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Outlook for the EMS Market: Current Trends and Perspectives
January 3, 2013 |Estimated reading time: 5 minutes
Editor's Note: This article originally appeared in the November 2012 issue of SMT Magazine.
The EMS landscape is going through major transformations and challenges. Original equipment manufacturers (OEMs) will continue to look for innovative EMS partners that can help propel internal development and lower costs.
The EMS marketplace is expected to continue transitioning from specialization in high-volume production in traditional markets, such as consumer electronics, to low- to mid-volume production in niche markets, such as medical and aerospace and defense (A&D). Value-added services such as design, aftermarket services, and complete supply chain support will lead to stronger competitive positioning. Much emphasis is being levied on R&D, technology innovation, and new product introduction (NPI). These factors will further strengthen the foundation for EMS participation in design and engineering services.
From a manufacturing strategy standpoint, both EMS providers and OEMs are rethinking low-cost manufacturing options. EMS providers are currently repositioning themselves with the aim of balancing low-cost options with opportunities for renewed growth and profitability. This has led to an increase in regionalization and this trend is expected to slowly gather momentum in the next four to five years. While outsourcing to low-cost regions continues to hold strong, a hybrid model of outsourcing is expected to emerge. Companies are now looking at low-cost regions that not only offer proximity to local markets, but also opportunities to tap into growing domestic economies of those regions.
Imperative Diversification: Expansion of Services
As competition intensifies, EMS providers will be hard pressed to diversify their services portfolio and offer a complete solution package. As a result, an increasing focus will be placed on diversification into design and aftermarket services. Both of these areas are expected to witness an increasing focus from EMS companies as they strive to differentiate themselves.
Rapid technological demands in the electronics industry are expected to have the greatest impact on the EMS market and subsequent growth strategies. Technology and product innovation will play a crucial role in determining the new opportunities and areas of growth for EMS providers. A case in point, demand for superior communication devices, navigation systems, fuel-efficient vehicles and aircraft, environmentally friendly products, green and smart manufacturing, and smarter products such as smartphones have the potential to speed up EMS opportunities.
However, a foray into design is easier said than done. Creating and maintaining strong design and engineering expertise in-house entails high levels of investment into infrastructure. Even now, most EMS providers prefer to use their increasing design services to win more manufacturing contracts. This has in many ways detracted true branding of EMS providers as a strategic design and engineering partner in the minds of OEMs.
End-User Market Opportunities
Traditional markets such as consumer electronics, computing, and telecom still account for the majority of overall EMS revenues. As end consumer demand continues to remain strong, the price points will continue to encourage OEMs to increase outsourcing to EMS providers. EMS providers will continue to face constant pressure from their customers to reduce price. The automotive sector is becoming an increasingly appealing prospect for EMS providers. Increasing electronic content and hybrid vehicles are also expected to bolster outsourcing opportunities for the EMS market.
As profitability within traditional markets continues to shrink, an increasing number of EMS providers are seeking non-traditional markets to diversify into. A&D, medical, and industrial markets are expected to enjoy the fastest compound annual growth rates in the next three to five years.
The main factors encouraging EMS participation within these niche markets are increased stability, relative predictability in demand, and relatively healthier profit margins compared to volatile demands in traditional EMS markets, such as consumer electronics. Despite being new to outsourcing models, especially within the levels of engagement, OEMs in niche markets have recognized the benefits of partnering with an experienced and reputed EMS provider.
The use of sophisticated electronics for military weaponry, guiding systems, and both military and commercial aerospace are to boost outsourcing to EMS providers. However, the North American defense market is at cross-roads. Impending defense cuts and the impact of the upcoming elections have created an air of uncertainty that is expected to have a significant impact on EMS growth.
EMS providers are anticipated to benefit from increasing opportunities due to continuous growth in consumer medical devices, single-use devices, diagnostic devices, cardiovascular devices, monitoring devices, and orthopedics. Additionally, continuous advances in technology, increasing miniaturization, and automation in medical devices are further spurring EMS growth.
However, to take advantage of these burgeoning opportunities, EMS providers need to thoroughly research the risk of diversification, required infrastructure and certifications, the implication on the supply chain (high levels of traceability and documentation), and also analyze if the new market opportunities map with internal business models and inherent capabilities. Only then can an EMS provider expect return on investment (ROI) and maximize potential of the opportunities within the A&D and medical sectors.
Conclusion
Despite looming challenges and possible troubling times, strong growth opportunities exist for savvy EMS providers. Smart EMS providers will benefit from stronger and streamlined supply chains, stronger service capabilities (complete end-to-end project management), and the flexibility to adapt to any market realities.
At some point, most or all EMS providers will face the need for fundamental change to survive. And this is evermore stronger in the face of economic uncertainty--where sharp slides in profitability, diversifying into new markets/regions, and outperforming competition are essential for success. As economic uncertainly prevails, the question at this point is what separates or distinguishes the leaders from the others? While every company’s transformation and diversification begins with high ambitions, what sets the elite apart? The following points are essential best practice requirements:
- Advanced design expertise;
- Delivery performance;
- Supply chain capabilities;
- Manufacturing flexibility and responsiveness;
- Ability to penetrate new/emerging markets and increasing level of services;
- And finally, if not most importantly: Financial stability.
EMS providers have shown resilience in the past and most companies have bounced back strong after the recent economic recession. However, future success will rely heavily upon their ability to learn from past failures and create value that transcends mere cost-benefit strategy. Lavanya Rammohan is research analyst and acting manager within Frost & Sullivan's Electronics and Contract Manufacturing practice. She has over eight years of experience in research, strategic consulting solutions, and project management, particularly for electronic devices, contract manufacturing, as well as supply chain providers. Since joining Frost & Sullivan in 2005, Rammohan has completed several research studies and consulting projects in the SMT equipment, electronics manufacturing equipment, semiconductor, and contract manufacturing markets. For more information on this subject or to contact the author, contact Jeannette Garcia, Frost & Sullivan corporate communications associate, at 210-477-8427.