By Eric Miscoll, EMSNow Publisher
The EMS business model went under attack due in part to the concept of continuous cost reduction that OEMs wanted to build into their agreements. Did anyone really do the math on that? A 2-3% price reduction every quarter ends up at zero eventually. Something had to give. And it did. EMS companies have figured out how not to go bankrupt…at least the ones that survived seem to have.
In our series of articles reflecting on the evolution of the EMS industry, we have arrived at Trend #4, ‘Revenue Diversification’. This trend is less a strategy than a mandate. Traditional EMS activities like PCBA and even box build have effectively become commoditized services and are barely profitable enough to be a sustainable revenue model, and public EMS companies especially are painfully reminded of that when they try to access capital. A couple million in net profit might sound like a lot, but bankers don’t think so if it took you a couple billion of assets to get to it.
So what is revenue diversification?
It’s a business strategy intended to:
- Garner higher profit margins than the low single digit profit usually generated by PCBA & Box Build.
- Balance enterprise risk among revenue sources
More specifically, it is an expansion of services beyond just PCBA and Box build that EMS have traditionally provided.
Now, EMS companies have for years engaged in any number of non-traditional activities designed to bolster profitability. These initially included: design services on the front-end, and post-manufacturing services on the back-end. However, after years of trying, and spending a lot of money trying to promote and grow those services, PCBA and box build remained the main revenue source for most EMS (over 70% of industry revenues).
That changed as more EMS decided that as “for profit enterprises” they need to pursue more profitable business. We have seen an increase in the number of EMS that have developed or acquired services such as:
- Subassembly or component manufacturing (an example is Sanmina’s PCB fab business)
- Packaging services (as in the case of Jabil’s Nypro business)
- OEM or ODM divisions (Vtech and Sparton are classic cases of this)
This is all in addition to still promoting design and post-manufacturing services.
Are these activities profitable?
It’s difficult to tell from earnings calls and an analysis of P&L statements. Back when we were consulting to the EMS industry, we cautioned EMS against trying too hard to get OEMs to pay for things they expected to get for free. But the fact remains that hardware in many instances is regarded as a commodity. OEMs simply want a Maserati for the cost of a Nissan Versa when it comes to hardware manufacturing. When OEMs shed their factories and start outsourcing they become removed from how difficult and costly these activities can be. And since manufacturing became a global endeavor, there are many companies that are very skilled at producing high quality electronics at a very reasonable cost. In order to differentiate themselves, EMS companies have had to diversify and bring on other revenue streams to stay in business.