While Severe Acute Respiratory Syndrome (SARS) may have put a scare into the electronics supply chain, it hasn't derailed the historic migration of contract manufacturing to China, iSuppli Corp. believes.

The outbreak of SARS has prompted global contract manufacturers-i.e. Electronics Manufacturing Services (EMS) providers and Original Design Manufacturers (ODMs)-to place greater emphasis on maintaining or establishing production in other low-cost regions, outside of China. This phenomenon, plus continuing softness in electronics markets, has prompted iSuppli to trim its 2003 forecast for contract manufacturing in China.

However, iSuppli still predicts rapid growth for China and eventual preeminence for China and Taiwan in the global contract manufacturing business. Due to its business-friendly environment, high-quality inexpensive labor, and expanding urban middle class, China remains at the center of EMS global restructuring efforts.

EMS production revenue in China will rise to $66.7 billion in 2007, up from $17.9 billion in 2002, iSuppli predicts. By 2007, China will account for 44 percent of worldwide EMS production and a staggering 82 percent of Asia/Pacific EMS manufacturing.

When factoring in total contract manufacturing, i.e. EMS plus ODM-in both China and Taiwan- manufacturing revenue in the region is expected to rise to $148 billion in 2007, up from $47 billion in 2002. The figure presents iSuppli's forecast for combined EMS and ODM production in China and Taiwan from 2001 to 2007.

With such rapid growth, China and Taiwan will control 50 percent of all contract manufacturing production revenue by next year, and 58 percent by 2007.

However, despite China's rise, success is not assured just by transferring production there, iSuppli believes.

Competition from ODMs and their expansion into new application markets will present a challenge to EMS companies. ODMs are based in Taiwan and their cultural and linguistic ties to China can give them an advantage doing business there, compared to their western-based competitors.

Furthermore, the migration of electronic component sourcing to China could result in competitive disadvantage to companies unaccustomed to EMS companies trying to do business there.

And SARS could still emerge as a major threat to EMS growth in China and Asia. iSuppli's present forecast assumes control of the spread of the disease within the next few months. If the epidemic worsens and lingers for longer, it will have a more significant impact on iSuppli's forecasts.

However, with EMS companies and ODMs continuing to view China as they key to their manufacturing operations, it appears that the China migration remains on track.

More information on this topic can be found in Hudson's latest report, China: Still the Key for EMS, from iSuppli's Electronic Manufacturing Services (EMS) service. Contact Hudson at shudson@isuppli.com