Electronics Manufacturing Services (EMS) companies play an important role in the electronics industry, but their role is often misunderstood. In this article, we will provide a clearer understanding of the challenges that EMS companies face, especially in the current global environment, and the benefits of working with them.
What are EMS companies?
EMS companies build products, but they are not really “product” companies. They provide design services, but the designs are owned by their customers. The EMS company will be responsible for purchasing components, which are typically 70-90% of their cost to produce the end products. They also do not determine what volumes should be built.
Challenges EMS companies face
EMS companies operate in an extremely competitive market, with over 1,000 EMS companies in North America alone. Large, publicly-traded EMS companies report gross margins in the high single digits, while smaller and niche EMS companies typically have slightly higher margins but are generally more constrained by working capital availability. To make this work in a sustainable, profitable manner, they must be able to manage materials and add value to create products as efficiently as possible.
The past two years have seen an unprecedented combination of labor shortages, supply constraints, demand surges, and global disruptions. This has been challenging for EMS companies and their customers. EMS companies and their customers could typically escalate within their established supply chains and reasonably mitigate significant constraints to a manageable level. However, this has not been the case over the past couple of years. Trusting that the original part from the established supply chain would ultimately be available with enough effort and leverage has just not worked.
EMS companies have been forced to push component issues back to their customers more often than ever before. If the parts are available in secondary markets or from brokers, they are viewed as having higher counterfeit risks and are often at extremely high relative costs. If the secondary market is not an option, the burden typically falls on the customer to explore alternate designs, which can create high-risk product transitions. Ultimately, all these issues are pushed back to customers for risk signoff and financial support, or an EMS company may not be able to survive the financial consequences.
Relation to Mexico
Mexico is a significant player in the EMS market, with a market share of around 6%. Mexico’s EMS market size was valued at $17.3 billion in 2020, and it is expected to grow at a CAGR of 4.6% from 2021 to 2028. The growth can be attributed to the availability of skilled labor, lower manufacturing costs, and government support for the development of the electronics industry in the country.
Benefits of working with EMS companies
- Despite the challenges faced by EMS companies, there are benefits to working with them, including:
- Cost-effectiveness: EMS companies can provide cost-effective solutions due to their ability to manage materials and add value to create products as efficiently as possible.
- Skilled workforce: EMS companies have a trained workforce, especially on the production floor, that can help recover quickly when parts are available.
- Dependable supply chains: EMS companies need dependable supply chains to convert component inventory to cash, and this can be beneficial for their customers as well.
EMS companies play an essential role in the electronics industry, and it is important to understand the challenges they face. Despite these challenges, there are benefits to working with EMS companies, such as cost-effectiveness, skilled workforce, and dependable supply chains.