Consolidation will remain a key trend in the Asian technology industry next year, as companies seek to expand their businesses and improve vertical-integration capabilities, according to a report.
"We expect more mergers and acquisitions as well as partnerships to be forged as companies seek to fill in their vertical-integration capabilities, or counter encroachment by new entrants pursuing a vertical-integration strategy," said the report released by Merrill Lynch last week.
Vertical integration is an increasingly popular strategy pursued by suppliers who seek greater customer penetration, enhanced economies of scale, greater revenues and profits, it said.
However, the US investment-research firm cautioned that a vertical-integration strategy is not risk free, as a wrong move by a key manufacturing division may jeopardize the contract under discussion.
It added that there may also be growing risks of overcapacity as specialized suppliers add capacity and new vertically integrated players put in capacity in competing for the same contracts.
Merrill Lynch released the report after concluding a two-week schedule visiting over 40 electronics manufacturing services providers, original-design manufacturers, component suppliers and handset vendors in South Korea, Taiwan, Hong Kong and China.
Its visits reinforced the positive views of companies with cost or technology leadership positions.
This includes Hon Hai Group (
While the firm does not envisage a "winner takes all" end-game, Hon Hai's success in the supply chain is putting pressure on others to expand economies of scale and scope to remain competitive.
"Hon Hai has set the standard for horizontal growth, as it penetrated all high-volume markets from PCs to handsets and networking to consumers. Its vertical integration spanned connectors, plastic casings and wire harnesses, which occurred in record time while maintaining high levels of profitability on the back of aggressive asset turns," the report said.
It added that networking and automotive are next on the company's agenda.
The success of Hon Hai's vertically integrated business model is being emulated by many other firms, Merrill Lynch said.
"We remain concerned that too many players are pursuing aggressive vertical-integration strategies in the electronics supply chain that could be disruptive to aggregate profitability," it said.
In a bid to generate favorable levels of profitability, a fresh product mix is gradually more critical to technology firms in Asia, according to the research firm.
"While high utilization rates and solid manufacturing yields continue to strengthen performance, commoditization of the manufacturing process means that a fresh product portfolio is becoming an increasingly important factor in profitability," the report said.
However, it is more difficult to ensure and thus predict a fresh product mix, which suggests that earnings volatility could increase for component vendors, it said.
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