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OEM business forms one of the three generic end use markets for wire and cable, alongside Building Construction and Infrastructure. The term »OEM« (»Original Equipment Manufacturer«) applies to the market for wire and cable within the manufactured products of other companies.
Much of the data content of this article is based on Metalica’s Copper Consumption Database, developed in collaboration with the International Copper Association (ICA).
… an undervalued sector …
As the OEM business is almost exclusively a market for copper cable, the copper figures which are presented for 2002 are fairly definitive for this sector of the cable industry.
While the OEM sector is clearly of major significance as a consumer of cable, it is often undervalued by the major cablemakers unless they are OEM specialists. In most cases they tend to focus on the infrastructure and/or the building construction markets. In our report we identify the size of the OEM business, the main business areas within it, the identity of the main OEM consumers and the role of cable within their business profile.
Size of the OEM Business
In our analysis of the markets for cable, we look at the business by applying a nine cell products / application matrix with three product groups on one axis (energy cable, telecom/data cable and winding wire),
OEM & General Market at US$ 21.3 billion
and three application groups on the other (»Infrastructure«, »Building Construction«, and »OEM & General«).
In the table on page four we show our estimate of the global OEM & General market for wire and cable in 2003 at 3.78 mio tonnes of conductor equivalent or 31.5% of total market volume. The term »conductor equivalent« is used as fibre optic cable is included at the notional equivalent of 80 fkm equals one tonne of conductor.
The relative importance of the OEM & General market becomes even more apparent if value rather than volume is taken as a measure. We estimate the segment’s market value in 2003 at US$ 21.3 billion, or 33.0% of the entire wire and cable market. The value is high, despite the large share of low-priced winding wire consumed, because of the high value of many of the insulated wire and cable products used in the OEM & General market.
As can be seen from the table, energy cable products account for the lion’s share of OEM & General wire and cable consumption, although winding wire is also very important. Data cable, though significant, has a much smaller share. The energy cable products concerned include primarily wires linking components within items of machinery and leads linking machines to the electricity outlet.
While our three-tier division of the wire and cable market into generic application groups is useful, it does not tell the whole story about the OEM sector. We break down the OEM & General sector into four application subgroups, labelled »Transport«, »Industrial Equipment«, »Other Equipment« and the »General Market«. The first three subgroups, which are roughly equivalent in size, form true OEM markets, where wire and cable is incorporated within items of assembled machinery.
The »General Market« is rather different. We define the General Market to include items that are not incorporated within machinery and are not destined for the Infrastructure or Building Construction markets. This group includes products such as extension cords that have intrinsic value in their own right, and products that form part of an aftermarket relating to OEM equipment. Winding wire sold for rewinding is the prime example of the latter, although there is also a large aftermarket for automotive insulated wire and cable.
As the General Market cannot really be considered to be part of the OEM group, its estimated US$ 2.11 billion market size should be subtracted from the OEM market. Counterbalancing this, a portion of product that is eventually used in either Infrastructure or Building Construction but which is also incorporated within items of manufactured equipment goes through OEM buyers. Although we have not included these within our »OEM« classification in the products / application matrix shown, it is appropriate to do so when looking at the importance of OEM customers to the wire and cable industry.
So, how large is the OEM component within the Infrastructure and Building Construction end use groupings? We suggest that all winding wire in these groups may alternatively be defined as an OEM product. This group includes utility, non-utility generators, transformers and lamp ballast as its main components. With the comparatively small amount of energy and information cable going into manufactured goods used in Infrastructure and Building Construction, we estimate the total non
the OEM Business is intrinsically multinational
»OEM & General« business that goes through OEM buyers at about US$2.5 billion. Including this, and taking out General Market wire and cable use, gives us a total of around US$21.7 billion of cable products sold to OEM buyers. This represents nearly 34% of the entire wire and cable industry.
Structure of the OEM Market
The OEM business is quite different in structure from Infrastructure and Building Construction. Whereas the latter two groups tend to be local in nature (despite the emergence of multi-national power and telecom utilities and electrical distributors), the OEM business is intrinsically multi-national. The world’s largest fifty OEM’s which account for the lion’s share of the entire market, are mostly organised on a global or at least multi-regional scale. This means that customers have a manufacturing presence in more than one country,
»Intermediates and Assembly Sectors«
differentials in production cost and logistics are being given at least equal weight in the choice of location as local market presence, often much more. The sale of the finished assembled products is often at some considerable distance from the point of assembly.
Another key feature of the OEM business is its multi-tier structure. Manufacturing is not simply a process of collecting together raw materials, processing them and producing final goods. The manufacturers of complex products typically assemble many items that have themselves gone through a manufacturing process by companies that may or may not be close by and to which they may or may not have corporate links. It is therefore valid to look at the OEM business in two categories: the »intermediates« sector and the »assembly« sector.
»Intermediates« producers are companies that make manufactured goods with little or no value other than their ability to be incorporated within items of manufactured equipment produced by someone else. The prime example of an intermediate in insulated wire and cable is the automotive (or other) wire harness. For winding wire, most processing goes through an intermediates stage, primarily through motor manufactures.
We have identified two groups of »assembly« companies. Firstly, the automotive group which form a clearly recognisable sub-market for OEM goods.
The home base of really large OEMs is still in the United States, Western Europe and Japan but…
Secondly, there is what we have defined as the »electrical / electronic equipment« group. In reality this latter group, accounting for over two-thirds of the OEM assembly market, includes many different types of product. We have put them together in one category because the assembly companies involved tend to make a range of products, with their areas of expertise overlapping to such an extent that it is not possible to define separate business groups.
The home base of most of the really large OEMs is still in the mature markets for industrial and consumer goods, namely the United States, Western Europe and Japan. However, this picture is beginning to change, with Korean companies being well established in the ranking and more recently companies from China and one from Brazil entering the list. Despite this, the dominant position of the biggest existing OEMs in their home markets remains and many have managed to penetrate emerging markets successfully, thus ensuring their continued presence at the top of the OEM ranking.
Which are the Major OEMs?
In the discussion above we refer to the top OEMs for wire and cable. It is perhaps relevant to make a note on how we define them.
We have attempted to rank OEM buyers of wire and cable by the amount of wire and cable that passes through their factories. Where cable passes through more than one process phase in a company, it is counted only once to avoid double counting. It should be noted that the top OEMs include companies that make wire and cable, some of which is for external sale. This is included in the wire and cable »pass through« figure, and thus, companies such as Yazaki and Hitachi Ltd. (with its subsidiary Hitachi Cable) are artificially pushed up the rankings. Other companies, which we have deemed to be primarily cable companies rather than OEMs, such as Sumitomo Electric, have not been included on the list.
Our estimates as to the amount of wire and cable passing through the OEMs are based in part on direct company information. However, even where company information is available, the actual figure is often unknown, cable being taken in different assembled forms and often through distinct purchasing channels.
Top 51 OEM Assemblers account for US$ 16.2 billion or almost 80% of total OEM business
In most cases, the volume figures are calculated. Our calculation is based on the product mix made at each OEM and the business units within it, taking an assumed cable content figure of each item or group of items of manufactured product.
Our OEM rankings table, derived by this procedure, shows that there is no clear pattern as to the business area of the main OEM companies. The top ten ranked companies, each taking 100,000 tonnes or more of conductor in cable in 2002, include automotive assembly companies, electrical and electronic equipment companies and makers of intermediate products. Motor makers tend to come lower down the ranking than automotive parts companies.
In our listing of the top OEM consumers of wire and cable, we identify a total market of slightly over 3.7 million tonnes conductor, with an estimated value of US$21.1 billion in 2002. As this figure is nearly as high as the US$21.7 billion total of cable estimated as going to the OEM sector in 2003, some explanation is required. The apparent anomaly reflects the fact that a large proportion of OEM cable is purchased twice, firstly by the companies that make intermediate products such as wire harnesses or motors, then by the OEM assemblers. Taking the OEM assemblers alone, we estimate the value of the wire and cable passing through the top 51 companies identified at US$16.2 billion in 2002. This is equivalent to slightly less than 80% of the entire OEM business, much of the remainder being fragmented between small, regional consumers.
Financial Performance of the Large OEMs and the Role of Cable
While the US$61 billion wire and cable business recorded in 2002 was dwarfed in scale by the US$2.26 trillion in turnover recorded by the major OEMs, there was a remarkable similarity in their accounts in 2002. For industry in general, 2002 was a very bad year. Companies in most business areas made very little profit, even at operating level. For the major OEM assembly companies for which we have financial data, there was an average operating margin of just 6.8%.
OEM consumers do not always have a clear strategy towards wire and cable.
The OEM intermediates performed slightly worse, with an average operating margin of 5.9%. Though the figure for the wire and cable industry was even lower, at 5.6% it was still very much in the range of the companies it supplied.
Like the wire and cable companies, much the OEMs turnover is offset by direct costs of sale. The average 25.2% gross margin recorded by cable companies in 2002 compares with 23.3% for the OEMs. The cost of sale includes purchased materials as its main component.
The situation was slightly different for the OEM intermediates, where wire and cable plainly has a larger (though still not imposing) role in their business profile. For the two groups of OEM intermediates research (motor and auto harness makers), we show an average purchase of 7.6 tonnes of conductor per US$ million in sales. In terms of value, we show that cable accounted for 4.21% of final sales value, and only 5.14% of the cost of sales.
While a growing centralisation of purchasing (and a reduction in the number of suppliers) is a common theme for many OEMs, a diversity of business activities, the relatively small volumes purchased in relation to the business overall and the fact that cable is not always a visible item in its own right (being pre-assembled in other products) means that OEM consumers do not always have a clear strategy towards wire and cable.
OEMs and the Cable Industry
At the beginning of this article we refered to the frequent under-estimation of the size of the OEM sector by the cable industry. There are good reasons for this. One of the main reasons is that specialist wire and cable companies dominate the OEM business.
In volume, winding wire accounts for a huge 40% of total wire and cable sales to OEM buyers. While the value share of winding wire, at 30%, is somewhat less, this product group still forms a very significant part of the overall OEM market. It has long been the case that winding wire has been considered as somewhat separate from the rest of the wire and cable industry. In terms of industry grouping, it is not uncommon for winding wire producers to consider themselves to be more allied to their customers than to other cablemakers. A large, and growing, proportion of the world’s winding wire is made by companies that do not make other wire and cable products. While some of the major diversified cablemakers still make winding wire, some have made no secret of the fact that they would divest this business if the opportunity arose.
Insulated OEM wire and cable production is also often carried out by companies that are quite distinct in philosophy from the mainstream cablemakers. In this insulated OEM business, there tends to be a very high level of downstream integration. Indeed, the world’s two largest automotive harness makers, Delphi and Yazaki, are also significant cablemakers, especially so in the case of Yazaki. Though they make cable, neither Delphi nor Yazaki would call themselves cablemakers. Indeed, it would be ridiculous for them to do so, as far more added value is achieved by these companies in the assembly of harnesses and in other products than in the production of wire and cable.
Some cablemakers with a diverse range of cable products have managed to secure a high level of OEM cable business by integrating downstream, notably Sumitomo Electric, with its wire harness business. Others have succeeded in integrating OEM business in non-value added products within their cablemaking operation. For many others, OEM sales form either a small proportion of the total business or are entirely absent. Clearly, the OEM sector is one that must be addressed seriously by a cablemaker if it is to be addressed at all.
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