TAIPEI/SINGAPORE - A SHAKE-OUT is brewing among the world's top manufacturers that toil anonymously to make the latest cellphones, iPods and other gadgets for big names such as Nokia and Apple.

The end game could see some of the unsung contract manufacturing industry's biggest names, such as Singapore's Flextronics and Taiwan's Hon Hai, driving a wave of consolidation that will boost their top customers while squeezing some of the smaller ones.

Contract manufacturers produce much of the world's electronics, with collective revenue of US$306 billion last year, making everything from PlayStations for Sony to notebook PCs for Dell, according to research firm iSuppli.

But growth is expected to dip into single-digits this year, and companies such as Celestica, Sanmina and Elcoteq saw revenues contract last year as margins erode all around.

'The competition is becoming more intense,' said Mr Calvin Huang of the Daiwa Institute. 'We will see another round of consolidation among these (contract) providers.'

The looming consolidation could prove a boon to major brands such as Motorola, Nokia and Sony, whose big spending outlays are attractive to mega-manufacturers, analysts said.

But smaller brands could be squeezed as competition shrinks for their business and new mega-players aggressively pursue top global brands.

While the bigger contract manufacturers will struggle to sustain recent double-digit growth, the mid- to lower-tier players will face pressure to be acquired, find new niche areas or be forced out of business.

Also, gadget sellers that rely on the big contract manufacturers to churn out their wares are starting to worry they could get squeezed in the upcoming consolidation, said Adam Pick, an analyst at iSuppli.

'Several of our ... clients are already concerned about supplier power from the mega-tier and niche providers,' he said. 'This industry is and will continue to be volatile.'

Slowing growth
Taiwan's Hon Hai exemplifies the sector's slowdown.

The company's revenue is forecast to grow 20 per cent this year to NT$2.05 trillion (S$90 billion), according to Reuters Estimates, down from 75 per cent growth three years ago. Margins have dropped to 9.7 per cent last year from 25.2 per cent in 1999.

While Hon Hai has been quiet on the M&A front, Flextronics has been more active, making a number of purchases including its landmark US$3.6 billion acquisition of Solectron last year.

That deal helped Flextronics, whose revenue actually shrank in 2006, notch 46 per cent growth last year.

Hon Hai and Flextronics shares are both down more than 20 per cent this year as their growth slows, though many mid-tier players are up on hopes they could become acquisition targets.

Top firms with good growth prospects such as Hon Hai's Foxconn International and Chinese telecoms giants Huawei and ZTE should drive the consolidation, said Neil Mawston, an analyst at Strategy Analytics.

But even the best prospects aren't immune to global economic cycles, as Foxconn showed earlier this week when it forecast a profit shortfall that sent its stock plunging 20 per cent.

Potential targets would be niche players such as Taiwan smartphone maker HTC's contract manufacturing business, or smaller firms with potential, such as Elcoteq, he added.

Singapore's Venture Corp makes no secret of its ambitions.

'We have a couple of targets on our radar, including medical, aerospace and other niche areas,' Chief Executive Wong Ngit Liong said last week after the company posted a 17 percent drop in second-quarter profit.

As consolidation occurs among the largest and second-tier players, smaller ones may be able to find refuge in high-margin niche areas such as medical and automotive devices.

'If there is a new wave of consolidation, it's most likely to be between leading firms,' said Mr Michael Palma, an analyst at International Data Corp.

'What may also take place is that the smaller firms may ... move into branded (contract manufacturing) business or other businesses in aligned industries.'

One area likely to avoid the crunch is the notebook PC-making sector, led by Taiwan's Quanta Computer, Compal Electronics, Asustek and Wistron While other sectors mature, notebook PCs are still expanding rapidly as smaller computers replace bulkier desktop models. Unit growth this year alone is expected to reach about 25 per cent, according to various estimates.

'Maybe in some mature industries we'll begin to see this consolidation happening,' said Daiwa Institute's Huang. 'But for the notebook PC industry it's not likely just yet as it's still growing fast.' -- REUTERS