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Commentary

Taking the “E” Out of EMS

22 April 2013

How can the global Electronics Manufacturing Services (EMS) industry reverse its long-term decline in margins without raising prices? The answer may be as simple as dropping the “E” from the “EMS” moniker and expanding into new product areas that are outside of—but closely related to--the traditional electronics market.

For decades, EMS was a simple thing to explain. EMS stood for “Electronics-Manufacturing-Services,” a phrase often self-explanatory enough to describe the business to even the most uninformed of non-insiders.

For those who needed more elaboration, this explanation would always suffice: "EMS builds many of the electronic devices that you use every day, but you’ve never heard of these companies because their names are never visible on the outside of products.”

For decades these descriptions remained valid, because the assembly of electronics represented the largest portion of EMS market revenue. The industry has ridden wave after wave of growth in various electronic product segments by achieving organic growth as well as by capitalizing on the long-term shift of original equipment manufacturers (OEM) from internal to external manufacturing. Initially, the business mainly built printed circuit board assemblies, and then evolved into full-system manufacturing.

The value proposition for EMS was always simple: Customers should concentrate on what they are best at, which is product development, sales and marketing. This leaves EMS providers to focus on what they do best: transforming a supply chain of components into a finished product.

For customers, the value proposition went a step further because they reduced the risk to their own balance sheet and reaped the benefits of the commingled infrastructure operated by EMS providers.

However, this simple business model is being complicated by the continued erosion of margins.

As is almost always the case in the electronics industry, the margins for EMS providers started at a higher level but have declined precipitously over the years. At this stage it is nearly impossible for EMS providers to recoup margins by raising prices to customers because of their own customers’ relentless focus on cost reductions.

Because of this, the only way for EMS provider to raise margins is to change their product mix. For some EMS companies, this has meant moving further into end markets that previously were underpenetrated and that had more product or supply-chain complexity.

This worked for a time to stabilize margins as well as provide some much needed growth, as the more traditional end markets saw growth rates mature somewhat. However, even these newer markets aren't immune to the macroeconomic conditions that exist today.

So what are EMS companies to do in order to drive growth and improve margins? One key strategy for many outsourced manufacturers now is to shift away from the "E in EMS and stress the "M.”

Over the past few years, there have been a number of transactions by EMS companies to move into areas outside of electronics but bearing similarities along products, markets and customers. The most recent example is Jabil’s agreement to acquire Nypro, a manufacturer of plastics manufacturing solutions that serves industries including the electronics segment.

Another strategy is to move more into the "S in EMS"—i.e., to make a large investment in services. Such services could entail repair, logistics and field provisions.

To learn more about this topic, see the IHS report entitled: “Stability Expected in 2013 as Market Continues Slow Uptick.”



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