Capability Trumps Capacity in EMS Industry

After two decades of concentrating on capacity, the focus of the electronics manufacturing services (EMS) industry now is shifting to capability, with competencies including manufacturing skills and supply chain management gaining in importance, according to IHS iSuppli EMS & ODM Market Research at information and analytics provider IHS Inc.

Over the past two decades, the EMS industry has grown by a combination of organic growth and acquisitions. Industry revenues increased as original equipment manufacturers (OEMs) outsourced production to EMS providers across myriad industries. At the same time, EMS companies acquired numerous manufacturing assets from many of those same customers.

As this trend has progressed during the last two decades, the end markets for EMS products have shifted somewhat. The decade of the 1990s was focused on enterprise-class products, while the stress during the 2000s fell on consumer-oriented electronics. These acquisitions brought, not only capacity, but more importantly, capabilities that IHS believes are in many cases just now starting to earn substantial returns for many companies across the industry.

So far this decade, IHS research shows the product mix has shifted slightly as more industrial products have started to flow through the industry. In parallel with this shift, there has been a rise in focus on enhancing capabilities.

Capabilities previously honed for the production of high-reliability, enterprise-class products can be adapted to industrial products. At the same time, the lessons learned in terms of cost control and meeting extremely tight deadlines for the consumer products sector can also be adapted to other products that are new to outsourcing.

Such need for improved capability could take many forms. Already, EMS companies have been observed to expand into capabilities that were previously considered non-core, such as in-house mechanical fabrication or aftermarket service. Furthermore, EMS providers are placing greater emphasis on end-to-end supply chain management. These and many more capabilities are likely to be the largest drivers of growth for the industry.

Given the concerns for much weaker global growth than currently expected, IHS remains quite cautious on its 2012 EMS industry growth outlook, but companies that enhance their capabilities are more likely to capture a larger share of the market over the next decade.

9 comments on “Capability Trumps Capacity in EMS Industry

  1. Eldredge
    March 29, 2012

    As the industry continues to get more competitive, it makes sense that the leading companies are seekng ways to add value. Additional capability is a good way to accomplish that end.

  2. Barbara Jorgensen
    March 29, 2012

    I'm not clear whether or not this capability brings higher margins along with it? Anything that boosts EMS margins is a good move…

  3. Houngbo_Hospice
    March 29, 2012

    EMS is changing to adapt to the market and respond to the new trends. Capabity developement is one good sign that the EMS industry is growing, and it now needs to sharpen a new strategic focus.

  4. bolaji ojo
    March 29, 2012

    The decision to add capability at EMS providers over capacity is tied to the fact these companies already achieved their initial goals. By adding capacity over the last couple of years, they gained the attention and patronage of the OEMs. I believe they even had to buy the capacity from the OEMs as part of new contract engagements.

    Today, OEMs don't have as much capacity floating around so EMS providers can't gain new contracts on that basis. To win new contracts they must add value and it helps in jacking up margins too. Good deal for EMS providers.

  5. elctrnx_lyf
    March 30, 2012

    Adding the new capabilities and inturn adding value to the customer will be the crucial matra of success for all EMS providers in the coming years. One example may be like they would certainly develop inhouse team for developing ATE for the OEM products. Is there anyone from EMS or OEM who can actually provide a list of desired capabilities?

  6. Eldredge
    March 30, 2012

    Exactly right – the first phase was to grow the business volume (width) and next phase is to grow the business value (depth).

  7. ahdand
    March 31, 2012

    Yes true but many try to do both in the same time and get into trouble.

  8. Barbara Jorgensen
    April 2, 2012

    @nimantha: it certainly blurs the lines between what is an EMS, ODM and OEM. However, if customers continue to demand higher levels of capability, EMS companies must deliver. But I think the OEM continues to cede too much to its partners.

  9. Eldredge
    April 3, 2012

    @Barbara – You may be right  – it will be interesting to see how the OEM-EMS relationship evolves.

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