FRAMINGHAM, MA — The electronic manufacturing services industry contracted 11% in 2009, less than expected due to a resurgence of consumer spending late in the year. According to a new forecast from International Data Corp., the industry will enjoy a compound annual growth rate of 8% for the 2010-2014 forecast period. But the recovery is still on shaky ground, with periods of weakness expected into 2011.

"While the PC market has roared back to life, the strength of the global economy is still questionable," said Michael Palma, senior research analyst. "With unemployment high, consumer spending will be slow to recover. Meanwhile, most enterprises remain cautious in their spending. Significant expansion opportunities will present themselves, but growth will be uneven throughout the industry, with some segments faring better than others."

In the near term, the PC segment will benefit from the end of ASP erosion and new form factors that will stimulate consumer demand, bringing shipment growth rates back into the low double digits. However, manufacturer concerns about inventory levels and component shortages may limit some growth opportunities. The industry's growth is still largely tied to the PC industry, with as much as a fifth of its revenues coming from PCs. The growing share of the PC segment within the industry has also altered the competitive landscape.

Elsewhere, datacenter expansion and continued interest in cloud computing will stimulate gains in the server, storage, and networking segments, while peripherals (ie, printers and monitors) will experience very low growth due to lagging demand. In the consumer devices segment the signs remain mixed, with emerging economies presenting some of the best markets for consumer spending in 2010 and beyond. The telecommunications segment will be driven by the continued rollout of 4G wireless networks and growth in optical and fiber telecommunications infrastructure.

Over the long term, market conditions will remain difficult for EMS and original design manufacturing (ODM) firms due to multiple issues:

• The shift in the mix of computer and consumer products to lower priced products will continue to place downward pressure on revenues.
• Many OEMs are expected to continue following commodity purchasing patterns, which erode profits for EMS/ODMs.
• OEM desires to increase efficiency in supply chains will continue to pressure lead times and inventory levels.
• Consolidation of OEMs and suppliers will continue even as emerging entrants from developing regions begin to impact global markets.
• Alternative service providers are likely to pose a greater competitive threat to the EMS industry and EMS firms will be challenged to keep providing new value to their client.