EMS industry executives comment on 2011 trends

10 January 2011

In looking at trends for 2011, Susan Mucha polled electronics manufacturing services executives and also tapped the expertise of long-time industry watcher Tony Hilvers at IPC.

The question I asked was: what are the top two trends (business, economic or technology) that you see impacting the EMS industry in 2011?

The answers I got varied widely and most respondents discussed more than two trends. Executives in Asia have different perspectives from executives in the US. The size and geographic coverage of EMS providers also influenced the answer, as did the core industries they targeted.

There is still a lot of economic uncertainty in the equation, but on a positive note, the respondents also saw new opportunities emerging.

Here are the responses:

Goh Chan Peng, CEO, Beyonics Technology Limited (www.beyonics.com)
In terms of financial trends, the US government’s change in monetary policy relative to printing more dollars will have major impact. This ‘hot’ money will flow to Asia and will force Asian currencies to appreciate with no economic value. This, in turn, will likely increase inflation and reduce exports. Asia property values are on the rise due to speculation from overseas buyers. This increased cost will further erode EMS industry margins.

The global economy is also influencing industry trends. The major economies of the USA, Japan and Europe are still suffering from the debt crisis. There has been a major shifting of manufacturing activities to Asia over the last five years. However, labour margins in Asia are under significant pressure. EMS companies in this region who have a business model dependent on heavy use of manual labor will find it challenging to maintain acceptable margins. Major players in the EMS industry will see consolidation.

From a technology standpoint, the successful introduction of the SMART phone, iPad and tablet PCs, is changing consumer behaviours in the middle and higher income earner brackets. Most of the major corporations have shifted to ‘one line’ 24x7 access to information, knowledge, and communication mode and style. With the introduction of the SSD or advanced chipsets, which improve the memory of tablets, the PC market is starting to see demand slow and lifespan lengthen.

Gary Burnett, Sr., C.E.O., Burton Industries (www.burtonindustries.com)
OEMs have low confidence in consumer demand right now and don’t want to build-up inventories. And, lack of consumer spending impacts even traditional business-to-business segments. For example, in the medical equipment segment we see drops in demand because consumer traffic in clinics is down and that impacts new equipment purchases. The housing industry is still driving a lot of economic weakness because people are afraid to spend money since home values have dropped and that often represents their main savings vehicle.

Uncertainty in taxes and changing regulations are also concerning to our customers. In 2010, we saw a 20% increase in sales, but it could have been better if consumer and business confidence had increased.

We also see new opportunities emerging. Alternative energy/green technology could drive increased manufacturing in the Midwest. The RoHS requirement expansion in 2014 may also increase need for value added support. Medical OEMs will lose their exemptions. Pre-downturn, some of our medical customers were starting to redesign, but many slowed that conversion process down as the economy worsened. So, many of our previously exempted customers still have conversions to implement.

Material pricing and lead-times are increasing and that pressures EMS companies to find ways to support that. US distribution is no longer a major player in the components market. The volumes coming to the US aren’t as high and the end result is higher US pricing.

On the bright side, companies that aren’t sending large volumes to Asia are much more interested in US production. This is not a new trend for Burton. We’ve been seeing business come back from Asia for the last two years. OEMs whose overall spend is too small to have leverage over their Asian suppliers tend to be most interested in exploring domestic options.

Ka Huat Tan, Managing Director, CEI Contract Manufacturing Limited (www.cei.com.sg)
On the economic front, the US has initiated QE2 (US$600 billion) and that impact has yet to be ascertained, while Portugal, Ireland, Greece and Spain are going through severe economic and banking/finance adjustments. However, as long as China, Germany and Japan are holding up well in 2011, I believe that the US, Europe, and hence other world economies, will continue to recover.

With above backdrop, EMS business in 2011 will continue to grow, albeit at a slower rate as compared to 2010. The projections I’ve seen have pegged worldwide EMS growth at rates at 15% in 2009-10 and 11% in 2010-11.

Outsourcing momentum from US and European OEMs will remain intact. In terms of market and business opportunities, I believe that two megatrends below offer fresh growth opportunities for EMS:
• Communication – 4G (GMS) and its applications in multimedia field for consumer content and products
• Clean energy technologies including solar, wind, fuel cells and related devices, for industrial and commercial products

In terms of technology adoption by EMS firms to stay competitive and relevant, I see challenges as well as opportunity in green production processes for sustainability strategy, e.g., RoHS and now REACH. I also see a trend toward increasing value-added services through the acquisition of technologies and skills in subsystem and/or full system assembly and testing capability, and design services of cross disciplinary or multidisciplinary skills, i.e., EE, ME, SW, Chemical Eng., Biomed, ergonomics, etc.

Clean energy is one of the markets that CEI is focusing on. We are a consortium member of the A*STAR Experimental Power Grid Centre (EPGC), under the Institute of Chemical and Engineering Science (ICES). The goal of this consortium is to explore smart grid products opportunities in data acquisition, metering/measuring, monitoring and communication. CEI is also exploring solar power business opportunities through our fully owned subsidiary, Clean Energy Innovation Pte Ltd. (CEI Pte Ltd).

Bhawnesh Mathur, CEO, EPIC Technologies (www.epictech.com)
The top trends that I see are:
Customers continue to want to broaden the services they receive from EMS partners. Although NPI and production are currently core services, we continue to see increasing amount of our participation on front end design and backend fulfilment and repair services.

Customers continue to want EMS partners to have knowledge of and accessibility to global partners. Not all are rushing to go to China, etc., although some are, everyone does want to know the risk/benefit and the ability of EPIC to become global. We have seen this become very interesting as we increased focus on Mexico as well.

We do see customers specifically ask for India. India is considered to be highly cost competitive, yet offers the benefits of UK-based laws and a fluently English-speaking workforce. The logistics to/from India have improved. Another consideration for customers, although cost competitiveness is number one, is the potential India consumer market. EPIC has created a Strategic Alliance with SFO Technologies so that current and future EPIC customers can benefit from both a North American-based company and one with outstanding India capability.

Joseph O'Neil, President of Hunter Technology Corp. (www.hunterpcb.com)
Here is my two cents on the top two trends in 2011:
• Transparency – The open book model is certainly working for us. Customers need an open, honest look at the cost drivers in order to make informed business decisions. The revolt against rebates, credit and bill, hidden PPV and other off-book practices is rooted in the need for trust and thus the need for transparency.

• Global Consolidation – The right work will continue to find the right home. Where is the best place for innovation? What is required to support that effort? Where is the best place for high reliability? For high volume consumer? For NPI? etc. The answer for OEMs will be different, but it is not typically all within the same factory or same geography. The cost of customer acquisition is high and the cost of managing multiple EMS solutions within the supply chain is even higher. I expect an acceleration of global EMS consolidation this time driven by the desire to provide OEMs with what they’ve been asking for all along, fast local engineering support and local-to-end customer manufacturing and configurability.

Other than that I wouldn’t bet against the holy trinity of trends: smaller, faster, cheaper.

Michael Stohr, President and Owner of MEC Companies, (www.meccompanies.com)
There was a period in the US where there was an infatuation with chasing the lowest cost manufacturer. We are not seeing that now. US companies are finding that the road to China is not as golden and smooth as they expected. Customers are looking more at the total picture rather than saying Asia is the only answer. Difficulties and lack of credibility with China suppliers driven by counterfeit components, improper substitutions, quality issues and lack of schedule flexibility are making some companies rethink their sourcing strategy.

We see companies evaluating options for moving all or part of the business back. They want pricing that is better than typical US pricing, but not equal to or matching China. They look at both measurable and hard-to-measure costs in this equation.

It also seems that there are significant opportunities for new product development support services coming out of the downturn. Opportunities seem to be more heavily weighted to new products and redesigned products. Prior to the economic downturn companies were focused on cost reduction through changing sources. Now they want to redesign or take a new approach on the product. The focus is on taking cost out of the actual product rather than changing suppliers purely for cost reasons.

Jow Peng, President, Tailyn Communication Company, Ltd. (www.tailyn.com.tw)
One concern is the exchange rate. The US currency policy may impact Asian EMS profitability significantly.

A bigger concern is that changes in customer behaviour driven by the downturn and component allocation during recovery may now be standard practice. Customers are concerned about excess inventory and are reluctant to give forecasts or make commitments. There are a lot of rush orders. Customers want their EMS provider to share much more inventory risk. EMS providers push that down to the supply chain. Businesses have been in this reactionary mode so long that is considered normal behaviour. But, the reality is that it may be driving non-value-added cost and inefficiency.

Customers are also shopping for more specialised suppliers. They may be sourcing based on perceived supplier expertise and value-added service core competencies rather than geography or cost alone. To address that need, we are specialising our focus as well. As both an ODM and EMS company, we have significantly more engineering resources than found in most EMS companies our size. We are focusing on finding ways to better provide engineering and technology related value-added services to customers with those needs. We call these capabilities EMS Plus. We see increased demand for NPI support and growing business opportunities in wireless communications-related products.

Tier One EMS companies are also chasing the high mix market and that presents a challenge to smaller players. We are continuing to focus on enhancing our systems and processes to more efficiently support high mix, low volume production in today’s ‘rush order’ environment.

On a positive note, China costs are increasing to the point where Taiwanese companies are very cost competitive. We see growing opportunities from ‘local’ Taiwanese customers, in addition to our customer base in the US and Europe.

Component allocation continues to be a challenge and shortages will likely exist through the first half of 2011. We believe component availability will improve by the second half of 2011.

While not an EMS executive, Tony Hilvers has been a valued part of the electronics industry for decades through his work at IPC. His trends focus reflects potential unintentional impact of proposed legislation.

Tony Hilvers, Vice President of Industry Programs, IPC (www.ipc.org)
The top trends that will impact the EMS industry in 2011 are not the common trends that usually come to mind -- technology, economics or business strategies. The trends that will continue to have a significant impact on the EMS industry and the electronics industry are, I believe, legislation, regulations and corporate social responsibility.

Don’t believe me? Chart the impact of RoHS on the electronics industry and you see what I mean. Here’s another example. Right now Section 1502 was inserted into the US Dodd-Frank Wall Street Reform and Consumer Protection Act and signed into law this past summer. Section 1502 contains a provision requiring companies to disclose what steps they are taking to make sure their products don’t contain tin, tantalum, gold and tungsten refined from minerals from conflict mines in the Democratic Republic of the Congo (DRC).

The section requires companies whose manufactured goods contain metals refined from the minerals columbite-tantalite (coltan and tantalum), cassiterite (tin), gold, wolframite (tungsten) or any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the DRC or an adjoining country to report annually to the Securities and Exchange Commission (SEC). This report would indicate if the minerals did originate from the Congo or adjoining countries and then submit a due diligence plan with the company’s annual SEC report.

Think about the amount of tin EMS companies use in their soldering process. And if you believe this issue is only going to impact publicly traded companies, think again. This is a complex supply chain issue that will reverberate throughout the electronics industry, from OEMs to EMS companies to raw-material manufacturers.

IPC is not sitting on its proverbial hands but working with industry to provide comments and guidance to the SEC. I guess in a real way legislation, regulations and corporate social responsibility will impact EMS companies’ technology, economics and business strategies.

From these comments, it is clear that the coming year will be full of challenges and opportunities. Geography, industry-focus and company size will dictate the mix. 2010 was better for most companies than 2009 and while growth prospects for 2011 may not be as great as those this year (it is easy to experience high grow after a year of contraction), hopefully 2011 will be the year where today’s shaky economies start to regain some stability. Only time will tell.

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