What Happens When a Major Customer Implodes?

It seems {complink 987|Celestica Inc.} placed a large bet on the wrong horse. In the next year or so, about 20 percent of the Canadian contract manufacturer's revenues will disappear as turmoil at {complink 4644|Research In Motion Ltd. (RIM)} wreaks havoc on the extended supply chain of the BlackBerry smartphone manufacturer.

Celestica, in a recent statement, said “over the course of the next three to six months, it will wind down its manufacturing services for Research in Motion.” This will result in the loss of about $1.4 billion of Celestica's annual $7.2 billion revenue.

Similar pain is being felt at hundreds of small and large companies around the world that supply components and other services to RIM, due to declining sales and eroding market share at the wireless handset vendor. As RIM's struggles intensify, the company is focusing on measures to reduce operating costs, including a reduction in the number of businesses that provide contract manufacturing services or supply components. That trend has accelerated and is spreading panic across its supply chain as sales continue to deteriorate: Analysts are projecting RIM's fiscal 2013 revenue will decline sharply to $12.85 billion in the year ending February 2013, down nearly a third from $18.5 billion in fiscal 2012.

A severe plunge in sales like this can be disastrous for supply partners and other support services providers in an OEM's manufacturing ecosystem. RIM, for instance, will require fewer dedicated contract manufacturing factory space, an ever smaller quantity of components, reduced logistics services support, and perhaps a one-third reduction in after-sales and warranty fulfillment functions. While direct services providers like Celestica will initially feel the pain, the overall effect will extend through the entire supply chain, hurting suppliers' suppliers and reverberating at non-tech companies such as retailers, real estate firms, and financial services providers.

RIM is only the latest in a growing line of high-tech companies to be hammered by a combination of economic downturn and competitive displacement by rivals. Finnish wireless handset manufacturer {complink 3847|Nokia Corp.} is in the same boat and may be heading down an even sharper river fall. Coming along for the disastrous ride are numerous suppliers, service providers, and support companies that Nokia estimates number in the thousands. “Our supply chain is extensive and complex and altogether we have thousands of direct and indirect suppliers,” Nokia said in its 2011 annual SEC filing.

Suppliers to Nokia can expect a wild ride as its sales fall. Its annual sales fell to approximately €38.7 billion (US$50 billion) in 2011, down from €42.5 billion in 2010 and €50.7 billion in 2008. Analysts' consensus estimate is for Nokia's 2012 sales to decline more than 20 percent to $39.5 billion. {complink 5703|Texas Instruments Inc.}, for instance, saw the problem brewing years back and began cutting back on its exposure to Nokia.

The first set of companies being hammered by events at Nokia are component suppliers, especially semiconductor vendors. Together with contract manufacturers, chipmakers, and other component manufacturers, these suppliers account for a major chunk of Nokia's €27.3 billion in cost of goods sold in 2011. As its revenue nosedives, so will the fortunes of these companies. In fact, those with a large exposure to Nokia may not recover.

Nokia acknowledged the effects of its changing business dynamics on its supplier base in a recent annual SEC filing, noting:

    The intensive competition among our suppliers and the resulting pressure on their profitability, as well as negative effects from shifts in demand for components and sub-assemblies, may result in the exit of certain suppliers from our industry and decrease the ability of some suppliers to invest in the innovation that is vital for our business.

However, while component suppliers and contract manufacturers will suffer as OEM customers' fortunes ebb, the eventual loser on a longer-term basis may be the OEM itself. Companies that survive the winnowing that follows the death spiral of an OEM gravitate away from that line of business, and even those that continue to serve that sector dedicate minimal resources to it. When the affected OEMs regain their footings, they may find it difficult to get the previous level of support and may be forced to pay a higher premium for such services.

For instance, last year, after announcing it would discontinue the Symbian operating system in favor of Windows OS, Nokia faced a mini-rebellion from suppliers and vendors. In order to get their continued support for Symbian devices, the company agreed to commit to “future purchase commitments.” Deals like this will dominate contract agreements in the future for troubled firms like Nokia and RIM, especially as more successful enterprises like {complink 379|Apple Inc.} intensify the pressure on the competition by paying ahead for guaranteed component supplies.

As for Celestica, diversification into new business ends such as the “industrial, aerospace and defense, healthcare, green technology, semiconductor capital equipment and other end markets,” holds the promise of greater stability, the company said in its last annual SEC filing. Last year, it bought the manufacturing assets of Brooks Automation and raised revenue from what it described as “diversified end markets… 40 percent from 2010 to just over $1 billion in 2011.”

Today, EBN will host a live chat on the implications of problems at a major OEM for the supplier base. EBN editor in chief Bolaji Ojo and Junko Yoshida, former editor in chief of EE Times, will discuss the direct effects of problems at Nokia and RIM for their contractors and component vendors. The one-hour live chat will start at noon EDT. To attend the session, click here.

10 comments on “What Happens When a Major Customer Implodes?

  1. Himanshugupta
    June 21, 2012

    As and when a company becomes successful with the host of successful products, it creates an ecosytem around the product lines. The financial ill health of the company directly effect its suppliers. To minimize the exposure, what strategy should the suppliers implement? Diversification, passing the risk further down to supply chain, outsourcing etc. are easy to identify but can steps like innovation, M&A, collaboration etc be of any help (as suppliers are mainly dependent on product's development).

  2. Eldredge
    June 21, 2012

    As for Celestica, diversification into new business ends such as the “industrial, aerospace and defense, healthcare, green technology, semiconductor capital equipment and other end markets,”

    Celestica and everyone else will be looking for expansion in these areas. Defense isn't a growth area either right now. I think competition will be pretty stiff.

  3. mfbertozzi
    June 22, 2012

    @Himanshugupta: it is good point to outline; diversification could be a strategy in order to avoid tremendous impact due to major customer's colapse, but is it really feasible? Usually a major vendor really want a given supplier works only for him and subscribes closed contracts for limiting interactions with competitors, for example.

  4. prabhakar_deosthali
    June 22, 2012

    It is a universally followed method that all the Buyers never depend upon one supplier to supply all their requirements. They adopt a share of business strategy whereby for each part to be bought , there will be more than one supplier and that information is embedded in the BOM. The computerized systems automatically distribute the purchase requirements to those suppliers as per their share of business.

    In my opinion the Suppliers should also follow the same strategy. Don't  be a 100% supplier to just one company. Spread your business across multiple companies and across multiple product lines.

  5. elctrnx_lyf
    June 22, 2012

    Its very simple idea for any supplier to not depend on a single customer. But manier times it may not practical to expand your services to multiple customers in multiple disciplines. Some time you may get the blow.

  6. mfbertozzi
    June 22, 2012

    @p_d: that's right p_d, definitely, in an ideal market it should be a very good and profitable model to implement; I was thinking that current financial crisis, maybe, obliges suppliers in accepting some constraints more against leaving their business/deals. I am not sure it is a correct thought.

  7. ahdand
    June 30, 2012

    These sort of factors do happen becasue we do not provide after sales service in a propoer manner. That is the major fault we do. After sales is the most important factor in the business and if we ignore it then the customer will never come back. We should know how to retain a customer which will ultimately bring loads of business to the company.

  8. mfbertozzi
    July 2, 2012

    @nimantha.d: I totally agree with you, until now it was a sector snubbed especially by young people, because the “bubble”  has deluded them to be “manager” – ” product manager, marketing manager, slideware manager…”, but what does manager mean if you are making customers upset without providing right service's level?

  9. ahdand
    July 6, 2012

    Thats exactly my point. If we cant keep the customers happy no point of having marketing managers.

  10. mfbertozzi
    July 7, 2012

    Right! I was wondering why executives from companies didn't feel like this, instead of making bigger the ” bubble “…

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.