Nokia Stops Outsourcing Production

More bad news for the electronics contract manufacturing business comes from the world's largest mobile phone maker, Nokia, which announced recently that it would not use any more outside contract manufacturers for the fabrication process of its phones. According to the company, due to weak global demand on the phone market, it would stop outsourcing its production to Electronics Manufacturing Service (EMS) providers or to Original Design Manufacturers (ODMs).

“Amid the global economic recession and slowing sales of mobile handsets, Nokia in recent months had begun the process of shifting some of its assembly operations away from contract manufacturers and back inside the company,” said Adam Pick, principal analyst for EMS/ODM at iSuppli Corp. “However, this announcement clearly illustrates just how severe the situation in the mobile handset market really is.”

Back in 2008, the Finnish mobile phone maker outsourced around 17 percent of the manufacturing volume of its mobile phone engines. The outsourcing included phones and the software that enabled its basic operations, while the companies involved were Foxconn International Holdings, BYD, Elcoteq and Jabil Circuit. Nokia's announcement is bad news for contract manufacturing and mobile handset businesses, yet it shows that the company is able to adjust according to changing market demand.

“This doesn't help the eroding EMS/ODM industry,” Pick continued. “Nokia's pull-back will shed more than $5 billion in revenue from electronics contract manufacturers. That most means more overcapacity, more headcount reductions and, obviously, more problems.”

According to iSuppli, the EMS/ODM market was expected to contract around 9.9 percent of the global manufacturing volume in 2009, or around $270.8 billion, registering a lower demand than a year before, when it reached $300.7 billion, yet Nokia's announcement will drive iSuppli to downgrade its prevision for the ongoing year, as well as that for the years to come.

“Nokia is an operational juggernaut with leading procurement and supply chain techniques,” noted Jeffrey Wu, iSuppli's senior EMS/ODM analyst. “You have to give Nokia credit for maintaining a hybrid manufacturing system that adjusts pursuant to volatile demand patterns.”