Better Data, Better Insight, Better Decisions – In Conversation With NVR’s Founder Randall Sherman

By Philip Stoten, Podcaster, Writer, Speaker & Founder of SCOOP

I’m not an analyst or an economist, but I do love some data! Bottom line, if I was running an EMS company, a brand that depended on outsourced manufacturing, or a supplier to the industry, I’d buy every report and survey I could get my hands on and I’d pore over the data, or have someone do that and let me know what it means to my business. With good data, you can develop better insight and insight drives better decisions.

The most recent stack of data to pass across my desk, well my email, is NVR’s annual study “The Worldwide Electronics Manufacturing Services Market – 2024 Edition”. I’ve been used to seeing this data every year for decades now and every year I am blown away by the depth and breadth of the data, as well as the detail. Having had a sneak peak of the report, I had a few questions for NVR’s founder, president and principal analyst, Randall Sherman. Randal has been up to his ears in this data for months and deserves a break, so I am very grateful he took the time to answer my questions.

Philip: When I look at the 2023 revenue numbers, the EMS industry is down around $46B, which equates to around 8%. Foxconn was off almost $25B, Pegatron was off almost $4B, Wistron over $4B, that’s $33B from three of the top four, with Jabil the bright ray of light.

Am I reading too much into this, or are we seeing a trend of decline in Asian dominance? The four US headquartered companies in the top ten (Jabil, Flex, Sanmina and Flex) all seem to have grown.

Randall: I think what we are seeing is a market correction in the high-volume industries (smartphones, PCs, and networking) that recovered strongly in 2021 (post Covid – 14.8%) and mildly in 2022 (1.7%). So, we are seeing a pendulum swing in a market that reached its nadir in 2023. I don’t think that regional dominance has much to do with it these days as most of the tier one players have successfully near-shored their operations. Anyone can get a new factory if required, but remember this is the outsourcing business model – you get the work if you have the capacity, operations, bandwidth, and the right price.

I think that maybe the real question is, “Will we see the volumes increase again?” The economic answer to that is ‘yes’ because buyers are going to need replacements and upgrades for their phones and computers which dominate so much of the production capacity worldwide (about 61%), What’s more, OEMs and EMS firms seem to be making money except for this last year.

 

Philip: The same seems to be true of the ODM market, the majority of whom are in Asia, with substantial declines from the likes of Compal and Quanta. Is the ODM market tougher than the EMS right now?

Randall: I continue to be impressed by ODM suppliers who draw my criticism with their business model, yet each year they outperform EMS companies financially. In 2023 ODMs return on sales averaged 7.1%, whereas EMS companies only achieved a 2.5% return. EMS firms outgrew ODMs, expanding 4.8% versus 0.5%, in revenue, but the ODMs made more money. There is something about their discipline and focus that leads them to deliver better and more consistent results.

Compal and Quanta didn’t do too badly with a return on sales of 1.0% and 3.7% respectively, in 2023, but it’s been rough on everyone. Compal is going to invest $15.4 million in a Czelad, Poland operation named CGS Technology.

Philip: Meanwhile Europe seems to have some solid stories of growth and performance in 2023, particularly in Scandinavia, what’s the story here?

Randall: The Europeans have been very active in consolidation deals and expansions in the supply chain this year (all this is covered in our recently published annual study “The Worldwide Electronics Manufacturing Services Market – 2024 Edition”). Cicor Group and Cicor Technologies each had an acquisition while the Foxconn Technology Group purchased Prettl SWH which operates out of 18 locations across 13 countries and employs approximately 8,000 people. NOTE closed on two deals and Universal Scientific Industrial announced the successful acquisition of the TE Automotive Wireless business from TE Connectivity, Ltd.

Revenue growth has been good for all of the leading players such as Zollner, Scanfil, NOTE, ALL CIRCUITS, BMK Group, Connect Group, éolane, Fideltronik, GPV Group, Kitron, LACROIX Electronics, and TQ-Systems.

Philip: Let’s also explore the sources of electronics manufacturing. It seems that we had a big swing back to insourcing, from 51% to over 56%, why was outsourcing out of favor after a general trend of steady growth in TAM share?

Randall: Let’s be careful with these figures. While we know in detail how much business is going to EMS, it’s a little dubious about the other side of the market. We calculate the total available market (TAM) by looking for analogs in the semiconductor industries, which are well known. At best, it’s an estimate and not especially reliable since many things affect the actual TAM. Our general sense is that EMS is capturing a greater share of the market each year as the outsourcing trend and benefits make so much economic sense, in the sense that everyone wins. ODMs take this business model to the extreme, but it explains their success.

Philip: Turning to end markets, which markets saw the most decline, was it consumer, thanks to economic trends? And which industries are the bright stars of 2023, but also of the future?

Randall: It all depends on which business model you chose to focus on and what is the business model for your company. Perhaps you lean toward the scale-side business model and are happy with low margin business that is in high volume. However, if your company’s business model is to achieve high profits and earnings without expensive capital investment, then maybe the low-volume/high mix BM is best for you.

From understanding this, the best end markets will emerge. We have analyzed this for many years and can help companies if needed.

 

Philip: You’ve predicted a small downward trend in 2024, then back to steady and solid growth in 2025- 28. Anecdotally, it feels like you’re right about 2024, what gives you confidence for 2025 and beyond?

Randall: So, the dynamic question is, “Who knows the future?” We all come from different perspectives and backgrounds that impact our positive or negative perception of the world. I tend to support the positive business model that believes in free enterprise, and incentive. That’s why the US economically performs so successfully compared to many other countries. Freedom is a necessary incentive to success.

 

Philip: Looking at performance by company size, growth seems to be easier and more consistent when you’re a small or medium size player, is that the case?

Randall: That is my general sense after watching the data over the years. Small and medium-sized EMS companies perform better economically than large ones that have many encumbrances over them unless they establish a niche. Foxconn, Jabil and USI are all developing separate conglomerate entities that will exploit the automotive, aerospace, and medical industries. But there will still be opportunities from the lower tiers.

 

Philip: Lastly, the US election campaign seems to be in full swing. Does the industry have skin in the game, or do they just want it to be over so they can get back to work with some confidence that nothing too monumental is going to happen?

Randall: Oh my, I once got criticized for making some politically charged statements in our newsletter (www.mfgmkt.com), so I’m a little wary to show how my writing is leaning (generally, middle). I will just say that Mr. Trump likes tariffs and that is bad for business, but any investment in the semiconductor industry is good.

I think you hit the nail on the head, Phil, when you say that people just want to get back to work and have good paying jobs and get on with their lives.

Philip: Thanks so much Randall. As I mentioned in my introduction, I firmly believe in data, data, and more data. I’d suggest anyone interested gets a copy of their own at https://newventureresearch.com/shop/the-worldwide-electronics-manufacturing-services-market-2024-edition/