Amid rising economic and market uncertainty, the electronics supply chain is moving in divergent directions when it comes to inventory, with contract manufacturers attempting to attain the leanest possible stockpiles and original equipment manufacturers (OEMs) laboring to ensure they have sufficient supplies on hand to rapidly respond to any rise in demand.
The two forces seem like polar opposites. For their part, electronics manufacturing services (EMS) providers want to accelerate the speed of inventory moving through their asset base, which means reducing aggregate dollars to the leanest level possible. On the other hand, OEMs wish to ensure that they have sufficient supply to respond to any unforeseen upside in demand at a moment's notice. This desire has become even more critical in light of the recent supply disruption wrought by the catastrophic flood in Thailand, which followed less than a year after the major disruption caused by the earthquake in Japan.
With the daily headlines sending murky signals on the economic outlook and order books showing increased volatility, a simple solution exists to this inventory tug of war: EMS companies need to ask their OEM customers to pay the tab for the additional stockpiles.
Already, inventory in many cases makes up the largest asset on the balance sheets of global EMS providers. The latest results from several of the largest global EMS providers show, in fact, that nearly one third of their tangible asset base is tied up in inventory, higher than the 25 percent level in 2007.
A similar ratio is apparent — although the levels are not perfectly uniform — in a survey across the EMS industry. Thus, as OEMs push for more flexibility for upside given the uncertain demand patterns, it appears that, in aggregate, EMS companies have made a rather large investment in inventory relative to their capital base.
For this reason, when OEMs push for even higher levels of secured inventory stock to prepare for demand volatility, EMS providers that already have devoted a material portion of the balance sheet to inventory simply need to tell them, “Fine, but it's on your dime.”
In the future, IHS believes this will become much more the norm in the industry as EMS providers look to improve their asset velocity in the face of highly uncertain demand. Otherwise, the industry is looking at another period of delayed shipments and of capital being tied up in less productive assets.