Contract manufacturing was once just a way for companies to farm out manufacturing needs to companies that specialize in assembling products inexpensively. However, the role of such companies has changed to include repair and warranty services as well as industrial designs. And it's proving to be a high-profit business.
The report from IDC estimated that contract manufacturing was a $103 billion business in 2000 and that it would grow to $231 billion in 2005.
"A lot of well-recognized companies are looking into cost-cutting programs during these tough times, and one easy area is to farm out manufacturing," Kevin Kane, an IDC analyst, said.
Kane added that the more efficiently and affordably a company can get a product made, the lower the cost to build and, ultimately, the lower the cost to consumers.
"However, overall market demand is slowing substantially, which is hurting (contract manufacturing) growth."
Kane said that next year the contract-manufacturing market is expected to grow only 13 percent compared with the 43 percent growth rate from 1999 to 2000. He said an annual growth rate of 20 percent for the market is considered healthy.
Cell phone makers as well as telecommunications and networking companies have benefited from contract manufacturing. But indications that the slowing economy is hurting some of the big names in contract manufacturing became apparent earlier this month when Motorola had to alter its $30 billion deal with Flextronics International because of sagging demand for Motorola cell phones.
Flextronics and Solectron were the biggest players in the contract manufacturing market in 2000 with market shares of 11.8 percent and 13.7 percent, respectively. No other companies had more than 10 percent market share.