For the latest contract manufacturing news and EMS industry trends, MMI is the place to go. But don’t take our word for it. Here are some important stories we’ve covered over the last year:
Most people who hear of 5G (and, increasingly, 6G) think of a wireless service for our handheld devices—of streaming video and downloading high-capacity files. When 4G arrived, the major use was obvious: content streaming. As consumers began to demand more bandwidth and better speeds to facilitate using online services such as YouTube, Netflix, and Spotify, telecom firms answered. In the next several years, the 5G network will introduce much new hardware, including upgraded mobile phones, modems, routers, and, most importantly, Internet of Things devices—but more on that later. During 2019, China-based smart phone brands, including Huawei, Vivo, Xiaomi, Oppo, and ZTE, have released 5G smart phones, almost entirely in the domestic market. Because 5G smart phones are expected to be able to support heavy workload applications such as streaming Ultra HD multimedia content, VR/AR, and cross-platform IoT connection, phone vendors are working to improve their devices’ computing performance, reliability, power consumption, heat dissipation, screens, and camera functions.
Double-digit growth for the first nine months of 2019 would suggest that the top 12 EMS providers as a whole will end up with annual growth in 2019. For the first nine months of 2019, revenue for the 12 largest EMS providers by total sales amounted to $233.9 billion, up 10.5% year over year. This is not quite to the standard of 2018, when growth was 18.3%. Unlike in 2016, when Hon Hai had exerted a drag on sales, so far this year Hon Hai gave a boost to top-12 sales. For the first nine months, top-12 sales without Hon Hai were 4.9% versus an increase of 10.5% including the company (Chart 1). So Hon Hai made the hike improve by 5.6 percentage points. Nine-month sales results can give
one a partial view of how the top-12 order will shape up at the end of the year. The first three companies in the current standings—Hon Hai, Pegatron, and Jabil, in that order—will easily retain those positions at year end, barring extraordinary circumstances. Flex, Sanmina, and Celestica will remain in fourth, fifth, and sixth places, respectively.
The US trade war was originally intended to be a stimulant for domestic production that was to be won by its benefits in new manufacturing jobs, but nearly one year after its implementation, this appears not to be the case. And based on some recent strategic market information obtained by New Venture Research (NVR), the parent of MMI, the electronics manufacturing industry in China is not only thriving, but it is growing rapidly, and it appears that it is going to make China great all over again.
Based on first-half results of 20 of the largest contract manufacturers, neither the EMS approach nor the hybrid model has enjoyed an appreciable advantage this year so far, but ODMs have performed better in comparison. Combined first-half sales of 11 large EMS providers increased to 4.4% and the aggregate sales of six large ODMs increased to 6.6%. Both groups were able to circumvent any macroeconomic headwinds swirling about the global economy. But that is not the end of the story of the first six months.
There is a third class of contract manufacturer—the hybrid provider—that does substantial amounts of both EMS and ODM business. In conformity with the increases in the EMS and ODM groups, combined sales of three large hybrid CMs increased in the first half. The hybrid group’s revenue increased by 4.4% year over year (Chart 1). If this comparison can be generalized, it would seem that all three groups—EMS, ODM, and hybrid model—were successful in withstanding the vicissitudes of the first half.
Based on MMI’s estimates for the first nine months, the six largest US traded EMS providers, as a group, are on their way to turning 2019 into a growth year. Such growth can be an easy task for the final quarter in the current demand environment, as providers have worked diligently to boost sales with new program ramps. MMI is projecting that third-quarter sales for the group will total $17.62 billion by setting the sales estimate for each provider equal to the midpoint of its Q3 guidance. At that level, Q3 sales will have risen 2.5% sequentially, marking the third straight quarter-to-quarter increase. Since the sequential increases started two quarters back, 1Q2019 looks in the rearview mirror like a revenue leading (see Chart 1).
The number of M&A (merger and acquisition) deals done in the EMS industry decreased in the first half of 20 19 versus the year-earlier period. According to MMI’s count, 10 M&A transactions closed in the EMS industry during the first six months of the year, down from 14 in the first half of 2018 (Chart i). That’s a decrease of 28%. If deal making continues at this pace in the second half, then 2019 will go down as the dullest year for industry M&A since 2009. While M&A has been virtually flat since 2017, current activity has been fueled by corporatious’ quest for growth. Rather than spin their wheels trying to do it all internally, it’s easier to buy another company’ s existing products, profits, and market share. The availability of debt financing at historically low financing rates is also a boon for M&A activity, especially in the healthcare and tech sectors. In the tech sector, it’s large organizations that are using their significant liquid assets to continue buying up the products and intellectual property of their smaller competitors.
NVR, the parent company of MMI, recently finished its annual report on the worldwide EMS industry, The Worldwide Electronics Manufacturing Services Market – 2019 Edition. We are highlighting some of the key research findings of the report in this issue (see https://newventureresearch.com/wpcontent/uploads/ems2019‐RS.pdf for more details). The worldwide contract manufacturing (CM) market experienced a significant increase in revenue—an estimated 15 percent—in 2018, which is the second year in a row that it experienced double digit growth. The industry reached an all time high of $542 billion in 2018, mainly led by EMS companies performing at a higher level of 18 percent growth since 2017 (ODM revenue increased by 4.9 percent; however, this was because Wistron was taken out of the ODM category and placed into the EMS column of revenue). EMS companies averaged the highest growth over the last five years, exhibiting a 9.5 percent CAGR, whereas ODMs experienced a negative 7.3 percent CAGR.
Readers of MMI know that the telecom industry offers some of the richest opportunities for manufacturing outsourcing. Telecom equipment is everywhere, starting on the local network level and extending out to the wide-area network. Just a short list of hardware includes products like gateways, routers, network bridges, modems, wireless access points, networking cables, line drivers, switches, hubs, and repeaters; and also should include hybrid network devices such as multilayer switches, protocol converters, bridge routers, proxy servers, firewalls, network address translators, multiplexers, network interface controllers, wireless network interface controllers, ISDN terminal adapters, and similarly related hardware. Networking hardware used in computers includes data center equipment (such as file servers, database servers, and storage areas), network services (such as DNS, DHCP, email, etc.), and devices that assure content delivery.
For the 13th time in the past 16 years, combined revenue for the top 25 contract manufacturers (EMS providers and ODMs) grew in 2018. Last year, the top 25 revenue totaled $428 billion, up 9.7% from 2017 (Chart 1). Because the top 25 group accounts for 80–90% of revenue in the outsourcing space, this upward tick in revenue serves as an approximate indicator of how the contract manufacturing market behaved in 2018. Perhaps more encouraging than the increase in growth was the realization that the top 25 as a whole performed well and increased more than the global economy, which grew at a 3.6% rate in 2018, according to the International Monetary Fund. Longer-term industry attractiveness is raised by a plethora of near-term catalysts. This suggests that expectations have modestly risen, while the fundamental outlook could become more receptive due to rapid growth in key end markets such as telecom infrastructure, computing, consumer/smartphones, and semiconductor capital equipment.
MMI’s annual list of the 50 largest EMS providers worldwide has reached another milestone. In 2018, combined sales of the MMI Top 50™ EMS providers broke through the $330 billion barrier with a revenue total of $333.7 billion. While not all of this revenue is pure EMS—there is some ODM and other non-EMS business mixed in among the largest companies—the vast majority of it is EMS, offering a clear indication of how much OEMs now depend on the EMS industry. With the results of MMI’s Top 50 survey now in, it can be said that 2018 was a generous growth year for the Top 50 as a whole. The group’s 2018 sales increased 10.9% from the previous year. This result should not be surprising, given better-than-expected growth in world markets and among OEMs.
In 2018, the number of EMS industry mergers and acquisitions increased from the year before. M&A transactions closed during 2018 totaled 20, up 17.6% from a revised count of 17 in 2017. Transaction totals have been in decline since a post-recession high of 45 in 2010. The lackluster macro environment and associated uncertainties that followed the recession have not been conducive to deal-making. The most common deal in 2018 was a service or supply chain extension (marked S on the Scorecard). This type of deal being the most popular type was unlike the year before. In 2018, there were 10 instances of EMS providers buying operations for supply or service chain extension, up from seven the year before. As the industry has matured and providers have built out their service offerings, fewer companies generally need to acquire capabilities.
While it is too early to say, it appears that 2018 was another strong year for EMS. This follows a very strong year in 2017 in which the contract manufacturing industry expanded by 10.8% over the previous year. We had estimated revenue growth of 10.7 percent by looking at a sampling of leading companies and other indicators (such as the nine-month results) and anecdotes gathered from industry participants. But it looks like 2018 will be even stronger than 2017, with revenue growth somewhere in the 10–15% range, and possibly higher, once the lower tier data has been collected. Contract manufacturing results definitely outpaced OEM revenue growth, which was in the very healthy 5–6% range.
We are witnessing a trend toward modularization of subsystems for smartphones and other digital devices that will usher in a new class of hardware integrating multichip ICs (logic, memory), active and passive elements (sensors, antenna, power supplies), and advanced packaging technologies such as FOWLPs (fan-out wafer-level packages). These fully functional devices are often referred to as system in packages (SiPs) or multichip modules (MCMs), although we now refer to them as 3DICs. Application areas in the greatest demand are for mobile communications (smartphones and wearables), factory automation and industrial control, and automotive and telecom solutions. These emerging technologies will help shepherd a new group of advanced IC devices that address artificial intelligence, machine learning, augmented reality, blockchain, and 5G networks.
The latest round of US tariffs is a 10% levy on $200 billion worth of Chinese goods, which is set to rise to 25% by the end of the year. That’s on top of the $50 billion worth of tariffs on Chinese goods that went into effect in August. EMS companies that MMI has interviewed are unanimous in their condemnation of the proposed tariffs, which by all accounts seem likely to achieve little other than to punish US EMS companies, raise prices on electronic assemblies, and threaten layoffs and thereby cause unemployment.
Based on first-half results of 20 of the largest contract manufacturers, neither the EMS approach nor the ODM model has enjoyed an appreciable advantage this year so far. Combined first-half sales of 11 large EMS providers increased to 13.5%, the aggregate sales of six large ODMs increased to 5.6%. Both groups were able to circumvent any macroeconomic headwinds swirling about the global economy. But that is not the end of the story of the first six months. There is a third class of contract manufacturer—the hybrid provider—that does substantial amounts of both EMS and ODM business. In conformity with the increases of the EMS and ODM group, combined sales of three large hybrid CMs increased in the first half. The hybrid group’s revenue increased by 17.4% year over year (Chart 1). If this comparison can be generalized, it would seem that all three groups—EMS, ODM, and hybrids—did a reasonable job of withstanding the vicissitudes of the first half.
Based on MMI’s estimates for the first nine months, the six largest US-traded EMS providers, as a group, are on their way to turning 2018 into a growth year. In the current demand environment, such growth may be an easy task for the final quarter, as providers have been working diligently to boost sales with new program ramps. MMI is projecting that third-quarter sales for the group will total $17.14 billion by setting the sales estimate for each provider equal to the midpoint of its Q3 guidance. At that level, Q3 sales will have risen 2.4% sequentially, marking the second straight quarter-to-quarter increase. Since the sequential increases will have started two quarters back, 1Q2018 looks in the rearview mirror like a revenue leading (see Chart 1). MMI estimates that group sales for the first nine months will reach $50.61 billion, up 11.2% year over year. All six providers are expected to experience revenue growth for the period and two of the increases will be of the double-digit variety (Table 1, p. 2). Jabil and Plexus will be the providers best able to achieve two-digit revenue growth for the first nine months, MMI predicts.
The number of M&A deals done in the EMS industry decreased in the first half of 2018 versus the year-earlier period. According to MMI’s count, 14 M&A transactions closed in the EMS industry during the first six months of the year, down from 15 in the first half of 2017 (Chart 1). That’s a decrease of 7%. While M&A has been virtually flat since 2017, current activity has been fueled by corporations’ quest for growth. Rather than spin their wheels trying to do it all internally, it’s easier to buy another company’s existing products, profits, and market share. The availability of debt financing at historically low financing rates is also a boon for M&A activity, especially in the healthcare and tech sectors. In the tech sector, it’s large organizations that are using their significant liquid assets to continue buying up the products and intellectual property of their smaller competitors.
The last time there was any significant growth in the EMS industry was in 2014, when the market expanded by 24 percent; then it stayed flat through 2016. But in 2017 the contract manufacturing market experienced good growth again, expanding by 10.8%. This growth was achieved in both the EMS and ODM industries, which expanded by 10.7% and 10.9%, respectively, in 2017. By far the largest growth occurred in the total assembly telecom sector among commodity smartphones, accounting for 35.5% growth in 2017. The industrial and medical markets experienced 5.8% and 5.5% growth, followed closely by the automotive market at 4.7%. The consumer and computer electronics sectors experienced a downturn of 10.2% and 5.6% percent as a result of slumping demand for digital televisions and computer products. The defense/aerospace and commercial avionics market had a combined growth of 4.0%, with the strongest expansion coming from the commercial sector.
As the EMS industry continues to evolve and expand in 2018, we asked Jeremy Vanselous, President and Executive Recruiter at The SearchWorks Group, for his view of the trends he and his team are seeing in the industry today. Clearly, the demand for talent is increasing and a skills gap in the EMS industry in the US and elsewhere is becoming more apparent every day. At the same time, the perceptions and attitudes of EMS professionals are also changing. Included are the highlights of what one of the most successful professional search firms in the EMS industry is seeing out there today.