reported quarter, for example, Hon Hai reported more than $27 billion in consolidated revenues. That number is greater than the trailing 12-month revenues for the second-largest company, {complink 2085|Flextronics Corp.} of Singapore. Putting this into even greater perspective, that works out to approximately $300 million in revenues for each day of the third quarter.

That level is nearly as large as the reported revenues for the tenth largest company in the industry. iSuppli now estimates that Hon Hai will represent more than half of total EMS industry revenues for 2010 and almost 30 percent of total outsourced manufacturing revenues, that is, EMS plus original design manufacturers (ODMs). Without getting into where the products are produced, what particular OEMs are driving this or any other topic for discussion, this raises the question again of what the “tier” really represents when a single Tier 1 EMS provider is now 50 percent larger than the combined revenues of the next nine companies that follow.

So if by “tier” the industry means which companies have a particular level of revenue, we almost have to start thinking of the moniker more in terms of small, medium, large, and extra-large. If the tier is also used to designate capability, capacity, service offerings, and so on, then there are a significantly larger number of companies with the geographic coverage, supply chain acumen, and manufacturing/design capability to more than qualify in the upper tier. The only thing missing is revenue.

— Thomas Dinges is the EMS and ODM analyst at the market research firm, iSuppli Corp., in El Segundo, Calif. For more information on the contract manufacturing market, see Dinges’s new report: EMS and ODM See Near-Term Pause on Road to Recovery.

5 comments on “Hon Hai’s Huge Size Redefines EMS Hierarchy

  1. Backorder
    November 30, 2010

    This is a tribute to the success of tech firms from Taiwan. Thanks to the Industrial Technology Research Institute (ITRI) which made it possible with a visionary initiative. Others like TSMC alongwith Hon Hai and the vastness of the Hsinchu tech park bear witness to what could be achieved with a focussed effort in the right direction!

  2. Barbara Jorgensen
    November 30, 2010

    Wow. You are right–Hon Hai is in a class all its own.

    I would find this of concern in any industry, though. One company accounting for half of total sales would worry me as both a supplier and customer. Are Hon Hai's customers mostly concentrated within Hon Hai, or do they spreadt the risk? And how much does Hon Hai represent to any one supplier?

  3. elctrnx_lyf
    December 3, 2010

    Hon Hai's performance and the 50% of the market share seems really an outstanding achievement. But I wonder what is happening to companies like Foxconn, sanmina and celestica. All these companies are also leading EMS service providers and these companies are investing lot of money to expand the business still they are no way close to Hon Hai. How is it possible for a single company to own such a huge part of the EMS?

  4. chipthecat
    December 6, 2010

    One thing to point out – Foxconn and Hon Hai are actually the same company.  That said, Foxconn are particularly poor at sourcing components and getting good pricing.  Maybe our product is just too low volume to command their full attention.  Also, I find it odd that Foxconn don't seem able to use their Chinese connections to find components in China when “the West” appears to have run dry.

  5. michaelmaloney
    July 12, 2018

    So are we trying to say that some sort of regulatory restrictions need to be imposed on HonHai to make it fair to all the smaller players who are trying to gain a piece of the pie? It seems like with such a large domination over the EMS market that it might be unfair to consumers in a way right? Perhaps we need to look at other alternatives to see if prices of various products can be brought down simply by allowing more competition to develop in those areas…

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