Frost: Growing Opportunities for EMS Providers in North American Auto Industry

October 6, 2006 // Published as a news service by IHS

With the automotive industry increasingly transitioning from a mechanical to an electronic era due to rapidly rising demand for entertainment, safety and under-the-hood electronics, analysts said automotive electronics is emerging as one of the most "exciting" areas in the industry today.

New analysis from Frost & Sullivan of electronic manufacturing service (EMS) opportunities in the North American automotive industry found revenues likely to grow from $1,047.4M in 2005 to $31,08.8M in 2012.

Analysts said the trend toward outsourcing certain key operations to benefit from technical expertise and cost-effectiveness is gaining ground in the automotive industry and creating opportunities for EMS providers.

Original equipment manufacturers (OEMs) and tier one suppliers are realizing the advantages of automotive outsourcing at a time when the electronic content in cars is expanding and expected to continue doing so.

"The increasing amount of electronic content and continuous technological advancements are acting as major incentives for OEMs and tier one suppliers to outsource to EMS providers," said Frost & Sullivan research analyst Lavanya Ram Mohan. "Thus, the automotive industry, which was once a niche segment, has developed into a full-blown profitable market offering largely untapped opportunities to these providers."

The North American opportunity for EMS providers is likely to increase at a compound annual growth rate (CAGR) of 16.8%, analysts said. Of the three major categories of automotive electronics - infotainment, safety and others, such as powertrain, body/chassis and navigation - infotainment is experiencing the highest demand today.

Revenues in this category are likely to grow at a CAGR of 17.8%. Safety electronics will also realize greater demand with an increased consumer and government-mandated focus on safety.

Despite numerous opportunities ahead, EMS providers could face considerable challenges in penetrating the demanding automotive industry. Analysts said OEMs place great emphasis on exceptional quality and zero-defect production lines, compelling EMS providers to achieve the same. However, maintaining such high levels of quality for products manufactured in massive quantities is likely to be a difficult task for these providers.

Analysts said EMS providers tend to underestimate the exacting nature of the automotive industry, considered one of the most difficult areas to break into. They often fail to realize the complexity and responsibility that comes with contracts to manufacture automotive electronics.

"If EMS providers learn the strategies and techniques that will help them penetrate the automotive industry, they can look forward to plentiful opportunities to capitalize on," said Mohan. "Growth in this industry is a continuous journey and successful EMS providers are likely to enjoy long-term contracts, with a fairly stable demand from consumers."

Source: Frost & Sullivan.