Size has always mattered in the manufacturing industry. Economies of scale have been part of the economy of mass production since the first industrial revolutions. But in the Roaring Twenties (twenties), companies are feeling the pressure of scale again. In the EMS (Electronics Manufacturing Services) industry, companies seem more concerned than ever with scale.
At the top of the industry, there are only five companies with sales exceeding US$10 billion, based on 2020 figures. The race to be the biggest in this league has well and truly been run. Foxconn dominates in terms of size with sales approaching $200 billion, not too far off the total of all the others in this top 10. But below the $10 billion mark is a hotbed of merger activity. and acquisitions as smaller companies seek to grow through meaningful deals. ranging from 70 to 300 million dollars.
Here are three scale trends.
TREND #1: THE SUPPLY CHAIN CRISIS
It would take living under a rock to ignore the crisis facing supply chains, and in particular chip supply. Simply put, this means more products requiring fewer parts and more manufacturers suffering the consequences of unmet demand and long lead times. This means dissatisfied customers, more inventory and more work in progress, all of which eat up working capital and impact cash flow. Yes, it also means bloated order books and greater visibility, but without the parts to deliver, that’s untapped potential.
Manufacturers see that scale can drive greater supplier access and influence. For decades purchasing power has been an imperative, but now it is more important than ever. The shortages are just the latest of many supply chain disruptions including trade wars, natural disasters and the coronavirus. More disturbances will come.
TREND #2: REGIONALIZATION
The pandemic has also accelerated the desire and trend for more regional manufacturing. OEMs are increasingly concerned about supply chain security and continuity and are prioritizing it over the previous strategy of seeking low-cost labor around the world. Manufacturing in a region for a region is, without a doubt, good for all parties involved, including the planet. Shorter supply chains are naturally more sustainable and have a lower carbon footprint.
A China-plus-one strategy is becoming increasingly popular as OEMs begin to hedge against the risks of relying on a single low-cost geography. And as China’s domestic demand increases, there is also more cross-region demand within China. To be a successful manufacturer in a global market where a region for a region is needed, a globally diverse factory footprint is needed. This means that European companies acquire in the Americas and in Asia. American companies acquiring in Europe and Asia, and Asian companies investing everywhere. The net result is a global footprint on a global scale.
In a recent series of articles, manufacturing executives voiced their expectations for greater industry consolidation. Bruno Racualt, CEO of ALL Circuits, said: “In our home country of France, OEMs are beginning to understand the importance of manufacturing locally and the value of reducing risk and complexity in their supply chains. . The government is playing its part in supporting us and the manufacturing industry in valuing the role that manufacturing can play in a post-pandemic recovery by creating valuable and rewarding jobs.
TREND #3: A PLACE AT THE NEGOTIATION TABLE
The sizing of outsourcing companies is a key factor when choosing a partner. OEMs know this, as do manufacturers. Big OEM business is reserved for manufacturing companies that have the scale and reach to serve the end user. Sometimes that means technology offering and expertise, but more often than not it needs to come with scale and geography.
A global OEM looking to deliver to markets around the world and in volume wants to know that it has leverage with its manufacturing partner. Let’s say a brand has $100 million in manufacturing to outsource and they would like to be between 10% and 15% of their manufacturing partners’ revenue to ensure the right level of attention and influence. This equipment supplier will probably only be interested in partners whose turnover is greater than 750 million dollars.
Just to be at the negotiating table for this deal, a manufacturer will need to have scale and geographic diversity. Manufacturing companies know this and understand that it is becoming increasingly important. They evolve to gain influence and secure a place at the table.
IS IT EVERYTHING A MATTER OF SCALE?
The simple answer is no – it’s about more than scale, but it’s an important factor in supplier selection and manufacturing success. The breadth of services offered is becoming increasingly important, as is the depth of partnerships manufacturers can create with their customers, but scale dictates many strategies today. Although money is cheap and cash is king, it should continue.
Philip Stoten has spent his entire career in electronics manufacturing and supply chain. He is a founding partner of SCOOP.