US electronics manufacturing service providers, tired of the shrinking margins and volatility of computers and consumer electronics, are shifting to other businesses. If they are successful, they'll be making more lights, plastic packages, and syringes than computing devices.
In a quest for revenue growth, higher margins, and less volatility, contract manufacturers are becoming diversified manufacturers. The writing has been on the wall for some time, as these companies have taken big revenue hits when a particular computer or consumer electronics product fails. The fall from grace of BlackBerry hit the bottom lines of both Celestica and Jabil Circuit over the last couple of years. More recently, Flextronics may suffer from Lenovo’s acquisition of the mobile phone business from Google and the low-end server business from IBM. Flextronics manufactures both. In fact, about 18% of the company’s revenue in the last quarter came from these two businesses. Although it may take a year or two, some analysts believe Lenovo will bring the manufacturing of both in house, or at least to low-cost Chinese factories.
Jabil has shifted dramatically away from electronics through key acquisitions in materials, packaging, and healthcare. In 2007, 93% of Jabil's business was electronics. As of 2013, that had shrunk to 65%. And there are more acquisitions to come. Mark Mondello, newly appointed as CEO this year, said at the company’s analyst day in October that acquisition would be a key part of Jabil's strategy going forward.
A big step in its diversification effort was its purchase of Nypro Inc. last year. Nypro is a precision plastics manufacturer that derives much of its revenue from disposable medical products, like syringes. Nypro CEO Courtney Ryan says healthcare disposables and consumables is a $65 billion market. Such products may seem low end, but they aren't, really. They require high-quality, precision design and manufacturing, which translates into higher margins for Jabil. In fact, the next step for Jabil could be putting the actual drugs in some of these devices before shipment. If you make an inhaler, for example, why not go ahead and ship it filled with asthma medication?
Nypro also makes rigid plastic packaging for food, household, and personal care products, a market estimated to be worth $130 to $140 billion. So the acquisition means Jabil now makes packages for some new, huge Fortune 500 customers like Kraft and Proctor & Gamble.
Flextronics has followed a similar path. Last year it acquired RIWISA AG, a Swiss company that does high-precision injection molding for the medical, consumer packaging, and industrial products market. It also opened a medical design center in Milan to help its customers design medical devices, drug delivery devices, medical equipment, and disposables.
More recently, Flextronics entered the lighting business. Already in green energy markets — it builds solar panels and smart meters, for example — last year it launched a lighting solutions business unit and started building commercial and industrial LED lighting systems. It is selling these through retail channels and also working with lighting manufacturers and OEMs to make the products available under private labels.
Even if they stay in the computer or consumer electronics market, EMS companies are more interested in the plastic than the electronics. Plastic resin is increasingly used in mobile phones. For evidence, look no further than the latest model of the iPhone, the iPhone 5c, which uses a plastic polycarbonate enclosure.
“With the introduction of the 5c, Apple now is part of a rising wave of plastic in the smartphone market — and in the overall electronics business,” says Jagdish Rebello, senior director for consumer and communications at IHS. The use of plastic resin in mobile phones is already a multi-billion-dollar business, and has tremendous growth prospects, according to IHS. In addition to enclosures, it is used in smartphone mounting brackets, display frames, display backlight guides, insulator sheets, and vibration cushions. As the market for low-end smartphones grows, IHS forecasts that plastics will be increasingly used for more mechanical and optical components as well.
What do these shifts mean for the computer and consumer electronics OEMs? Only time will tell. In the meantime, share your thoughts in the comments section below.