Following on the heels of a vicious economic environment, iSuppli is predicting another harsh year ahead for contract manufacturers.

According to a report penned by Jefferey Wu, senior analyst for EMS & ODM at iSuppli, overall cell phone shipments for the top 10 original development manufacturers (ODM) and electronic manufacturing services (EMS) providers will rise by 3.4 percent to 204.2 million units in 2010, up from 197.5 million in 2009.

While those numbers represent an improvement from last year, Wu concludes that when viewed from the perspective of an industry accustomed to double-digit growth, the slight increase is no cause for celebration.

“The relatively flat growth anticipated in 2010 by the top contract manufacturers for wireless handsets is unimpressive when juxtaposed against the steep 30 percent plunge recorded by the group last year,” Wu said in a statement.

iSuppli figures show shipment levels fell from 280.9 million units in 2008 to just 197.5 million in 2009.

Wu contends that the persisting challenges for the wireless handset contract manufacturers represent a carryover of the upheavals in 2009, when a fall in the global wireless handset market forced key strategic shifts throughout the industry supply chain.  

Responding to reduced demand, many mobile handset firms adjusted their overall manufacturing and outsourcing strategies, in the process impacting ODMs and EMS providers alike. As such, prospects remain gloomy in 2010 for the group, Wu notes in his report.

Among OEMs using the services of the contract manufacturers, outsourcing strategies are being adjusted in the face of the recession, and OEMs remain cautious about re-engaging contract manufacturers in case the market does not recover as quickly as expected.

Nonetheless, Wu projects that the overall wireless handset market will bounce back this year, not only growing 12.8 percent to 1.5 billion units but also expanding at a compound annual growth rate of 6.8 percent from 2009 to 2014, suggesting that recovery could be around the corner even for the Top 10.

One example of the severe blow absorbed by contract manufacturers is exemplified in the 2009 decision by Nokia to bring in-house previously outsourced orders. iSuppli estimates that Nokia’s overhaul of its old business model translated into revenue losses among contract manufacturers reaching up to $5 billion. Sharing similar concerns about internal capacity utilization, other OEMs contemplating a ramp-up in contract manufacturing services then either reduced the size of their outsourcing programs or halted outsourcing considerations altogether.

In addition to the pullback from these companies, the market-share losses of Motorola and Sony Ericsson – two major Tier 1 OEMs that relied heavily on contract manufacturers – rippled through the chain, affecting the manufacturing partners of the two giants down the line.

Wu says that while expanding into manufacturing for the smartphone segment allowed big-name contract manufacturers to obtain new orders from Tier 2 OEMs, those gains could not offset the larger losses that slipped away from the pullback of bigger customers such as Nokia and Sony Ericsson.

“Ultimately, it is only when robust growth is attained in the wireless handset market and confidence restored among firms that contract manufacturers can expect to revitalize their pipeline,” Wu wrote in his report.