Observations on Mark-up Percentages
Mark-up percentages in all sectors are expected to remain relatively constant into early CY2010 as backlogs and book-to-bill ratios stabilize (except in the Renewable Energy sector which has been extremely and progressively more competitive since the late second half of CY2009).
Historically, during times of flat to falling demand in the EMS industry, average margin expectation tends to be flat to very slightly down at the higher levels (i.e. $100 million and above, as business at this level is extremely competitive at all times), down in the mid-range (i.e. >5M$ <100M$ as Tier I, II and III EMS aggressively pursue these opportunities to back-fill their factories) and flat to up slightly on the smallest projects (i.e. <$1M, as Tier IV EMS who require higher margins to be profitable become the primary solution for most of these opportunities) which is exactly the pattern we have seen over CY2009.
As CBA has previously written, the primary risk factors we see for the EMS Industry in CY2010 and beyond are:
- On-going supply failures associated with issues related to inappropriate construction of the demand/supply solution (i.e. FIT: Flexibility, Integration and Timing).
- Problems associated with the ongoing consolidation of capabilities at all Tier Levels within both the CM and ODM space.
- The probability of additional enterprise failure at all Tier Levels within both the CM and ODM space.
- The significant ongoing shift in the Business Model of Tier I CMs.
- The probability of a shift in the business and pricing practices of Chinese National EMS (considered to be greater than 80% probability in CY2010).
- Continuing pressures related to CSR, Cost of Energy, IP Protection and Global Trade policies.
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