Electronic Subcontractors in Big Trouble

Nokia (NOK - Snapshot Report) and Samsung have turned handset manufacturing in-house, a big blow to concerned subcontractors. iSuppli estimates that Nokia’s decision alone would cost its subcontractors Foxconn, BYD, Jabil (JBL - Analyst Report) and Elcoteq more than $5 billion. Nokia announced its decision in March 2009.

The decision can be traced to the sorry state of the handset market, which is expected to decline around 10% this year. The subcontractors dependent on Nokia and Samsung were particularly unfortunate, as these companies were always less dependent on them. Although they were willing to tap the cost saving opportunity, they continued to maintain and even build their own facilities and supply chain relationships.

When the market was strong, outsourcing helped to take on additional business and earn higher profits. But with the recession and declining demand, they were faced with inventory accumulation and lower utilization of internal facilities. Therefore, both the number one and two players decided to forego outsourcing until the situation warranted a further change in plan.

From what we can tell so far, the decisions by the top two will not have too much of a ripple effect, since other large handset OEMs such as Motorola (MOT - Analyst Report) and Sony-Ericsson ( a 50-50 JV between Sony [SNE - Analyst Report] and Ericsson [ERIC - Analyst Report]) do not have their own facilities, and therefore, remain dependent on them.