Research into the status quo and the future
The potential of the European EMS industry is enormous, because most of the products that are now manufactured by OEM companies themselves could be produced more cheaply by service providers. Reason enough to take a look at the market.
According to research by in4ma, the European EMS industry consists of around 2,179 EMS plants that belong to 1,879 companies. In contrast, there are around 35,000 to 40,000 customers who either outsource all or part of their production to EMS service providers, or who still manufacture all electronic products themselves and are therefore categorized as classic OEMs. If you look at the production shares between EMS and OEM today, the share of electronics production by EMS service providers is around 39%.
This means enormous potential for the EMS industry, because most of the products that are still manufactured by the OEM companies themselves could be produced more cheaply by service providers. However, especially in Germany, the largest electronics market in Europe, many family businesses are very conservative about this step and justify it with their social responsibility towards their employees. Accordingly, they are even willing to accept up to 10% higher production costs in-house. However, the train of thought has not been thought through to its conclusion.
Why SMEs should also outsource their production to EMS
Transferring products from your own company to an EMS service provider does not automatically mean that your own employees have to be laid off and the production systems are sold in an asset deal.
The most recent examples, in which exactly the opposite happened, show the direction. In 2020, the Katek Group took over the electronics production of the precision mechanics specialist HUF Hülsberg & Fürst GmbH & Co. KG in Velbert with around 150 employees and, in addition to the machines, also took over the production employees. Today the factory is fully integrated into the Katek Group and HUF is enthusiastic about this decision. Of course, you don’t take over the entire administrative area, because this is exactly where the advantage of an EMS company with lean administration comes into play, which ultimately leads to lower costs and therefore attractive prices for the OEMs. OSRAM also took this step with its electronics factory in Plovdiv/Bulgaria at the beginning of 2021 and transferred the entire factory to Sanmina.
In 2021, the Swedish OEM Pricer, which had two of its own production plants in the Far East to produce digital price displays for retail, no longer had the capacity to further expand production. The “make or buy” decision was not difficult because they did not want to tie up more capital in another plant and the additional capacity was needed at short notice. Since this additional capacity was needed for the European market, it quickly became clear that they would look for a European EMS, because on the one hand they did not want to send the products halfway around the world for environmental reasons, but on the other hand they also realized that production with an EMS in Europe was no more expensive than production in the Far East. After careful examination, the decision was made to go with Zollner Elektronik AG.
The advantages of production with an EMS service provider
History has many other examples of this, some of which date back a long time. For example, in 2009 the transfer of the Sony TV factory in Niš/Slovakia to Foxconn or the transfer of the Sony Elektronik repair factory in Alsace to a former employee, Serge Cordon. Today, by specializing in repairs and renewals, but also in manufacturing, the Cordon Group has worked its way into the TOP 30 of European EMS companies with a turnover of 262 million euros, 2,800 employees and 26 locations worldwide.
Switching production to an EMS service provider has significant advantages. This reduces the OEM’s plant intensity and the capital requirement for production, which means that they always have to make sufficient investments. The need for personnel also decreases and, as an OEM, you have nothing to worry about, especially in times of staff shortages. An even greater advantage are the engineering departments of EMS service providers, which are confronted with new challenges from a wide variety of market areas every day and therefore have much broader know-how than OEM internal engineering departments, which are only focused on their own products. With EMS, synergies are constantly created that can be implemented to improve products or optimize production.
Why is there still in-house production? In addition to the reason for the idea of social responsibility mentioned in detail, it is simply a lack of conviction on the part of the OEM. This is where the work of the marketing and sales employees at the EMS companies comes into play. However, in many cases this has been extremely neglected. More than half of the EMS companies, especially the smaller EMS, have no field service/sales at all to explain the advantages of relocating production. This is then the task of the managing director, who of course hardly has any time to travel to potential customers in addition to his actual tasks. So you limit yourself to a homepage, which is usually poorly maintained, and hope that existing customers continue to call.
Things are even worse in the marketing departments. Here, the area of responsibility is often limited to organizing trade fair participation, developing print media or websites and ordering promotional items. Professional marketing work looks different. In addition, many marketing departments still do not know the digital purchasing guide EMS SCOUT (www.ems-scout.net). This buying guide, in which almost all EMS companies in Europe are listed, offers enormous advantages for OEMs when selecting the right service provider. Every OEM can now start a radius search if the proximity of the service provider to their own company is important to them.
However, EMS companies must include additional information in the purchasing guide, which allows potential customers to search even more precisely. These are e.g. B. Certifications, average batch sizes, manufacturing options, existing manufacturing processes and much more. This information is then entered by EMS SCOUT for a small processing fee and activated for an annual activation fee. All in all, an investment that will bring EMS more customers in the medium term if the range of offerings is right.
But what’s next for the EMS industry? Anyone who uses the general development of industry to do this is completely wrong. While some companies are expecting a loss in sales due to various macroeconomic problems, the market research company in4ma expects sales growth of 15.4% for the European EMS industry in 2022. In Western Europe, even higher growth is expected. But how does this fit in with the problems with semiconductor supply that are constantly being discussed in the press? The demand for semiconductors has increased massively after the corona pandemic, also due to the bull-whip effect.
This means that even small fluctuations in demand from the end customer can trigger exponentially increasing fluctuations in demand from upstream suppliers. The longer the supply chain and the further away you are from the customer, the greater the impact of these fluctuations.
The myth of the missing semiconductors
Although the semiconductor industry produced and delivered 21.6% more products in 2021, the increased demand for semiconductors could not be met. Accordingly, there is no discrepancy between sales growth in the EMS industry, partly driven by the passing on of increased purchasing costs, and material availability. It is individual areas, especially in the automotive industry, that do not necessarily use the latest semiconductor technologies that cause problems and make headlines. However, despite the switch to electric motors, the total demand for semiconductors for the automotive industry still accounts for less than 10%. In addition, the automotive industry is constantly in the headlines for fundamentally refusing to accept additional costs that are not contractually agreed and for insisting on compliance with delivery contracts, regardless of whether this causes a supplier to go bankrupt or not. It is not surprising that the EMS industry is not particularly keen to give preferential delivery to such business partners. However, those who are committed to the automotive industry with a high share of production not only had a sharp drop in sales in 2020, but many have not yet managed to return to the sales level of 2019.
