What’s the SCOOP – 2023 Trends – One Writer’s View
By Philip Spagnoli Stoten Founder of SCOOP
By Philip Spagnoli Stoten
Having compiled the input from more than a dozen contributors, including industry executives, thought leaders and consultants, here’s how I see 2023 for the EMS Industry.
Varying and inconsistent economic indicators
Let’s start with the elephant in the room, the economy! Recession or no recession? Well I suspect that it all depends on which sector you’re in, who your customers are and where you are in the world. A softening in demand seems inevitable particularly in the consumer-led markets like smartphones, fitness trackers or laptops as those consumers feel the pinch of rising interest rates and inflation.
But this needs to be set against two other factors. Firstly, demand is robust in some sectors, like Mil/Aero, thanks to geopolitical instability and in others like EV and sustainable energy for more positive reasons. Secondly, we continue to see the digitization of everything. That is to say, more and more products depend on more and more electronics for their functionality. These two factors are the counter trends that will make any decline gentler and allow EMS companies to continue to thrive. For many, reshoring and other changes in where things are made will also have a positive impact, but that’s another story.
More consolidation, but a different M&A market
I’m expecting more acquisition activity this year and whilst my prediction of three European players over $1B by the end of 2022 may have just missed, we won’t be far into 2023 before we hit that number with some players enjoying exceptional growth in sales and bottom line and others continuing their acquisition-driven growth strategy.
It is clear that the market has changed a little since the heady days of 2020 and 2021 with over inflated valuations with too much money chasing too few deals. I expect to see more thoughtful strategic deals take place as companies explore the gaps they have in technology, markets and geographies. I am also expecting some opportunist deals as the impact of the supply chain crisis continues to suck cash from the balance sheet to work-in-progress or inventory.
Easing stress in the supply chain as the pendulum swings in the buyer’s favor
We all know how bad the supply chain crisis has been, right? I talk to EMS leaders every week and while some see some easing, many are still struggling to get what they need to finish production and get product out of the door. So many earnings calls this year have included the caveat that if parts were available performance would have been even better.
Indicators, like Nexar’s Electronics Design to Deliver Index (EDDI), show a real shift towards supply and demand parity, with the last three monthly reports showing a consistent reduction in demand and an increase in supply or availability. I have explored this report in a podcast with a different guest as well as my co-host Nexar’s Dan Schoenfelder. It’s worth a watch or a listen wherever you get your podcasts, including Apple and Spotify.
Most executives agree that a balance is not too far away, while pockets of tightness will likely continue for a while, particularly in integrated circuits and microcontrollers. On the last episode both Dan and our guest Benchmark’s Michael Lucia agreed that the pendulum was swinging in the buyer’s favor and that we should see reduced pricing in the coming months.
Major geographic shifts as geopolitics continue to impact – breakout year for India
I am expecting some more pressure on globalization this year as the impact of the pandemic and more recent geopolitical instability continues to encourage manufacturing to reassess their global footprint. Demand for manufacturing capacity in China is softening and countries like Vietnam, Mexico and India are likely to be among the major beneficiaries.
With companies like Apple grabbing headlines as they shift production and reduce dependency on China, expect others to follow. What’s more, the presence of these high volume brands brings with them infrastructure and a whole manufacturing ecosystem. I suspect Vietnam and Mexico will have very good years, only constrained by their ability to bring enough talent to the industry. India, however, does not have such issues, with over a billion people and literally millions of talented graduates. I wonder if 2023 could finally be the breakout year for India that has been predicted for decades.
We really do need to take a long hard look at what reshoring means to us and consider if friend-shoring or ally-shoring is something we want to embrace as an industry. If we do want shorter supply chains we need to invest locally to ensure we have competitive capacity.
Continued talent shortages, only mitigated by outsourcing and automation
I’ve had as many discussions about talent shortages as I’ve had about component shortages in 2022 and I expect more of the same in 2023. We find ourselves in the unusual position of having high inflation with very low unemployment. Recruiting and keeping talent will be hugely important for manufacturing companies and the entire industry in the coming months and years. For the industry it means training more people and working with academia to attract talent. For EMS companies that means being the employer of choice.
If EMS companies are to attract and keep the right talent they will need to increasingly hire a large number of millennials and that means they’ll need to reflect that generaton’s ideals and values. The EMS companies that win this race will be those that truly care about the environment, about creating a more sustainable industry and making more sustainable products, and about diversity and inclusion in the workplace. This means a real shift in culture and in the brand promise.
Recruiting and keeping staff is one thing, but if there aren’t enough people to go around, solutions like outsourcing or automation of specific tasks will come to the fore. Outsourcing administrative tasks that can be done remotely, like engineering or purchasing will become more popular, with India once again being a prime location. Automation, particularly post SMT, also has huge potential. I think vendors that can unlock as-a-service models for automation could see a huge growth in 2023 and beyond.
An ongoing drive to digital transformation and greater use of AI
As mentioned above there are an increasing number of reasons to embrace digital transformation including the mitigation of labor shortages. What’s interesting is that that demand is matched by an increase in available solutions and a maturity in the game changing technologies needed for those solutions.
The increasing value driven by the use of AI comes from new disruptors and innovators like Cybord with their component traceability and verification solutions to existing players like Koh Young who are embracing the technology to drive even more value from the data collected by their inspection systems. This year could be a real breakout year for AI in the EMS industry.
I go back to my previous comment on business models however. I think those that can shift the cost from capex to opex with a really clever as-a-service solution have the best chance of success.
A more thoughtful, caring, collaborative, stakeholder focused industry
I hope this is a prediction as much as a wish. Truth be told it is both. I have certainly seen a tangible trend in this direction. The recent supply chain crisis has driven more open and honest collaboration in the supply chain, we certainly want to see that continue. Shortages have led brands to place longer order schedules, creating a level of loyalty previously not seen. And as we move to a stakeholder driven economy, one can only hope that the needs of the consumer, the employee, society and the environment are much higher on the C-suite’s agenda.
I’ll keep banging on about these issues in 2023 and I’ll keep interviewing those in the industry that can have a real impact. I expect the winners in 2023 will be those that are more thoughtful, caring and collaborative.
See what a dozen executives said:
