Partnership is not a one-way street
04. April 2022

A partnership is not when only the partner creates, but requires real cooperation and cooperation. After all, the EMS producers in Europe are ultimately only the extended workbench or the production department of the customer. This connection is strong and no customer changes his EMS producer at short notice, after all, the OEM and the EMS are a well-rehearsed team.

This teamwork also includes supporting each other to ensure a smooth production process. This includes adapting to economic changes. No one can claim to have not noticed the great global shortage of semiconductors in the last 15 months. Semiconductor producers are trying to allocate their products evenly to the various customers (allocation), but are not yet able to cover the total demand.

Of course, this phenomenon is partly caused by an illogical behavior of the buyers, who in such times then like to order twice in the hope of at least receiving an order or prefer the delivery dates unfounded in the hope of receiving the goods at least at the real time of need. In business administration, this effect is known as the bull whip effect, which is reflected in a cyclical change and rocking of demand. According to the well-known market laws, a higher demand than an available capacity always leads to price increases.

If old orders could mostly be booked at originally agreed prices or existing orders could still be processed with existing stock, the end of the flagpole has been reached since the 4th quarter of 2021 at the latest. Price increases of 12-15% for semiconductors are now taking hold. But it is not only there that there are price increases. Prices for connectors, solders, metals for heat sinks or housings have risen.

Since the 3rd quarter, intensive price negotiations between OEM and EMS have been underway and in many cases have been settled. In addition, many OEMs have understood that they not only have to order bindingly in the long term so that the EMS can bindingly order the materials for the order, but the large OEMs have also recognized that the financial capacity of the EMS will eventually be exhausted if significantly higher quantities of raw materials have to be put in stock to ensure delivery capability. These additional raw, auxiliary and operating materials (RHB) have increased the stock of EMS from an average of 18-20% to 38-40% of an annual turnover. Neither large nor small EMS can easily handle this massive capital commitment. Far-sighted OEMs have therefore long since started to pre-finance part of the required raw materials at the EMS supplier in order to be absolutely sure that orders cannot be delivered due to a lack of raw materials.

But, and you should not believe it, there are still buyers who think we have a buyer’s market. Occasionally, we really receive calls where the EMS tells us that its customer does not accept price increases. There is only one answer to such stupid behavior: No more supply, because if the customer terminates the partnership in this way, the EMS no longer has to tear out its legs to supply the customer.

The EMS have complete lists with all price increases, sometimes even divided by supplier, so there are no imaginary price increases but comprehensible facts. It is now time to further consolidate the intensive cooperation by listening to the EMS and ensuring that the production service provider still earns money. If this is no longer the case, the OEM has gained nothing but rather risked the future and delivery capability of its own company lightly.

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