For the latest contract manufacturing news and EMS industry trends, MMI is the place to go. But don’t take our word for it. Here are some important stories we’ve covered over the last year:
The last time there was any significant growth in the EMS industry was in 2014, when the market expanded by 24 percent; then it stayed flat through 2016. But in 2017 the contract manufacturing market experienced good growth again, expanding by 10.8%. This growth was achieved in both the EMS and ODM industries, which expanded by 10.7% and 10.9%, respectively, in 2017. By far the largest growth occurred in the total assembly telecom sector among commodity smart phones, accounting for 35.5% growth in 2017. The industrial and medical markets experienced 5.8% and 5.5% growth, followed closely by the automotive market at 4.7%. The consumer and computer electronics sectors experienced a downturn of 10.2% and 5.6% percent as a result of slumping demand for digital televisions and computer products. The defense/aerospace and commercial avionics market had a combined growth of 4.0%, with the strongest expansion coming from the commercial sector.
As the EMS industry continues to evolve and expand in 2018, we asked Jeremy Vanselous, President and Executive Recruiter at The SearchWorks Group, for his view of the trends he and his team are seeing in the industry today. Clearly, the demand for talent is increasing and a skills gap in the EMS industry in the US and elsewhere is becoming more apparent every day. At the same time, the perceptions and attitudes of EMS professionals are also changing. Included are the highlights of what one of the most successful professional search firms in the EMS industry is seeing out there today.
For the twelfth time in the past 15 years, combined revenue for the top 25 contract manufacturers (EMS providers and ODMs) grew in 2017. Last year, top 25 revenue totaled $410.5 billion, up 13.1% from 2016. Because the top 25 group accounts for 80–90% of revenue in the outsourcing space, this upward tick in revenue serves as an approximate indicator of how the contract manufacturing market was developing in 2017. Perhaps more encouraging than the increase in growth was the realization that the top 25 as a whole performed well and increased more than the global economy, which grew at a 3.5% rate in 2017, according to the International Monetary Fund. Longer-term industry attractiveness has been improved by a plethora of near-term catalysts. This suggests that expectations have risen modestly due to rapid growth in key end markets such as telecom infrastructure, computing, consumer/smart phones, and semi-cap equipment. High-complexity/low-volume end markets (e.g., industrial/medical/test) should garner solid results. In addition, M&A activity has picked up within the supplier (semiconductor) segment and industry opportunities appear stronger than ever. The Nokia/Alcatel deal bodes well for EMS as the parties are committed outsourcers.
MMI’s annual list of the 50 largest EMS providers worldwide has reached another milestone. In 2017, combined sales of the MMI Top 50™ EMS providers broke through the $300-billion barrier with a revenue total of $300.5 billion. While not all of this revenue is pure EMS – there is some ODM and other non-EMS business mixed in among the largest companies – the vast lion’s share of it is EMS, offering a clear indication of how much OEMs now depend on the EMS industry. With the results of MMI’s Top 50 survey now in, it can be said that 2017 was a generous growth year for the Top 50 as a whole. The group’s 2017 sales increased 11.4% from the previous year. This result should not be surprising given better-than-expected growth in world markets and among OEMs. In recent years, Top 50 expansion has received a boost from EMS giant Hon Hai Precision Industry because of its size and history of above-average growth. Last year, Hon Hai generated consolidated sales of $154.9 billion, which represented a growth rate of 14.6%. When Hon Hai’s contribution to the Top 50 is excluded, the growth rate for the rest of the group decreases to 8.3%. So in 2017 Hon Hai exerted a 310-percentage point boost on Top 50 growth.
In 2017, the number of EMS industry mergers and acquisitions decreased from the year before. M&A transactions closed during 2017 totaled 17, down 41.4% from a revised of count of 29 in 2016. Transaction totals have been in decline since a post-recession high of 45 in 2010 (Chart 1). The lackluster macro environment and associated uncertainties that followed the recession have not been conducive to deal making. MMI’s annual Scorecard of EMS industry M&A deals on pages 2 and 3 lists the transactions closed in 2017 and classifies them according to four categories developed by MMI. The most common deal in 2017 was acquiring operations of competitors. In 2017, this was the most popular type of deal, unlike the year before. Last year, there were eight instances of EMS providers buying competitor operations (marked C on the Scorecard), down from nine the year before (Chart 2, p. 4). Most of these 2017 deals resulted in consolidation, or the loss of an independent provider. Industry consolidation persists, though the number of consolidation deals has bounced around from year to year.
In MMI’s annual outlook, published in the January issue, the Newsletter tries to give a sense of the latest trends in the EMS industry and an outlook for the coming year. Instead of looking forward to the next year, we have decided to summarize the results of the previous year with the best data that we have available, recognizing that many companies have not yet reported their 2017 revenue. Several of our subscribers have asked for at least a preliminary look at 2017 so that they can measure their own performance against the industry as a whole. Anecdotally, MMI is hearing that the second half was stronger than the first half, with most companies reporting a much better year in 2017 than in 2016. But, let’s begin by reviewing industry performance as reported in earlier issues of MMI last year. Over the last six years, EMS industry growth has been more or less flat since 2011, with slight growth from 2011– 2013 and negative growth from 2014–2016, as reported in our March issue. In May, we started to see things changing with revenue growth in the first quarter of 2017. We did a special feature in the May issue on outsourcing in Japan, a country slowly but surely embracing the outsourcing model.
Silicon Valley is synonymous with innovation, and for EMS everyone wants to be there. MMI decided to look at the EMS footprint in Silicon Valley and see who stands out. As it turns out, there is a substantial amount of innovative manufacturing capacity, with the majority of production being completed by EMS firms rather than OEMs, who have long since abandoned in-house production. The table on page 2 summarizes the leading EMS companies and manufacturing capacity in the Silicon Valley area. “This is not your father’s manufacturing in the US any longer,” says Joanne Moretti, SVP and Chief Marketing Officer for Jabil. “Programmers versus factory workers are the new norm, and everything has gone digital.” Hence, we find enormous investments being made in advanced manufacturing technologies, including robotics, 3D (additive) printing, AI/VR, smart packaging and supply chain, and the connected car and/or pharma device. All top tier EMS firms have proprietary innovation programs, some with names like Jabil’s Blue Sky platform and Flex’s Sketch-to- Scale program (Sanmina plans to launch its solution in 2018).
Double-digit growth for the first nine months of 2017 raises the possibility that the top 12 EMS providers as a whole will end up with annual growth in 2017. For the first nine months of 2017, revenue for the 12 largest EMS providers by total sales amounted to $187.4 billion, up 10.4% year over year. This is in sharp contrast with 2016, which had a decline of 6.2%. Unlike in 2016, when Hon Hai had exerted a drag on sales, so far this year Hon Hai gave a boost to top 12 sales. For the first nine months, top 12 sales without Hon Hai were 5.5%, versus an increase of 10.4% including the company (Chart 1). So Hon Hai improved the increase by 4.9 percentage points. While top 12 revenue is not all EMS—ODM, component, and other types of revenue are mixed in—the majority of it is, enough so that this increase serves as a rough gauge of how well the EMS industry did in the first nine months, based on the belief that the top 12 account for about half
of industry revenue.
EMS companies do two things really well: They excel at soldering and they are also very good at managing inventory. Material requirements planning (MRP) is the production tool used by manufacturers to schedule and control the inventory and manufacturing process, but if not tightly controlled, it can create excesses that can have a devastating effect on profitability. Sooner or later, an EMS company is going to have an excess inventory problem (either resulting from internal processes or customer imposed)—so wouldn’t it be nice to have a tool that mitigates this exposure and allows the principals to see the dynamics of forecasts, yields, orders, cancellations, shipments, and inventory levels, all in one place? Robert Freid, president of Contract Manufacturing Consultants (CMC), has developed such a tool. The tool doesn’t have a name, but Freid describes it as a proprietary simulation model that allows the manufacturer to calculate expected excess inventory quantities on a part-by-part basis after production ends, and presents the dynamics and results in an understandable and usable format.
Based on first-half results of 20 of the largest contract manufacturers, all three types—EMS companies, ODMs, and hybrid providers—exhibited growth this year so far. Combined first-half sales of the 11 large EMS providers increased 6% and the aggregate sales of the six large ODMs increased 17.9%. Both groups were able to circumvent any macroeconomic headwinds swirling about the global economy. But that is not the end of the story of the first six months. There is a third class of contract manufacturer—the hybrid provider—that does substantial amounts of both EMS and ODM business. In conformity with the increases of the EMS and ODM group, combined sales of the three large hybrid CMs increased in the first half. The hybrid group’s revenue increased by 15.7% year over year (Chart 1). If this comparison can be generalized, it would seem that all three groups did a very adequate job of withstanding the vicissitudes of the first half.
Based on MMI’s estimates for the first nine months, the six largest US-traded EMS providers, as a group, are already on their way to turning 2017 into a growth year. In the current demand environment, such growth may be easy in the final quarter, as providers have been working diligently to boost sales with new program ramps. MMI is projecting that third-quarter sales for the group will total $15.57 billion by setting the sales estimate for each provider equal to the midpoint of its Q3 guidance. At that level, Q3 sales will have risen 3.7% sequentially, marking a second straight quarter-on-quarter increase. Following the high point in 4Q2016, revenue has begun another ramp-up (see Chart 1). MMI estimates that group sales for the first nine months will reach $44.97 billion, up 1.6% year over year. Three out of six providers are expected to experience revenue declines for the period, and all of the declines will be of the single-digit variety (Table 1, p. 2). Sanmina, Flex, and Celestica will be the providers able to achieve revenue growth for the first nine months, MMI predicts.
The number of M&A deals done in the EMS industry increased in the first half of 2017 versus the year-earlier period. According to MMI’s count, 15 M&A transactions closed in the EMS industry during the first six months of the year, up from 13 in the first half of 2016 (Chart 1). That’s an increase of 15%. If deal making continues at this pace in the second half, then 2017 will go down as the busiest year for industry M&A since 1995. Industry data presents a strong argument that the uptick in M&A activity has been fueled by corporations’ quest for growth. Rather than spin their wheels trying to do it all internally, it’s easier to buy another company’s existing products, profits, and market share. The availability of debt financing at historically low financing rates is also a boon for M&A activity, especially in the healthcare and tech sectors. In the tech sector, it’s large organizations that are using their significant liquid assets to continue buying up the products and intellectual property of their smaller competitors.
The last time there was any significant growth in the EMS industry was in 2011 when the market expanded by 11.3 percent, and then again in 2013 by 4.1 percent. But in 2015 and 2016 the market declined by 1.5% and 1.1%, respectively. To be fair, the overall growth of the electronics manufacturing industry has similarly stalled, with revenue growth in 2015 and 2016 coming in at 3.0 percent. What little growth occurred came from the automotive sector (4.1%), while all other sectors expanded between 2 and 3 percent. To this end, the computer sector declined to 1.9 percent growth in revenue, and this was offset by the communications sector, which grew 3.7 percent. The industrial market did second best, with growth of 3.5 percent. The consumer, medical, and defense/aviation sectors all expanded between 2.7 percent and 3.1 percent.
Outsourcing of electronic assemblies by Japanese companies has always been considered one of the “final frontiers” for EMS suppliers. Japanese OEMs have always considered manufacturing one of their core competencies, and for a long time resisted engaging EMS companies. Additionally, the supply chain was well established for the parts and mechanical assemblies that are essential to mechanical products like copiers, fax machines, and other office automation equipment. But a number of factors conspired to bring the Japanese to the outsourcing table. First, there were the rising costs of labor, land, and taxes that made manufacturing in Japan unaffordable. Electronic products coming out of Japan had always been expensive, but starting in the 1990s, they were becoming even more costly. Japanese OEMs watched as their Western competitors gained competitive advantage in price, supply chain, delivery, and repair as a result of their relationship with EMS subcontractors. Even worse, asset utilization was abominable—sometimes as low as 10–15%—as expensive manufacturing equipment sat idle and facility space was left empty, making for a very poor return on invested capital. The old business model of vertical integration was not holding up to a new world of the extended enterprise that hedged against changing technology and provided better expertise, thereby offering a solution to managing in-house capacity loads. More important, it made economic sense though it went against the grain of Japanese DNA. There was also the issue of quality. Japanese OEMs were known for their intense dedication to 100% total quality and didn’t trust any third-party suppliers to live up to their standards. And there were cultural issues that involved language and behaviors that were unique to the Japanese, resulting in these OEMs simply being more comfortable working with Japan-based companies. Breaking into the Japanese EMS market was like trying to break into Fort Knox for many Western EMS firms.
For the ninth time in the past 14 years, combined revenue for the top 25 contract manufacturers (EMS providers and ODMs) declined in 2016. Last year, top 25 revenue totaled $361 billion, down 4.4% from 2015 (Chart 1). Because the top 25 group accounts for 80–90% of revenue in the outsourcing space, this downward tick in revenue serves as an approximate indicator of how the contract manufacturing market behaved in 2016. Perhaps more disappointing than the lack of robust growth was the realization that the top 25 as a whole did not keep up with the global economy, which grew at a 3.1% rate in 2016, according to the International Monetary Fund. The top 25’s underperformance says something about the contract manufacturing space: It can no longer be relied on to outgrow the global economic baseline. Longer-term industry attractiveness is tempered by lack of near-term catalysts. This suggests that expectations have modestly risen, while the fundamental outlook could become more challenging due to slow growth in key end markets such as telecom infrastructure, computing, consumer/smart phones, and semi-cap equipment. Last year it was clear that softness among end markets, along with revenue losses from products at end of life and cost reductions, can offset gains from new programs.
MMI’s annual list of the 50 largest EMS experienced a decrease in revenue of $2.8 billion in 2016. Combined sales of the MMI Top 50™ EMS providers came in slightly behind 2015’s $272.5 billion mark with a revenue total of $269.7 billion. Over the last few years, we have separated out the ODM business among the largest companies; this year it accounted for approximately $18.6 billion in revenue. In recent years, Top 50 growth has declined and EMS giant Hon Hai Precision Industry can be partly blamed for it. Last year, Hon Hai generated consolidated sales of $135.2 billion, which represented a decline rate of 4.3%. When Hon Hai’s contribution to the Top 50 is excluded, the growth rate for the rest of the group still declined 0.2%.