With a field of more than 2,000 competing companies, less-than-ideal utilization rates, and a surplus of capacity, the global electronics manufacturing services (EMS) business appears to be prime territory for industry consolidation.
And yet, having toughed out the last downturn and now enjoying a recovery in demand, EMS providers remain resistant to consolidation even as they pin hopes on the arrival of a new wave of growth in the future, IHS iSuppli research indicates.
To be sure, questions have been raised on why more consolidation hasn’t occurred, given the very low level of merger activity in the global EMS space. True, a few original equipment manufacturer (OEM) divestments in the consumer and computing segments have taken place, and several of the larger EMS providers already have acquired smaller competitors to gain scale or enhance specific end markets. There has also been a slew of small investments in other companies within the supply chain in order to improve service offerings for OEM customers.
However, despite a rise in aggregate industry revenues, industry-wide EMS utilization rates still remain below optimal levels, and a number of providers concede that the industry on the whole has too much capacity. The more than 2,000 outsourced electronics manufacturing providers worldwide run the gamut from global and regional companies to small and midsized businesses, in terms of footprint coverage and revenue generation.
With the industry still at underused capacity, consolidation appears to be in the EMS sector’s best interest in order to reduce capacity and acquire a small amount of leverage. The last time the EMS industry found itself in an overcapacity situation was during the period from 2000 to 2007, a time marked by a great deal more consolidation.
Following the dotcom implosion, a number of small-to-midsized EMS providers, as well as regional and super-regional companies, saw revenue decline significantly. Information technology and communication OEMs spent the better part of a decade leading up to the crash divesting themselves of manufacturing capacity — and the EMS industry was there to absorb much of it.
Capital during that period also was relatively plentiful for many companies in the industry, which helped fund industry consolidation. Nonetheless, the largest driver of industry consolidation at that time was the willingness of sellers, IHS believes. In fact, a number of management teams emerged that had done the restructuring, built out new capabilities, and worked diligently to refill the revenue pipeline — only to feel afterward as if they were somehow stuck on a treadmill. This led a number of companies to realize that it was easier to sell to a more willing buyer than to stay on the current path.
Some striking differences can be seen when that period is compared to the current era after 2007. First, a survival mentality among EMS providers remains despite memories of the recent Great Recession. In the face of having survived the downturn, many companies feel confident in being able to tackle potentially worse events.
Second, despite improving earnings, many firms went through dramatic and costly factory realignments — not an exercise that anyone wishes to undertake again anytime soon.
Last, organic growth for a number of companies has been stronger than expected. This is the cheapest kind of growth available, which throws into question why EMS providers should buy what they already have.
All told, this rather slow period of consolidation won’t last forever, but those hoping for a major wave of mergers and acquisitions may find themselves having to wait awhile.
— Thomas Dinges is the EMS and ODM analyst at the market research firm IHS iSuppli in El Segundo, Calif. For more information on the contract manufacturing market, see Dinges’s new report, “EMS and ODM See Near-Term Pause on Road to Recovery.” For media inquiries on this article, contact Jonathan Cassell, editorial director and manager of public relations, at firstname.lastname@example.org. For non-media inquiries, please contact .