21 April 2008
An interesting comment I heard several times from regional EMS providers attending APEX was, “what recession?” Make no mistake, segments of the U.S. economy are experiencing significant downturn, but many U.S. regional EMS providers are seeing record levels of new opportunity. What drives this and what trends should be watched?
First, all is not rosy across the entire EMS market. The U.S. recession has been primarily driven by the housing market meltdown and further fueled by rising energy costs. I’m not a Harvard economist, so I’ll give my “state university educated” economic perspective.
In 2001, the U.S. economy was jumpstarted without real job creation or earnings growth through lowering of interest rates and easy access to financing. Consumers without significant savings were encouraged to buy houses and those with equity in their homes were encouraged to refinance to free up that money for consumption or further investment. As more people started shopping for their first home, a bigger home or “flip that house” type investments housing prices in many markets skyrocketed. A new chairman of Federal Reserve came on board and started expressing concerns about the amount of borrowing lowered interest rates had driven and started to raise rates. Meanwhile, people who had purchased more than they could afford were starting to see basic costs for gasoline, utilities, healthcare and food creep up. If they took out adjustable rate loans, they also saw an increase in mortgage payment amounts. In addition, as house prices increased, so did house valuations which had the net effect of increasing property taxes. In short, consumers who leveraged the most found themselves with more money going out than coming in and no savings to make up the difference. Many defaulted and available housing exceeded demand. People who wanted to sell found themselves owing more on the mortgage than the market value of the house, which meant to sell they needed to write a check at closing. More defaulted. Bankers who had been most aggressive in looking the other way found themselves inundated with bad debt and that has created shakiness in the investment community as well as calls for greater regulation. The end result is significant downturns in markets impacted by consumer spending. And, because the root cause is too much consumer debt, it will take time for these trends to reverse.
EMS providers who focused on product segments such as automotive, durable goods and high-end consumer products are feeling pain because a lot of spending that drove growth in those segments has stopped. Consumers who can still afford to buy a car have shifted in vehicle preferences toward more fuel efficient cars and U.S. car sales are slumping. New home construction and remodeling is down. Similarly, consumers worried about their jobs and increases in the cost of living have less disposable income for frills such as consumer electronics.
Comparatively, EMS companies who focused on low volume, high mix products in industrial, medical, defense and public safety applications are doing well. Investments in those areas are growing and there is renewed interest in optimizing sourcing for best total cost which includes responsiveness, rather than lowest unit price. While these industry segments did not show nearly the growth experienced in segments such as automotive or some consumer electronics applications, they also aren’t experiencing the slowdowns now found in these previously high growth segments.
While the current recession is significant because it is setting records in mortgage foreclosures, the cycles of industry segment downturn and upturn are not new to EMS. EMS companies who are growing today need to look no further than the next election to see clouds on their forecast horizon. All of the presidential candidates have agendas that will create growth in some market segments while creating a downturn in others. Defense and healthcare are definitely two to watch.
The key to long-term success in EMS is to diversify your customer base and ensure it includes industries with differing business upturn/downturn cycles. Business strategies which focus on maximum leverage may be risky in an era which may have a fair amount of “rolling” economic uncertainty. Business models which focus on decreasing time to market and optimizing processes will continue to be in demand. Customer service and responsiveness never go out of style and become most important when demand is variable due to economic uncertainty.
This topic will be discussed in more detail in an upcoming tutorial at SMTA International in Orlando, Florida. Powell-Mucha Consulting, Inc. will present “Identifying EMS Market Trends: Learn to Predict the Future and Help your Company Lead the Pack,” on August 21, from 8 a.m. – 11:30 a.m. For more information on this event and the SMTA International Conference visit www.smta.org.
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