October 18, 2004
Engineering Manufacturing Service (EMS)
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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Electronic Manufacturing Services (EMS) firms provide contract design, manufacturing and related product support. EMS clients are generally electronics OEMs. The OEMs own the design and brand name. EMS firms are sometimes referred to as Contract Manufacturing or Contract Electronics Manufacturing companies.

According to Electronics Supply & Manufacturing and to Manufacturing Market Insider the top 50 largest EMS companies accounted for ~80% percent of the sector's global revenue of about $90 billion in 2003. The top 11 firms each had revenues over $1B and the next 40 largest firms each had revenue over $100 million. From 2001 to 2003 the Americas' share has dropped from 65% to 43%, while the AP share outside of Japan has increased form 29% to 39%. The table below shows the revenues and net income for the last four reported quarters and the last reported fiscal year. Given significant differences in their fiscal years direct comparison is difficult.

Table 1 Top 6 EMS Providers

Figure 1 Reported Revenues Top 6 EMS Providers

Over the last few years the industry has been relatively flat. However, several major players have had negative earnings in part due to restructuring charges as they move from relatively high cost locations to relatively low cost location and in part to the downturn in the industries served by their OEM clients. As a typical example consider the following excerpt from the 10K of Jabil Circuits.
“The EMS industry experienced rapid change and growth over most of the past decade as an increasing number of OEMs outsourced an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry's revenue declined as a result of significant cut-backs in its customers' production requirements, which was consistent with the overall global economic downturn. In response to this industry and global economic downturn, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Our restructuring activities included reductions in workforce,
and re-sizing of certain facilities and the transition of certain facilities into new customer development sites. Additionally, we have made concentrated efforts to diversify our industry sectors and customer base through acquisitions and organic growth. Industry revenues have slowly increased over the last year as customer production requirements generally began to stabilize.”
Since EMS firms are heavily invested in property and capital equipment they typically have single digital percent gross margin.

The primary markets served by EMS vendors according to end user product category are:


Computing and Storage

Consumer Products




Defense & Aerospace

The major benefits that EMS firms claim to offer provide their customers, principally OEMs, are:
Reduce Capital Investment: OEMs can significant reduce capital expenditures for property, plant and equipment as well as in systems and infrastructure. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures. OEMS can shift fixed costs to variable costs.

Better Supply Chain Management: As significant purchasers of electronic components and other raw materials, EMS companies can capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS' scale and continuous interactions with materials marketplace helps OEMs reduce their cost of goods sold and inventory exposure.

Global Manufacturing Services: By having manufacturing facilities throughout the world especially in lower cost regions EMS are able to reduce costs, to have proximity to end markets, and to reduce freight and logistics costs, tariffs and time consuming custom clearance.

Access to Latest Manufacturing Technologies: OEMs would find it increasingly difficult to maintain their technology edge as the industry moves to new process nodes.

Opportunity Costs: By employing the services of EMS OEMs can focus their limited technical and financial resources on areas of their core competence and where they provide differentiation and greatest value.

Access to Engineering Capabilities: As electronics products become increasing complex and sophisticated OEMs are increasing relying on EMS companies for product design and engineering services.
EMS firms rely heavily for revenue on a few client firms. Combined these major customers often account for a majority of a given EMS' revenue and individually for more than 10% of the EMS' revenue. Major customers include such well know firms as IBM, HP, Dell, Cisco, Motorola, and Ericsson. This can be a two edged sword as major OEMs have considerable negotiating leverage.

A common practice among EMS firms involves the acquisition of facilities and employees from their major customers, so called divestiture transactions. As Sanmina-SC describes:
“We typically enter into supply agreements with our major OEM customers with terms ranging from three to five years. Many of these supply agreements were entered into in connection with divestiture transactions, which are transactions in which we also acquire plants, equipment and inventory from the OEM. In these divestiture-related supply agreements, the customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. Our OEM customer supply agreements that were not entered into in connection with divestitures typically do not require the customer to purchase their product requirements from us, and in these cases customers may
alternate sources of supply available to them. Our supply agreements with our OEM customers generally do not obligate the customer to purchase minimum quantities of products. However, the customer typically remains liable for the cost of the materials and components that we have ordered to meet the customer's production forecast but which are not used, provided that the material was ordered in accordance with an agreed-upon procurement plan.”
From the viewpoint of a major OEM and EMS customer Cisco
“We primarily employ an outsourced manufacturing strategy that relies on contract manufacturers for manufacturing services. Our manufacturing operations primarily consist of quality assurance of materials and components, subassemblies, final assembly, and testing of products. We presently use a variety of independent third-party companies to provide services related to printed circuit board assembly, in-circuit test, and product repair as well as product assembly. Proprietary software on electronically programmable memory chips is installed in our systems in order to configure products to customer needs and to maintain quality control and security.“
The broad services rendered by EMS providers span but are not limited to the categories described below. Individual EMS providers will have different areas of focus.
PCB Fabrication - prototype, preproduction, transition to volume manufacturing, low volume and high mix, high volume and low mix.

Systems Assembly and Manufacturing - assemblies incorporate PCBs and complex electromechanical components, enclosure systems, power and thermal subsystems to interconnect subsystems, cabling and enclosures.

Testing - management defect analysis, in-circuit testing, optical and x-ray inspection, functional testing, environmental testing, testing for conformity to applicable industry, product integrity and regulatory standards.

Logistics - warehouse and distribution, freight management, logistics consulting services, product and materials visibility and reverse logistics.

After-market product and support services - field failure analysis, product upgrades, product repair, re-manufacturing and maintenance at repair depots, logistics and parts management, returns processing, warehousing and engineering change management.

Supply chain management - links to factories, extranet-based management, vendor-managed inventory and build-to-order programs.

End of Life Support - product recycling, part reutilization, remanufacturing and waste management.

Design services - electronic design, industrial design services, mechanical design, computer-assisted design (CAD) and applied research and development.

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-- Jack Horgan, EDACafe.com Contributing Editor.


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