EMS companies may profit from U.S. economic pain
22 September 2008
In April I wrote a column titled What Recession? discussing positive comments from EMS providers at the APEX show, which in large reflected the fact that different sectors of the economic were in different economic cycles.
As U.S. economic woes deepen, I’d like to focus on a paragraph from that column:
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.
It is difficult to write a column that essentially says natural disasters, high energy prices and a financial services meltdown are a good thing for EMS. It reminds me of the internal guilt I felt in my first job at a defense contractor when I was told that my recommended selection of a company Christmas card which read “Peace on Earth” reflected a policy that was inherently bad for business.
That said, virtually every economic woe has business upside that potentially creates jobs and distributes wealth to employees of the companies who profit from it. The current U.S. set of economic woes is no different, and the upside is that sectors of the economy that were previously depressed from the housing crisis may see increased demand in the next few quarters. How does this work?
First, let’s look at natural disasters. We’ve had a lot of hurricanes and tropical storms recently. This has driven significant flooding in the Gulf States and Midwest. In Texas, entire subdivisions have been wiped out. Estimates suggest it may take over a month to restore power to some areas. The housing crisis had impacted demand in new construction and durable goods. This ultimately translated to business downturns and job losses across several sectors. From a general economic standpoint, rebuilding these areas particularly in the cases where losses were insured, will create jobs and business growth in industries that were depressed. From an EMS standpoint, rebuilding drives new demand for appliance electronics, telecommunications infrastructure, utilities metering and control applications, HVAC equipment, security systems, public safety equipment and even consumer electronics. Companies already positioned in those industries with business models capable of responding to immediate demand increases will reap the greatest benefits.
While high energy prices have impacted all U.S. businesses and their employees in the last few months, they are opening the doors to business growth in the EMS sector both here and abroad. Higher energy prices make alternate energy options far more cost effective. Tier One EMS companies are already supporting fuel cell and solar panel manufacturing efforts. European companies supporting countries which have already embraced alternative energy solutions may be particularly well positioned to support a sudden U.S. interest in more energy efficient technologies. New pipelines for natural gas, wind energy turbines and additional nuclear reactors create demand for control instrumentation, data acquisition and monitoring systems, and communications infrastructure. This potentially drives demand in mid-tier EMS companies specializing in instrumentation and industrial control products. High energy prices also drive more interest in intelligent metering applications, driving demand in EMS providers who have specialized in supporting the utilities market. Finally, the roll out of more fuel efficient vehicles may spike consumer demand in the automotive industry, which in turns helps EMS companies who have specialized in the automotive sector.
So how does the financial services sector meltdown play into this? First, in some ways it is a negative, since credit is tightening and EMS company revenue is often 75% pass-through expense. Industry consolidation will slow and that may hurt companies who have M&A in their near-term business plans. However, the positive is that the latest round of excesses on Wall Street are starting to scare even the most liberal of the free market advocates into realizing that a society focused on building exit strategies that reward a chosen few is doomed to economic failure. The rhetoric in the current election is far different from our last few elections, because middle class voters understand a service economy doesn’t work and they want to see a growth in manufacturing. Public debate on fair trade vs. free trade, the need for tax incentives for U.S. business investment and job creation, and the value of having a strong domestic manufacturing sector is increasing in frequency. We are once again starting to recognize that the economy performs best in the middle ground between pure capitalism and pure socialism. Longer term that may help promote a stronger global economy vs. one that is simply shifting economic prosperity between countries.
My point in this column is not to minimize the fact that the U.S. current economic challenges are significant and a lot of businesses and individuals are struggling. Instead, it is to point out that in all negative news, there are serendipitous opportunities. This cycle is no exception.
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