Mid-Size EMS: Getting Squeezed on All Sides
For most electronics companies today, it doesn’t make dollars or sense to own their own manufacturing facilities. Instead, they contract manufacturing out to companies that specialize in just that — Electronics Manufacturing Services (EMS) companies. The global EMS market is very large. Depending on how you draw the boundaries, it is somewhere between $500 billion and $1 trillion annually, and growing at well over 10% as new entrants join the marketplace. It is also quite fragmented: There are a couple of global giants like Foxconn, but also a large number of players focusing on a technological or geographical niche. “Niche player” may sound small, but there’s a large number of mid-size EMS companies in the market. You need well over $300M in revenue to make the Top 50 list.
Being a mid-size company in a large and rapidly growing market doesn’t sound too shabby. But in this market, margins are razor thin, and it only takes a step or two in the wrong direction to go from black to red. To make things more challenging, the mid-size EMS is getting squeezed on all sides. Let’s first look at some of the disrupting factors, and then come back to some recommendations.
Pressure from the top, pressure from the the bottom
From the top, the EMS giants are pushing downwards. They are growing their share in the value chain, expanding from pure manufacturing into design services, aftermarket services, etc. They are acquiring suppliers of critical components to secure capability and capacity for themselves — leaving others potentially worse off. And they are deploying automation aggressively to deal with labor shortages, pushing down the market price of EMS services in the process.
From the bottom, you have an army of smaller EMS companies expanding up. There are several nimble startups that make extensive use of technology to provide a radically improved customer experience — for example instantaneous online quoting as opposed to the traditional quoting process that could take days or weeks (1)(2). And there are incubators offering young hardware companies the full ecosystem ranging from funding to manufacturing to go-to-market (3)(4).
Technology exerts change, reshapes offerings
Then there’s technological change. As in every market, technology is evolving rapidly, and the pace of change is only increasing.
- Improving simulation technologies and computing capacity make it increasingly viable to do major parts of prototyping and new product introduction (NPI) virtually
- 3D printing changes the economic equation for parts that are needed in small quantities and enables mass customization
- AR solutions and exosuits promise to augment the capabilities of human workers
- AI powered visual inspection improves quality
- Convergence of IT and OT allows real-time visibility into shop floor and supply chain (5)(6).
A mid-size EMS can’t possibly be at the forefront of every technology, so the strategic choice is either placing bets on a selected few, or observing others and being a fast follower.
Security should be everyone’s concern
In addition to the technological changes listed above, there’s one overarching trend that’s worth calling out separately: Security. As everything in the factory, from production equipment to employees, is increasingly connected, the surface that’s vulnerable to a cyber attack grows exponentially, as do the potential implications of a security breach. Combine that with large, state-run hacker operations whose resources are at a completely different level compared with the high-school kid hacking you just for fun, and it is clear that security can no longer be just an IT issue. It should be everyone’s responsibility and a board room concern.
For more details on the current state of affairs as well as actionable recommendations, I would recommend reading the recent IBM Institute for Business Value report on Industrial IoT Security (7).
The potential for market lockout: component shortages
Last but not least, the business environment is changing rapidly as well. Component shortages are becoming the new normal in some areas, and some of the giant competitors are using their power to secure their own supply at the expense of others. In many countries, there’s also a shortage of skilled labor, which makes the case for increased automation even stronger. And finally, world politics is at least temporarily less predictable than it has been in a long time, impacting location choices.
What to do
So you’re getting squeezed from all directions — is it all doom and gloom? Of course not. Each of the technological changes represents not only a threat, but also a great opportunity for the companies that master it really well. Does one of these technologies play to your existing strengths? Focus on that, and you’re already starting from a position of strength. How about the small nimble startups? Remember, you as the mid-size company have enormous muscles compared to them. Learn what you can from them, particularly in terms of leveraging an ecosystem as opposed to going it alone. Finally, keep your eyes open. In tomorrow’s world, competition and new ideas are likely to come from a direction that you didn’t anticipate yesterday.
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Sources:
(2) https://www.asteelflash.com
(4) https://www.plugandplaytechcenter.com
(5) https://www.cbinsights.com/research/future-factory-manufacturing-tech-trends/
(6) http://www3.weforum.org/docs/WEF_White_Paper_Technology_Innovation_Future_of_Production_2017.pdf
