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Slower Growth Means Tougher Competition for EMS Providers

Buyers involved in outsourcing decisions for their companies can expect electronics manufacturing services (EMS) providers to be willing to go the extra mile to retain or win business.

Many small and medium-size EMS providers will focus more on certain industries or services to differentiate themselves in the market. They may specialize in a certain customer segments such as medical or industrial, or certain technologies such as radio frequency.

EMS providers will compete harder because overall sales growth will slow in coming years because the industry has matured and the number of outsourcing opportunities in some industry segments has peaked.

The global EMS market grew from $187.9 billion in 2010 to $207.5 billion in 2011, according to researcher IHS. However, sales growth will be slower in the next several years. In 2012, the global EMS market will rise to just $207.5 billion. Single-digit revenue grew growth is expected through 2015.

The good news for some EMS providers is that while overall industry growth will slow, there will still be growth opportunities in certain customer segments, which are just starting to outsource or will outsource more business to EMS providers.

Such segments include industrial, medical and alternative energy. However, the “three Cs” of the electronics industry – computer, communications and consumer – represent the bulk of outsourcing and are near saturation in terms of what they can outsource. That means the overall EMS business, which used to post double-digit annual growth, will likely see revenue rise in the single-digit range in the coming years.

"Looking out 3 to 5 years, I am projecting revenue growth numbers dropping from five or six percent to two percent," said Charlie Barnhart, president and founder Charlie Barnhart and Associates, an electronics industry consultancy in Maui, Hawaii.

A maturing industry

Barnhart said the industry has matured and many "OEMs that were going to outsource have outsourced."

The electronics manufacturing services industry will grow, but will rise at a slower rate than in the past.
To grow sales greater than the industry average, EMS providers will have to take market share away from competitors, focus more on customer segments that are beginning to outsource further, or acquire other EMS providers.

The good news for some North American-based EMS providers is that some manufacturing, which had been outsourced to China and other low-cost Asian countries, is coming back to North America.

“We continue to see work coming back from China and Asia in general. We are seeing stuff that should never have went to China coming back,” said Barnhart.

He added that labor costs are rising in Asia and some EMS providers “are sick of the high cost associated with the support their outsourcing initiatives, flying people back and forth for months on end.”

“I think it would it benefit the smaller contractors,” Barnhart noted.

While small- and medium-size EMS providers may benefit from some manufacturing returning to North America, the industry is dominated by Foxconn which has about $100 billion in sales in 2011, and to a lesser extent, Flextronics which had $30 billion in revenue, according to IHS.

Then there are large companies such as Celestica, Jabil, Plexus, Sanmina- SCI and some other EMS providers with sales in the $1 billion to $17 billion range, IHS reported.

“Then you drop off a cliff and have about 1,000 contractors,” said Barnhart. “Some may have regional sites, a site in Mexico and maybe a small site in China.” Most are doing $2 million to $300 million per year and many are growing.”

“The small guys are gaining traction because they are going after lower-volume, higher-mix jobs,” noted Barnhart. “They have fewer customers.”

He added that customer surveys of the industry indicate manythat OEM customers are dissatisfied with the solutions provided by larger EMS companies.

More flexibility wanted

"Looking out three to five years, I am projecting revenue growth numbers dropping from five or six percent to two percent," said Charlie Barnhart, president and founder Charlie Barnhart and Associates.
“They are not satisfied with the flexibility and are overall not satisfied with the model,” said Barnhart. Small or medium size EMS providers may be able to win some business because of the dissatisfaction.

Expectations of EMS providers have “ratcheted up. They basically don't want to invest in anything,” Barnhart noted. “They want somebody to do it all for them. Just figure out what I need and then make it happen is the attitude. Those kinds of relationships are very difficult for many EMS providers.”

Barnhart stated that while large EMS providers are very competent and do a good job for their OEM customers, they have low profit margins. “The margins are abysmal. The margins at the top level are unbelievable. They are ridiculous.”

Some smaller EMS providers have decided to focus on certain markets offering certain specific manufacturing skills and are staying away from communications, computer and consumer customers, according to Barnhart. They are less concerned with top line growth and more concerned with profitability or bottom line growth.

“They are finding niches in the industry and try to develop specialty talents within those niches. They try to find customer relationship that will provide them a profitable long-term business,” Barnhart noted.

Niches could include specific types of medical equipment or skills maybe expertise in RF engineering.

One example of an EMS provider that has increased its manufacturing capabilities, while focusing on niche customer segments is MC Assembly in Melbourne, Fla.

MC Assembly grew its revenue about 20 to 25 percent in 2011, and it expects similar double-digit growth in 2012, according to Jake Kulp, vice president sales and marketing for the EMS provider.

“We are bucking a lot of trends," said Kulp. "We set a strategy several years ago about markets that we're going to focus on and what types of customers were good for us. We have stayed the course."

Kulp added that MC Assembly had been primarily a board manufacturer and in recent years began to do entire box builds for OEMs. It also does not focus on computer, cell phones, or consumer.

“We don't believe the high-volume cell phone business is a moneymaker,” Kulp said. “Our focus is the industrial marketplace.”

Industrial includes transportation, meters, gaming, gas pumps, industrial controls and energy management including clean technology among others. “We are spending our time with power consumption, power savings power clipping, smart meters. It's a very new industry,” Kulp noted.

The EMS provider also builds for defense and aerospace, medical equipment, and networking/telecom OEMs. MC has plants near Boston, Florida and central Mexico.

Kulp said the issue MC Assembly will have is managing double-digit annual growth.

“It is ultimately the problem that everyone wants,” he said. “How do we continue to expand in all the markets so that we don't get too heavy with one customer or in one market? That is a challenge for us.”

Be diversified

“There are maturity levels in certain industry segments, but other segments such as aerospace and defense, healthcare, and industrial are starting on the outsourcing journey," said Harvinder Sembhi, chief procurement officer at Celestica.
Some larger EMS providers are also focusing on “diversified” markets other than computer, communications and consumer.

Harvinder Sembhi, chief procurement officer for EMS provider Celestica in Toronto, said his company has a goal of 6 to 8 percent annual revenue growth and part of its strategy to achieve that goal involves diversified markets.

Sembhi noted that Celestica is growing its revenue in customer segments such as industrial, medical, aerospace and defense, and green technology. About 16 percent of Celestica's revenue is from those diversified markets, and the EMS provider expects that in the near future, Celestica will derive 30 percent of its revenue from those customer segments.

The diversified markets are helping to drive North American growth, Sembhi noted.

“There is more outsourcing to be done in those markets. There are maturity levels in certain industry segments, but other segments such as aerospace and defense, healthcare, and industrial are starting on the outsourcing journey," said Sembhi.

While focusing on diversified customer segments can help grow sales, Sembhi noted it is also necessary for an EMS provider to offer flexibility to OEM customers.

“Flexibility continues to be a major differentiator. How quickly you can scale up and down your operation to respond to customers’ end demand? How quickly can you get to upsides in demand and how well you deal with demand volatility are a differentiating factors,” said Sembhi.

Besides flexibility, major EMS providers have indicated that supply chain and value added services are necessary to differentiate and grow sales.

“OEM customers look for value-add services to differentiate their suppliers,” said Naresh Nigam, chief technology officer for EMS provider Sanmina-SCI in San Jose, Calif.

He said hardware is not a differentiator for OEMs. “They want to focus their resources on marketing their brand and software. They’d rather leave the hardware design and manufacturing to EMS. Once a product is manufactured and shipped, OEMs turn to EMS providers for after-market services such as logistics, repair and recycling,” according to Nigam.

He noted such services are valued by Fortune 500 companies which realize the benefit of outsourcing manufacturing.

“Generally, these customers have very well defined outsourcing models. They have in-house teams that understand outsourcing processes and can calculate the return on investment for buy-versus-build and aftermarket services. Therefore, they see the cost benefits and value of outsourcing,” said Nigam.