Are ODMs Making Inroads into OEMs’ Tier-1 Set Top Box Biz?

The recession immediately hit the electronics supply chain across various verticals, ranging from mobile handsets, to PCs, to GPS navigation devices. As a result, many OEMs and contract manufacturers downwardly revised their shipment and revenue targets for 2008, citing reduced consumer and corporate spending.

However, the Set-Top Box (STB) market remained relatively resistant to the spend stagnation and, in fact, experienced reasonable growth in 2008 and 2009, thanks primarily to the market drivers enabled by the macro environment. The continued growth in the face of economic adversity suggests attractive business potential for OEMs and contract manufacturers.

Steady Growth in the STB Market
Compared to other electronics products whose shipments may stay flat or even decline in 2009—for instance, the GPS portable navigation device market may contract by 0.7 percent in 2009—the estimated annual growth rate of 4.2 percent for the STB market should be considered relatively healthy. For the future, iSuppli maintains that the STB market will continue to grow at a steady rate with a five-year Compound Annual Growth Rate (CAGR) of 8.9 percent for the period of 2008 to 2013.

Increased Outsourcing from STB OEMs
STB OEMs demonstrate a wide range of outsourcing considerations, including asset flexibility, the focus on higher-value supply chain activities, shortened time to market and cost savings.

The percentage of in-house STB manufacturing will decrease to 22.5 percent in 2013, down from 30.9 percent in 2008. In contrast, outsourced STB manufacturing will increase to 77.5 percent in 2013, up from 69.1 percent in 2008. This increase is driven primarily by the leading OEMs’ increasing use of contract manufacturers.

ODM Developments
One of the most prominent developments in 2008 and 2009 is that Original Design Manufacturers (ODMs)— especially those in Taiwan—finally started to gain more meaningful exposure to the Top-10 OEMs. A few have even won programs from Tier-1 OEMs such as Cisco/Scientific Atlanta and Thomson, which traditionally used Electronics Manufacturing Services (EMS) providers such as Elcoteq and Flextronics exclusively to fulfill their outsourcing requirements.

iSuppli’s research reveals that until 2007, STB ODMs mainly served OEMs on an EMS basis (e.g., Calcomp) and Tier-2 OEMs. However, the ODMs’ continued focus on and enhanced design competence in technologies such as IP STB, one of the primary STB segments driving the overall market growth, began to gain traction with OEMs.

The most important implications include:

* More Tier-1 OEMs began to relinquish design activities to external partners.
* The ODMs that tapped into Tier-1 OEMs’ supply chains may see their STB shipment volume grow in the future.

The prospect for STB ODMs, however, is not all rosy. The non-standardized platforms in the STB industry and the lack of economies of scale may cast uncertainty on the future of STB ODMs.