EMSNOW Up Close with Randall Sherman, New Venture Research

Randall Sherman is the Founder and President of New Venture Research and has more than 25 years experience the high technology electronic products industry, as well as a background in design and deployment of advanced, new products. His company issues the MMI Top 50 EMS companies as well as an annual report on the industry. EMSNOW caught up with Randall to find out more about some just published research reports.

 

EMSNOW: New Venture Research has been collecting data for many years. Give us a bit of background on your work.

We actually started tracking the EMS industry in 1993 when the industry was $310 million in size. At that time, EMS was just taking off and revenue was growing at 30+% a year. With all the change going on, we decided to produce the first market research report on the subject and have been publishing updates ever since.

EMSNOW:NVR released two reports this month, its annual EMS report The Worldwide Electronics Manufacturing Services Market – 2020 Edition, and the China SMT Capacity database based on analysis of historic data. Let’s start with the capacity database. How can that report help people looking more closely at their global manufacturing footprint because of the disruptions from COVID-19?

The China Capacity Study came out of the need to understand the SMT line footprint worldwide, but particularly China where the worldwide manufacturing had shift from about 10% in 1993 to 70% of total production in 2019. The question asked was this dominance going to continue or change? The short answer is that it’s going to continue because of the massive investment that China’s OEM/EMS/ODM companies are making in the SMT equipment today all over China. While COVID-19 has disrupted some production coming out of China, most suppliers have flexible supply chain networks that can fill in the gaps. We also discovered that there are a substantial number of very large electronic companies making this investment in manufacturing infrastructure.

 

EMSNOW: Relations between China and the rest of the world are… complicated. Looking at the geo-political situation, how much risk do you see materially impacting the EMS industry?

The impact of the trade war between China will be negligible given the current fluidity of the worldwide electronics supply chain. Besides, EMS companies are always seeking out the lowest possible cost for product assembly which is why India and Vietnam have become so attractive lately. The politics of it are unnecessary and counter-productive to put it politely.

 

EMSNOW: Do you see any other geography replacing China anytime soon?

Nothing replaces China but India’s domestic market for smartphone manufacturing is going to be a serious threat a massive amount of production that until recently was in China’s pocket. The entire SE region is still very affordable for assembly like this with established and functioning supply chain and sources for various C components like connectors, passives and bare boards. But China is still the big dog in the EMS industry.

 

EMSNOW: Your Worldwide EMS Report has some valuable insights. What would you say are the key takeaways?

It’s interesting to see that after 27 years the EMS industry is still growing and capturing a major part of the TAM. The remaining assembly that is being done in-house is mainly achieved by Asian OEMs. But these providers are not going to be able to resist the positive business case for outsourcing for very long. The transformation, efficiencies and cost reductions in EMS over the last 25 years are staggering. Subsequently, industry growth of EMS is expected to be robust for many years to come (barring stupid trade wars).

 

EMSNOW: You say growth for the industry going forward will continue to be from communications and computer sectors and will be driven by conversion to 5G. What do you see as the major hiccups for 2020-2021 because of COVID-19?

It is encouraging to see the computer and communications industries showing strong CAPEX spending with replacements and new models. The whole 5G network and demand for streaming services are driving production in servers, storage systems and enterprise LANs. The obvious loser in this scenario is the transportation industries (automotive and commercial aviation) and to some extent retail. Until people feel safe again in travel and dropping their kids off at school, we are not going to see a recovery in those sectors anytime soon.

 

EMSNOW: The transportation sector demand has all but collapsed. According to your Figure 2, that represented around 30% of the total market in 2019 (automotive 7% and aviation/def 23%). Will increased demand in medical (3% in 2019) and computer/communications (59%) make up the difference?

Yes, it will. Medical has experience a significant surge in product output and is expected off-set some of the downturn incurred by transportation. People are still buying smartphones and computers so that has mitigated the downturns seen by the other industries. We see a dip in total revenues for 2020 and a return to growth in 2021. So far in 3Q20, we’ve seen a return to earlier levels of production by approximately 80%.

 

EMSNOW: You said in the press release that “The trend to move price-sensitive manufacturing to low-cost regions has ceased…” Could you elaborate on that statement?

It is perhaps unfair to say that the trend to move to low-cost region has ‘ceased’ but that it has restored balance over the last five years. The three major regions (Americas, EMEA, APAC) all offer low-cost labor and skilled assembly services. But the mad rush to concentrate in China is over being off-set by the build up taking place in Mexico and Eastern Europe.

 

EMSNOW: What kind of consolidation if any do you expect to see in the industry moving forward? How will that play out in each of the tiers and in the geographies?

When industries don’t grow, they consolidate. We’re not to the point yet that large consolidation will occur, but there are an awful lot of providers in the market today, and companies need to grow someway, so predatory acquisitions should likely continue. Of course, the question becomes, “Can you achieve economies of scale with consolidation?” A larger question is how sticky are your customers and how loyal is your work force? There are definitely some companies better in this industry that others, and it shows up in things like customer and employee loyalty. But expect to see some consolidation of some Tier 2 providers in the next few years, along with the continuous shopping for opportunities by investors in the Tier 3 and 4 supplier arenas.

 

EMSNOW: Thanks for spending time on these questions – can we end on a lighter note? What have you and your tribe been doing during the quarantine to stay sane? Any Netflix recommendations?

We are very fortunate to have experienced very little change over the last 4-5 months. The second quarter is a time where we are wrapping up all our field work and focused on publishing. This publishing cycle dovetailed quite nicely into the lockdown and we will have three reports out this summer. All our colleagues seem to be focusing on video platforms and the ways to do a virtual business, so we’re looking at that.  It is a bit lonely, however.