EMSNOW Analyst Interview: Randall Sherman, New Venture Research Part Two

EMSNOW Analyst Interview: Randall Sherman, New Venture Research Part Two

Randall Sherman is President and CEO of New Venture Research, publisher of the MMI Top 50 EMS, and several other important industry reports. We caught up with him to learn more about his firm’s latest report on the EMS industry. Here is Part Two of an insightful conversation we had with him about his view of the current state of the EMS industry and its growth drivers for the future. Part One can be found here.

EMSNOW: The report forecasts continued growth of the CM market through 2023, with a CAGR of about 7.5 percent. What do you see as the main drivers of this continued growth?

width="200"The EMS industry is now like a runaway train in that OEMs can ignore these suppliers only at their peril. No serious OEM today can take on product development without a skilled contracting manufacturing partner. While industry growth may experience intermittent downturns over the next five years, the EMS industry is going to capture all of the emerging new product growth for the foreseeable future. That is, unless Trump manages to drive the economy into a ditch with his silly tariffs. Otherwise, there’s just no way this industry is going to slow down. We’ve had two consecutive years of 15%+ growth in EMS industry in 2017 and 2018. EMS is the only way to keep the costs under control where a company has new product launches happening on a frequent basis. However, there is a danger of OEMs flooding the component market which will create an excess in supply, as they commonly do, but hopefully that excess supply will get consumed in the subsequent year.

EMSNOW:What is the impact that IoT will have on the industry?

That is the question! There are all kinds of industry data that suggests a positive outlook for the IoTs components, which we believe to be real. Most of these devices are module makers, measuring wireless performance and sensor accuracy, but as is often the business case, Asians tend to drive their costs to the margin, all to capture more market share, and sadly make no profit. The industrial market will take off first (as per Industry 4.0), but there will also be strong demand in the transportation markets (automotive and aerospace), led by autonomous drone and vehicles and applications. The consumer markets will be led by smart home and appliance solutions that are becoming increasingly ubiquitous.

EMSNOW: The report states that for the ninth year in a row, the industry was profitable at $8.4 billion. What differences were noted among the various size categories (tiers) of the CMs in this regard?

People forget that the majority of that profit came out of Foxconn, but so many drop below the line that you have to wonder why they are engaged in this industry. The answer is that there is lots of revenue volume which most CMs and ODMs find irresistible. Fortunately, we can say that the industry is finally starting to show some discipline in its gross margins and that should improve only over time. 

EMSNOW: How do you see the issues of chasing low cost manufacturing sites vs. return to regionalization playing out?

I think the time for playing musical chairs in site reallocation is over. Most EMS firms have finalized their manufacturing footprint and that will not radically change except in an acquisition or merger situation. We are back to a regional manufacturing model as all EMS companies now can offer competitive value-proposition in any region in the world.

EMSNOW: Looking back at the totality of the research you conducted to complete this report, what insights surprised you about the industry?

I’m just surprised with how resilient the EMS industry is. There was a time when Sanmina had six years of continuous losses, and they still survived. Small EMS firms like Creation Technologies, SMTC and SigmaTron have done a great job at surviving and adapting. Some are still struggling in their niche (AsteelFlash, Benchmark, Celestica, and Venture Manufacturing). Others like Fabrinet, Foxconn, Hana Microelectronics, Jabil, Pegatron, and Zollner are pushing the technology envelope and have performed extremely well and demonstrate that they know their business and customers.

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