It may not be easy to envision amid the current state of economic uncertainty and demand volatility, but the global electronics manufacturing industry could be on the cusp of a massive growth phase, as original equipment manufacturers (OEMs) engage in a new round of outsourcing.
This will be one of three major trends reshaping the electronic manufacturing services (EMS) industry over the next decade, according to the EMS & ODM Service at information and analysis provider HIS.
The year 2012 will be a challenging period for EMS providers, with industry revenue expected to decline to $357 billion, down by slightly less than 1 percent from $360 billion in 2011. Although several of the largest EMS providers have predicted stability in orders for 2012, IHS remains skeptical that the next 12 months will bring a change in the prevailing status quo of the past six months, characterized by volatile customer orders and driven by concerns over sales growth.
Beyond 2012, however, IHS sees reasons for greater optimism in the EMS market, propelled by three key underlying trends. These are:
- The next wave of manufacturing outsourcing.
- Services take center stage.
- Consolidation determination.
Countless conversations with OEMs spanning all industries have led us to believe that we are likely at a tipping point of a new round of outsourcing. Although IHS is quite cautious in its forecast for the next five years, we believe this outsourcing wave could result in a wave of growth for the EMS industry over the next decade. While the exact timing of this event remains uncertain, it's likely that very few OEMs will maintain the same amount of manufacturing capacity in 2022 that they do now, presaging a wave of growth to come in the future.
The second major EMS trend of the next decade will involve services. Services — especially those of the aftermarket variety — are expected to take on a much more highly valued role for EMS providers. As profit margins decline even for complex products, EMS providers will have to offer aftermarket services such as warranty, repair, and in-field assistance. These services will be essential, not only for EMS to continue to grow profitability, but also to foster tighter relationships with customers.
Furthermore, OEMs are going to lean much more heavily on EMS providers in order to maximize supply chains for improved production velocity. Product cycles are already shrinking, which puts added pressure on EMS providers to respond rapidly to changing end-customer demands. This puts more focus on front-end logistics services and supply chain optimization services.
The third trend focuses on consolidation. EMS companies of all sizes are destined to undergo consolidation during the next decade. Fewer companies should mean slightly less competition and reverse the trend of having too many companies bidding on a limited amount of business.
As can be seen in the OEM and service provider world, consolidation at the top has a strong trickle-down effect. After all, one of the first things that newly consolidated entities do is realign the supply base in order to maximize savings. That being said, there will always be a need for companies of all sizes and skill sets. However, with OEMs continuing to demand broader geographic reach, more complex engineering skills, and greater operational scale, the EMS industry will see fewer companies that can keep pace with those demands. This will only serve to increase the allure of consolidation.
Although the decade has started off on somewhat unstable ground, IHS believes the next 10 years could turn out to be one of the better periods in the history of the EMS industry.