The EMS industry: A strategic outlook

5 min read

From identifying key technological developments to managing supply chains, the EMS industry has to contend with a range of challenges.

For suppliers, customers, and associates alike, directional questions to guide their decision-making process are crucial, and for businesses in the EMS space it’s critical to undertake extensive market research and intelligence gathering to ensure that they remain ahead of the market.

For an EMS business, a strategic outlook is vital as it allows it to predict: sourcing, equipment, skill base requirements, and to maintain its competitive position.

For example, when it comes to the technologies that we are preparing our design, development, manufacturing and distribution teams for, Dynamic is looking at: the Internet of Things (IoT) and the shift towards The Blockchain of Things (BIoT); Fintech; Augmented Reality (AR); Li-Fi; Artificial Intelligence (AI) and medical devices.

We believe that the IoT, when combined with blockchain, is set to make IoT devices even more useful by creating a digital record across hundreds or thousands of computers, helping to reduce the risk of hacking. It could usher in a host of new services and businesses. BIoT can be used, for example, to track shipments of pharmaceuticals and to create smarter cities.

We are also seeing companies beginning to use Application Programming Interfaces, or software used to connect different databases and computer services. Combined with the BIoT, it will make it as easy to get data from sensors in a warehouse, as it is to access websites via our phones.

Supply chain issues

But if we, as an industry, are to meet the needs of our customers, we need to better understand trends in our supply chain and manage them effectively.

Aggressive mergers and acquisitions, especially among semiconductor manufacturers, have led to consolidation and changes in distribution sales models. As a result, end-customers have fewer supplier options and fewer qualified design resources. We expect semiconductor suppliers will continue to win share, and will likely have pricing/margin power over the industry for a number of years to come, and in the chip industry, mergers have created mega-suppliers with considerable power.

When two OCM suppliers merge, there’s a tendency for mature lines to be phased out in favour of newer and more profitable ones and we’ve seen end-of-life notices from OCMs accelerate within the past year.

At the end of the day, OCMs want to satisfy all demand, but they don’t want to get into a situation where they expand and then the market contracts.

Therefore, the reality is that where we once had several choices, we now have one or two, or sometimes a sole supplier.

Passives lead-times are stretching to 30-plus weeks, with some orders quoted for delivery into mid-2019. That’s a long time for buyers to live hand-to-mouth. This leads to a ’bunker mentality’ within the procurement department that double, and even triple, orders to stock up on supply.

The term ‘allocation’ is now back on the table.

Of course, in any scenario when demand exceeds supply, there is an impact on cost, with prices rising at an extraordinary rate. For the first time in years, we are beginning to see price increases in chips, making buyers anxious. Naturally, business is booked well in advance to avoid absorbing an increase, especially in a margin-sensitive business such as EMS.

Being involved in the design stage allows your EMS partner to design the product for manufacture, taking into consideration components that may create a challenge for the Original Equipment Maker (OEM) to secure. Products can be designed with an alternative component, one that could be easier to source, or one that isn’t approaching its end of life or obsolescence.

Technology migration, particularly within the already-volatile memory market, has had a ripple effect on availability.

There is currently a transition in the flash market from 2D to 3D technology. Flash is, of course, the key component in SSDs. This movement is naturally driving a shortage in both flash memory, with a knock-on effect on SSDs.

Demand gradually puts pressure on established technology, such as DRAM, with DIMM modules for servers in short supply at a time where cloud technologies drive demand up for server production.

This shouldn’t be a show-stopper, however. Take a sustainable approach by forging open book and transparent relationships with your OCM partners.

We’re now seeing shortages across a wider range of products such as passives, MLCCs and tantalum and some resistors and diodes. The industry’s largest DRAM supplier, Samsung, is considering increasing its DRAM output, even as it adds capacity for newer technologies.

But how should they do this? Does the OCM add capacity, which is expensive and takes considerable time to ramp-up, to a point where the return on investment is visible? If they don’t add the required capacity, could they run the risk of losing the sale?

And it’s not just the OCMs who face challenging decisions, the EMS buyers do too, as the suppliers and distributors are allocating products, using customers’ buying history as a baseline.

The solution, to reduce or eliminate risk, is to take control of the parts of the supply chain that can be controlled. Work with like-minded OCM partners only, and form a two-way relationship. Develop your supply chain for cost-effective solutions to reduce waste.

Work with your OEM partners to design products with the circular economy in mind, which we at Dynamic EMS see as becoming more important to our EMS business model, and our OEM customers, who now request our company mission statement in regard to environmental issues and/or policies, such as, Just-in-Time (JIT).

“If we, as an industry, are to meet the needs of our customers, we need to better understand trends in our supply chain and manage them effectively.”
John Dignan

We’ve recognised that what we are experiencing currently, is part of a continuous cycle. As this cycle develops, we will see new, smaller component manufacturers emerge and grow. These companies are born as developmental spin-offs from the larger existing companies, with the talent, experience, and resources in place to transform and disrupt the market once more.

So it’s a cycle, do what you can to sail through it with the minimum amount of disruption - change is a business objective, belt up and hold on tight, as it could be a bumpy ride.

Value chain

Manufacturers have moved up the value chain to concentrate on more technically advanced industries or products and look to compete on innovation and flexibility.

Dynamic EMS has looked to reposition itself as more than a company focussed on Printed Circuit Board Assembly (PCBA) dedicated to a build-to-print model – as a standalone service it is no longer valid or competitive within the UK.

In order to remain competitive, businesses need to evaluate where else they can add value along the production lifecycle and they need to embed this service into the company’s DNA. Promote it well to change your target markets’ natural perception of your business.

Over the past five years, innovation has been identified as one of the main drivers of growth. This goes hand-in-hand with continuous reinvention, but also expands out to ensure that, as a company, you are continuously connected to innovation and hubs of technology talent.

By forging strong connections to governmental authorities and through our open-door policy, local authorities, incubators, seed funders, universities, and colleges are able to see manufacturing in action and how we at Dynamic EMS, look to engage with technology and innovators.

While it is a competitive environment and EMS businesses tend to be cloaked in non-disclosure agreements, privacy policies and paranoia, it’s crucial that as an industry we learn to share.

It’s my personal belief that there is enough Total Available Market (TAM) for us all to succeed and grow, but beyond that, perhaps we should continuously consider the health and well-being of the entire industry.

Author details:
John Dignan is Managing Director of Dynamic EMS