Making a Move? Try Eastern Europe.

Two major factors are driving contract electronics manufacturing (CEM) growth in Europe-telecommunications and Eastern Europe. According to a report by MHM's (Ayr, Scotland) Technology Research Center, European CEM Future Growth Targeting Volume I-Key Sectors, Regions and Strategy, the majority of European expansion, forecast in the next three years, is emanating from indigenous European companies such as Ericsson, Nokia, Alcatel, Siemens and Marconi in the telecommunications sector. Overall, MHM is predicting $38 billion in new CEM business-encompassing telecommunications, medical, automotive, networking and mass storage-in the region by 2003.

Eastern Europe Takes the Lead

With such massive growth forecasted, MHM recommends that half of any CEM's development budget be focused on development in Eastern Europe and Turkey. Both countries share a low-cost base, internal demand and geographic proximity to Europe's center. Threats to expansion in the region do exist, such as the possibility of an economic downturn and the risk of saturating the local market, but the opportunities for CEM growth largely outweigh these risks.

Organic company growth and original equipment manufacturing (OEM) site acquisition offer exceptional opportunities for CEMs. Site acquisition has historically been the most important business development tool in Europe, but, for high-growth sectors where many sites have already been divested, organic expansion will become increasingly important. Western Europe is forecast to register a 19.4 percent per annum (PA) growth rate from 1991 to 2003. Eastern Europe, for the same period, is forecast to experience a 36 percent PA growth rate-nearly double the growth of Western Europe.

Growth by Technology Sector

Telecommunications sector growth is staggering-current forecasts show the sector will encompass 50 percent of new European CEM business endeavors. The increasing popularity of the sector can be attributed to a 60 percent PA historical growth in mobile/telecom CEMs in recent years and the fact that Eastern Europe requires significant telecommunications infrastructure and handsets (for local demand). A much smaller sector, medial at $428 million, offers many future opportunities in the region.

The computer and retail sectors have declined from 30 percent of the market to just over 20 percent-the forecast for 2003 is approximately 17 percent. A continuing decline should serve as a warning to CEMs over-subscribed in the computer sector.

Growth by Region

As a region, Eastern Europe is forecasted to deliver a 56 percent PA growth due to low labor and land costs, indigenous demand for electronics systems and location near the center of Europe-possibly becoming a significant draw over Asian countries. In fact, many Japanese and Asian companies now have East European bases.

-United Kingdom and Ireland

From early 1998 to 2000, the United Kingdom experienced only 2 percent PA growth-narrowly avoiding a decline. The slow growth, according to MHM, is a reflection of the burgeoning market in Eastern Europe. The United Kingdom and Ireland have a fairly mature electronics market and cannot boast optimal geographic location to European centers of business. Personal computers, including printed circuit board assemblies (PCBA) and box build, account for more than half of the sector's CEM services, which are concentrated in a handful of customer accounts.

The near-term outlook for the region can be summed up in one word: consolidation. Smaller plants will merge with larger competitors; and new products, currently made by OEMs, will transfer to CEMs. Although Ireland has shown a PA growth rate of 24 percent, this number is a result of OEMs being acquired by CEMs and limited organic growth.

-Germany, Austria and Switzerland

The forecast for Germany is good-the willingness of global CEMs to acquire plants in high-cost European countries will boost electronics markets growth. The high forecasted growth in telecommunications CEM facilities in Germany, Austria and Switzerland is based on Siemens, Alcatel and Nortel site divestiture possibilities.

-France and Benelux

The professional CEM market in France and Benelux has grown, over the last two years, at 12 percent PA. This number is somewhat misleading as the growth can be attributed to three companies: SCI, Flextronics and Sanmina. In other words, the general market is not increasing, but specific high-growth OEMs, with global outsourcing requirements, are responsible for the figure. The divestment of Alcatel, Nortel and other plants will be the main growth driver in the region in the near-term.

For more information on the report, contact MHM, 00 44 (0) 1292 263625.

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