Mobile communications brands are choosing to manufacture smartphones on their own, decreasing the chances of growth for outsourced manufacturers that were previously successful in the cell phone market.

The IHS iSuppli Global OEM Manufacturing and Design Market Tracker Report, noted that cell phone original equipment manufacturers (OEM) that have their own manufacturing facilities—a group that includes Samsung Electronics, LG Electronics and Nokia—accounted for 73.4 per cent of all cell phones manufactured in 2012. Meanwhile, the two major types of outsourced manufacturers—electronics manufacturing services (EMS) providers and original design manufacturers (ODMs) accounted for the remaining 26.6 per cent of production.

During the next few years, these percentages are likely to remain largely unchanged, with the outsourced manufacturers' share of shipments rising only slightly more than 1 percentage point to 27.9 per cent—an increase mainly driven by gains in non-smartphone market segments.

"Cell Phone OEMs have been scaling back their use of outsourced manufacturers as they realign their product portfolios towards smartphones," said Jeffrey Wu, senior analyst for outsourced manufacturing at IHS. "OEMs like Nokia, LG, Sony and Motorola all have trimmed their use of outsourced manufacturers to ensure that internal facilities are being fully utilised and not being idled, and also to safeguard the quality of the smartphones being produced."

Nokia and LG, both suffering in the smartphone segment, will experience little change in their overall outsourcing strategies, Wu noted. Motorola, on the other hand, with its divestiture of its manufacturing facilities in China and Brazil, will fully outsource its smartphone production in the future.

EMS beats ODM

Among the two groups of outsourced manufacturers vying for what handset-production business remains, EMS providers will have an edge over ODMs. The primary reason is that Apple, which is well-positioned in the growing smartphone segment, will continue to retain design in-house and engage either EMS providers or traditional ODMs on an EMS basis for production and assembly.

Even so, EMS providers will face their own challenges moving forward. In particular, the once-successful formula for handset production created in the mid-2000s by Foxconn International Holdings—the subsidiary created by Taiwanese manufacturer Foxconn to focus on mobile handset manufacturing—is no longer working. That model relied on three factors: the deployment of manufacturing in low-cost countries, a vertically integrated supply chain that allowed for production synergies; and reference design capabilities that bolstered EMS strength.

But because many handset brands that relied heavily on EMS missed the opportunity to develop smartphones early on, these handset OEMs have been caught up instead with restructuring efforts that include managerial changes, layoffs and capacity reductions—leaving their EMS partners with little to do.