As EMSNOW considers the challenges of 2024, we see some trends coming into focus in our crystal ball. As we heard during our many discussions this year with EMS executives, 2024 did not unfold as many hoped it would. Many EMS saw a substantial decrease in overall revenues; some businesses failed all together, and those companies that saw flat or slightly higher revenue growth counted themselves lucky.
Revenues are down for most of the larger global EMS players, and for many of the regional companies. IPC’s Chief Economist Shawn DuBravac’s Global Electronics Industry Sentiment index remained ‘subdued’ at the close of 2024. “The Demand Index rose 2.6 percent in November but remains subdued for the third consecutive month. The Backlog Index, already in contraction, fell an additional two points to reach a new record low. Capacity Utilization returned to expansionary territory, while the New Orders Index improved slightly but stayed in contraction for the third straight month. The Shipment Index rose three points, signaling some positive movement,” he reported.
Dieter Weiss, Founder of European market research firm, in4ma, expects overall revenues for the EMS industry in Europe to have decreased 9.3% in 2024 compared to 2023. But despite these negative numbers, overall, the prevailing mood in the EMS industry in Europe remains cautiously optimistic.
The companies we visited were almost unanimously focused on improving efficiencies during these slower quarters. They tried to consume excess inventory despite reduced demand that was most acute in the automotive sector and less so in military/defense sectors. The fortunate ones with access to capital made acquisitions. Despite capital constraints due to inflation, higher interest rates and inventory levels still higher than normal, some EMS companies (e.g. Teltonika EMS to name but one noteworthy example) continued to invest in automation, software solutions and expanded capacity.
Here are seven trends we will be watching in 2025:
Demand uncertainty.
EMS companies must be cautious and informed when it comes to which markets to pursue. Growth in medical, automotive, defense, and consumer markets will be difficult to predict, but it is the OEM’s demand forecast that is needed to effectively plan and execute by the EMS. “It is dangerous for EMS companies to believe all the sensational news about new developments like AI, Bitcoin, miraculous medical technology breakthroughs, the latest consumer gadget, or forecasts about how fast EV will replace internal combustion engines,” commented Dieter Weiss.
Inventory visibility.
Which brings us to inventory. “Normally we see about 15% of annual revenues in raw goods on EMS balance sheets. This number jumped to 30-35% at the end of 2021 and 2022,” Weiss explained. “As semiconductors are a higher share of revenues for smaller EMS, their inventories jumped to 50-60% of revenues during this time. I believe this is clear evidence of panic buying on the part of the EMS procurement teams. Panic ordering infected the OEMs as well.”
Distributors need accurate forecasts from their customers to help them manage inventory to mitigate long component manufacturing cycle times. Companies like Luminovo and CalcuQuote are working with EMS to bring software solutions to the complicated material acquisition process, but without good data, these solutions won’t add value.
Workforce challenges.
Countries once considered to be low cost are seeing rapid increases in labor rates, diminishing effectiveness of the labor arbitrage game that the industry likes to play. This is happening in Mexico, Romania, and Tunisia, as we have reported. Finding and training workers is expected to continue to be challenging, especially as lower demand means shorter work weeks and slower production. Training of workers is a constant activity when new workers must be brought in to replace the ones that leave for greener pastures. The companies that invest in their workforce, whether through better benefits, higher wages, better training programs, apprenticeships, and outreach to community resources, will be the most successful.
More and more automation
The drive is to automate as many repetitive tasks as possible. Since the pre-reflow portion of SMT is already highly automated, the focus is on the many labor-intensive processes involved post-reflow such as PTH, testing, box build and final integration. This is easier for high volume low mix manufacturing but proves challenging for high mix low volume manufacturing. Investing in automated solutions requires capex costs that are hard to justify when demand remains uncertain. But the promise of Industry 4.0 and low touch manufacturing epitomized by the lights out factory concept remains the goal.
Reshoring/Regionalization
We expect geopolitical issues and tariffs to continue to impact where OEMs choose to manufacture their products. The China Plus One strategy is likely to gain traction because China needs business and will do what it takes to be competitive. China is a manufacturing powerhouse, and it is not realistic or desirable to stop manufacturing there completely. The build in region for region (i.e., local for local) approach will be the prevailing strategy.
Rebuilding regional manufacturing ecosystems, especially PCBs
At the same time, it makes sense from a security perspective as well as environmentally to build products close to the customers. This means each region must continue to rebuild its entire electronic manufacturing ecosystem, including printed circuit boards, semiconductors and advanced packaging capabilities. It is destabilizing to have all of one technology centralized in one nation or company. Governments and the private sector must continue to invest in rebuilding regional electronics manufacturing. “The biggest issue is the PCB and still few understand its importance,” lamented Dieter Weiss. “Nippon Denkai USA just decided to close the last remaining copper foil plant in the USA. In Europe, we have no woven glass fabric for laminates anymore. We are totally dependent on China and politicians do not understand the situation. In Europe we manufacture only 2% of global PCBs; in the US it is not much better. According to the World Electronic Circuits Council (WECC), China today has 58.7%, and Taiwan has 10.9%, so together nearly 70% of global production.”
The work being done by the Printed Circuit Board Association of America (PCBAA) in this area is a noteworthy and important initiative in the United States that deserves greater industry support; attempts are being made to replicate this initiative in Europe with the support of ZVEI and the IPC.
Macroeconomic factors
The retreat from globalization is not confined to manufacturing, which may impact the outlook for the EMS industry. Hot wars continue to ravage the Middle East, Africa, Europe and tensions continue in Asia as well. Incumbent governments are toppling right and left, with unexpected bright spots like in Argentina.
EMS companies will do well to stay focused on the fundamentals and keep a close eye on true demand. The general consensus is that a return to growth is pushed out to late 2025, with real improvement expected in 2026. Most EMS do not expect orders to return until the second half of next year.
“On a global level, we will return to normal growth in 2025,” Weiss predicts. “That means about 4%. In Europe we expect about 3.4% for 2025, mainly coming in the second half. The first half of 2025 for some companies will continue to be difficult. We should see several insolvencies in the first half of 2025, and several M&A deals,” he concludes.
2025 will prove to be another challenging year for the EMS industry, but hopefully not as bad as 2024. EMSNOW will continue to track and report on the developments and elevate the industry that has become so critical and ubiquitous to the modern electronics driven world.
