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:
The number of M&A deals done in the EMS industry decreased in the first half of 2021 versus the year-earlier period. According to MMI’s count, 12 M&A transactions closed in the EMS industry during the first six months of the year, down from 17 in the first half of 2020 (Chart 1). That’s a decrease of 29.4%. If deal making continues at this pace in the second half, then 2021 will go down as the dullest year for industry M&A since 1995.
While M&A has been consistently in the 12–18 deal range since 2010, current activity has been fueled by corporations’ quest for growth and new customer acquisition. Rather than trying to achieve all the growth organically, it’s easier to buy another company’s existing customers, profits, and market share, often resulting in accretive earnings. Moreover, 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 is large organizations that are using their significant cash assets to continue buying up the manufacturing 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 – 2021 Edition. We are highlighting some of the key research findings of the report in this issue. See https://newventureresearch.com/wpcontent/ uploads/ems2021-RS.pdf/ for more details. The worldwide contract manufacturing (CM) market experienced an excellent increase in revenue—an estimated 7.1 percent in 2020 based on NVR’s field research and worldwide survey—which is far in excess of the annual worldwide GDP rate of –3.2% established by the International Monetary Fund in 2020. The industry reached an all-time high of $595 billion in 2020, mainly led by top tier EMS companies performing at a higher level of growth since 2019. EMS companies averaged the highest growth over the last five years, exhibiting a 7.5 percent CAGR, whereas ODMs experienced a somewhat lower growth of 3.7 percent. Both supplier types benefited from the rising tide of sales of PCs and feature phones.
Contract electronics manufacturing has largely succeeded over the last 30 years because suppliers learned to do two things really well: solder and manage the supply chain. Since the beginning, there has been a constant and persistent shift of revenue by OEM companies to EMS companies, so that by 2020, the total contract manufacturing market reached $596 billion in electronics assembly production. Of course, the task of soldering has expanded to include building all manner of things (the so-called box assembly) and EMS companies have gotten so good at it that very few OEMs are able to match their production without the help of a partner. Contract manufacturers now account for product assembly of up to 90 percent of certain types of cases (motherboards, networking equipment, and most smart phones).
In 2020, for the fifteenth time in the past 18 years, combined revenue for the top 25 contract manufacturers (EMS providers and ODMs) grew. Last year, top 25 revenue totaled $485 billion, up 11.4% from 2019. 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 2020. Perhaps more encouraging than the increase in growth was the realization that the top 25 performed well and increased more than the global economy, which contracted for 2020 at –3.5 percent, 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 positive due to rapid growth in key end markets such as telecom infrastructure, computing, consumer/smart phones, and semi-cap equipment. In addition, M&A activity has remained robust, and the primary driver of the consistent transaction activity was the favorable EMS industry tailwinds in 2020, despite the challenges COVID-19 created in the M&A environment. M&A opportunities have remained strong as companies perform well due to the “electronics super-cycle.”
MMI’s annual list of the 50 largest EMS providers worldwide reached another milestone in 2020. The combined sales of the MMI Top 50™ EMS providers increased by $17 billion over 2019, for a total of $388 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 for their production assembly.
In 2020, the number of EMS industry mergers and acquisitions increased from the year before. M&A transactions closed during 2020 totaled 26, down by two from the previous year. Transaction totals have been in decline since a post-recession high of 45 in 2010 (Chart 1). The lackluster macro environment and associated uncertainties that followed the recession have not encouraged deal making. The most common deal in 2019 was service or supply chain extension (marked S on the Scorecard). In 2019, this was the most popular type of deal, similar to the year before. Last year, there were 11 instances of EMS providers buying operations for supply or service chain extension, up from 10 the year before (Chart 2, p. 4). As the industry has matured and providers have built out their service offerings, fewer companies generally need to acquire capabilities.
Despite many regions just beginning their reopening process from COVID-19, PC demand across the globe remains strong and in some cases was at record levels exiting 2020. The largest drivers of demand continue to be consumers and students needing reliable systems in order to be productive and connected, and corporate upgrades. Additionally, IDC believes that strong demand exists for new PCs, to enable the hybrid uses that will be required as the world finds its post–COVID-19 normal.
SMT line utilization is often the most important metric that EMS companies use to describe production efficiency, profit, and ultimately success. It’s necessary to optimize key performance indicators (KPIs) that include metrics like line utilization (LU), machine utilization (MU), and the overall equipment effectiveness (OEE), which measures associated metrics such as throughput, performance, and quality. Presenting this manufacturing machine data for effective use by business managers requires several processes that can pose significant challenges for EMS companies.
A mid-single-digit decline for the first nine months of 2020 raises the possibility that the top 12 EMS providers as a whole will not end up with annual growth in 2020.
For the first nine months, revenue for the 12 largest EMS providers by total sales amounted to $205.8 billion, down 4.7% year over year. In order to match last year’s sales of about $233.9 billion, the top-12 group would need to increase its Q4 sales sequentially by some 13.6%. That may be a lot to ask, but it’s not completely out of the question in a seasonally strong Q4.
Why are so many governments getting it wrong? When we examine the world situation regarding COVID and the key figures of total deaths and deaths per 100,000 population, the results call for further inquiry. While it seems clear that COVID will remain a threat for years, the obvious gap between those countries that have handled the pandemic well (which include Taiwan, New Zealand, Singapore, South Korea), those that have not (US, Brazil, India, Mexico), and others that are lying somewhere in between (Sweden, Germany, Canada, Israel) indicates that it may come down to the sociology of its citizens. Underlying this behavior is the desire to escape a trade-off between shutting down to keep people alive and staying open so that life goes on. Yet people are social animals and while some are compliant to an authority’s request for mitigation, others are rebellious and indeed skeptical of the reasons why.
Based on first-half results of 20 of the largest contract manufacturers, the COVID-19 virus is having a significantly negative impact on the contract manufacturing industry. The company that has suffered the most is Hon Hai (Foxconn), which experienced a decline of more than $9 billion in year-on-year 2Q revenue between 2019 and 2020. This was equivalent to a 23.2% decline and the largest setback in earnings in the company’s history (resulting in a nearly $1 billion loss). Other EMS/ODM companies experiencing losses include Venture Corp. (–25.6%), BYD Electronics (–22.4%), Kinpo Electronics (–22.1%), Sanmina (–21.5%), Benchmark Electronics (–18.4%), Cal-Comp Electronics (–13.6%), and AmTRAN Technology (–12%), followed by Plexus, Kimball Electronics, Flex, and Jabil with only single-digit declines. The company that did the best in terms of growth was USI, which saw a more than doubling of revenue y-o-y (+128%) as the company continued its focus on system inpackage (SiP) technologies for modular and miniaturized product designs. Inventec achieved surprisingly good growth of 11.5%, followed by Quanta, Pegatron, Celestica, Wistron, Qisda, and Compal Electronics, all in the single digits. All this positive and negative growth resulted in an average of –7.6% y-o-y for 2Q, which would have been a positive 2.0% expansion without the massive loss by Foxconn (see Table 1).
Based on MMI’s estimates for the first nine months, the five largest US-traded EMS providers, as a group, are on their way to experiencing 2020 as a year of declining revenue. Companies have been reporting a significant dip in sales since the first quarter of 2020, with the trend continuing in the second quarter and some recovery occurring in the third quarter.
MMI is projecting that third quarter sales for the group will total $15.3 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 1.6% sequentially, but if we include Celestica, which has not yet reported or given guidance for its thirdquarter results, that number might improve significantly. Having a turnaround in the third quarter after two of the last three quarters declining looks like a decidedly good sign (see Chart 1).
The number of M&A (merger and acquisition) deals done in the EMS industry increased 70% in the first four months (activity went flat in May and June) of 2020 versus the year-earlier period. According to MMI’s count, 17 M&A transactions closed in the EMS industry during the first six months of the year, up from 10 in the first half of 2019 (Chart 1). If deal making continues at this pace in the second half (and activity is now high among various providers), then 2020 will go down as a turnaround year for industry M&A.
The worldwide contract manufacturing (CM) market experienced a nominal increase in revenue in 2019—an estimated 2.5 percent based on our field research and worldwide survey—which is slightly less than the annual worldwide GDP rate of 2.9% as established by the International Monetary Fund for 2019. The industry reached an all-time high of $555 billion in 2019, mainly led by second- and third-tier EMS companies performing at a higher level of growth since 2018. EMS companies averaged the highest growth over the last five years, exhibiting a 5.5 percent CAGR, whereas ODMs experienced a somewhat lower growth of 2.6 percent CAGR, which seems likely a result from lower demand for commodity PCs and feature phones.
MS in the Era of COVID‐19 MMI has been polling its subscriber base to get a pulse on how the EMS industry has coped with the coronavirus in April and 1Q20. Feedback was mixed but generally positive, depending on the industry being served. As one might expect, companies with medical product assemblies were experiencing a strong increase in orders, followed by increases in the test and measurement sector (10–15%). The industries most being hurt were those with anything to do with transportation (automotive, commercial avionics, recreational vehicles) or with the retail sector (food services, apparel, and consumer products), and here some companies were reporting a drop in April revenue of as much as 25%. Both the telecom and computer sectors were in suspension, with most seeing a small drop in orders. Most industrial products and aerospace/military were holding steady without much decline. Fortunately, the majority of EMS assemblies today are engaged with “essential” products and so demand for services, while temporarily down, will not suffer too badly starting from 3Q20 and after.
In 2019, for the fourteenth time in the past 16 years, combined revenue for the top 25 contract manufacturers (EMS providers and ODMs) grew. Last year, top 25 revenue totaled $461 billion, just barely up 1.2% from 2018 (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 2019.