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EMS Business Update
December 31, 1969 |Estimated reading time: 6 minutes
By Susan Mucha, Powell-Mucha Consulting Inc.
Any time the words "global economic downturn" become frequent headlines, the EMS industry will be impacted. However, assessing the degree of that impact can be difficult, because the EMS industry is a collection of subgroups that cluster around revenue, geographic focus, OEM industry niches, technologies and services. For example, Tier One EMS companies concentrated on consumer electronics are likely to be impacted more in the current recession than mid-tier EMS providers focused primarily on medical or defense electronics. Rather than speculate on industry growth or shrinkage as whole, it makes better sense to look at general trends that influence the industry and think forward rather than look back.
From a management strategy standpoint, it is important to recognize that with a six-to-eighteen month sales cycle, course correction relative to organic sales growth will take time. Companies with diverse business bases are in a better position to continue organic growth than those invested in a few economically-challenged sectors. Companies in the latter position are better off making internal consolidations or acquisitions designed to improve the overall business portfolio.
To better illustrate the complex nature of likely EMS impacts, this article focuses on four key areas of trends:
- •economic;•political-legal;•technology;•behavior.
EconomicIndustry segment economic challenges include downturns in consumer electronics and the automotive sector. Across the board, OEMs are stretching payables at the same time that lenders are tightening their criteria, which presents challenges for an industry where material cost can be 7080% of revenue. Lower in the food chain, the supply base is equally stretched, which may drive availability or performance issues.
However, not all trends are bad. On the positive side, OEMs tend to have better visibility into inventory levels than in the last recession and this may translate to faster recovery as demand resumes.
The supply base may be more willing to negotiate on price or service terms to keep good customers, which may help with cost control or OEM-mandated cost reductions.
Another potential positive is that a poor economy drops company valuations. Companies looking to diversify their business portfolios through acquisition may find more attractively-priced options available.
The cost structure of low-cost-labor markets such as China is increasing, which drives more introspection into outsourcing choices. EMS companies with good understanding of labor cost trends are beginning to retrench into more cost-effective regions and increase their competitive position over time. At the same time, business-focused domestic EMS providers are also focusing on better aligning service offerings with customer needs, which provides another competitive advantage. An uncertain market ensures that both of these activities will be carefully studied by OEM outsourcing teams.
Political-LegalThis is the most interesting trend area in the current downturn. While it remains to be seen how much of the Obama Presidential team's change message is spin versus action, economic stimulus could help many business sectors that outsource. The last election had many interesting points of debate around cost of medical care and the value of technology in lowering those costs, alternative energy, and infrastructure renewal. Free trade versus fair trade was also on the table.
Depending on how these issues are addressed, medical, industrial, public safety, automotive/transportation, and defense segments could see growth in electronics products requirements. The free trade versus fair trade debate also has some merit for EMS companies with strong U.S. presence. In addition to opening the door to increased medical sector product development, a true focus on reducing healthcare costs potentially also helps manufacturers whose health insurance benefit costs have become increasingly unsustainable over the last couple of years.
TechnologyAlternative energy programs will not be a short-term revenue generator. In fact, it is more likely to drive increased capital investment requirements and depress margins initially as the technology develops and demand slowly increases. However, the sector could represent some positive long-term momentum for the EMS industry both in terms of new areas for revenue growth and investor excitement. Government stimulus targeted to green automotive technologies could also help EMS companies that have been impacted by automotive industry downturns over the last two years.
As technology as a tool to reduce costs is touted in the political world, there may be growth in use of RF- and Bluetooth-based products that can potentially reduce costs in energy use or manpower. This area tends to have higher value-add revenue potential because it often is an engineering, manufacturing, and logistics management opportunity versus a manufacturing opportunity alone. Increased infrastructure spending may also benefit companies supporting central office switching equipment and other forms of telecommunication infrastructure.
BehaviorOEMs also are looking more closely at total cost. Those with products that generate marginal savings when built offshore may return to local manufacture. However, the converse can also be true. If demand is flat, in some cases products not well-suited for offshore manufacturing are bundled into a single offshore outsource since variable demand becomes less of a concern. EMS companies need to be experts at helping OEMs understand the true costs of their outsourcing decisions.
OEMs are also cutting internal resources, yet expecting their teams to work with shorter product cycles. EMS companies that successfully fill their customers' infrastructure gaps will see additional business.
Another behavior trend in recession is that, as larger EMS companies see excess capacity grow, they become more willing to chase smaller accounts. A key point of difference between this practice in the 2001 recession and the current recession is that there has been a changing of the guard in many OEM purchasing organizations and these new teams may be less aware of the risk of failing to align projects with their suppliers' likely long-term business models. The basic rule of thumb in the EMS industry is that bad-fit business accepted in a reactionary mode to fill excess capacity will be quickly shown the door when attractive business begins to grow.
Capitalizing on the DownturnIt is important to understand that the basic rules of good EMS management haven't changed. Points to focus on include:
- •visible mastery of niche capabilities important to target customer bases;•strong vision of the business model;•financial resources sufficient to support business growth;•adequate internal resources to execute business strategy;•development of a diversified customer base;•good definition of target markets and best fit customers;•strong program teams focused on both superior service delivery and growing profitable accounts;•effective internal systems and processes that minimize waste and errors;•focus on cost control;•shared vision and commitment among the employee base.
What does change includes the best industry targets, the best build site locations, and short-term capacity requirements. Companies that maintain good core values while implementing course correction strategies that reduce overall cost while minimizing excess capacity and underutilized resources will thrive over time. Those that make reactive cuts without considering the impacts to a long-term strategy will likely struggle, and in some cases, become this recession's consolidations or business failures.
Susan Mucha is president of Powell-Mucha Consulting Inc., a consulting firm providing strategic planning, training, and market positioning support to EMS companies. Her new book, Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services, is available through www.pennwell.com and other online retailers. Contact her at smucha@powell-muchaconsulting.com. She will be presenting a tutorial based on the book at the IPC APEX Conference on April 2 from 8 am to noon. Information is available at www.ipcapexexpo.org/html/main/programs-for-executives.htm.