The Worst Is Yet to Come
Component allocation is hitting the electronics industry with a vengeance. It started in Q1-2021 when the industry woke up to the grave situation regarding the supply of microcontrollers and semiconductors for power management. Shortly afterwards, other components became in short supply and by the second quarter everybody was keenly aware of the problem. Rather than looking at ways to solve the problem, the automotive industry was pilloried.
Albeit the automotive industry has a share in the blame, the real problem was massive demand shifting in the different areas needing electronics and semiconductors. The bullwhip effect, explained last week in an article by Jennifer Read on this website makes a whirlwind of forecasts, orders and supplies. The ultimate impact is a curtailed supply of components at higher prices.
The EMS industry experiences the biggest impact. Whereas the distributors like to be seen as the Samaritans helping everybody, the OEM customers of the contract manufacturers try to ignore the looming price increases by willfully denying the curtailed supply conditions.
EMS customer and supplier managers are on the phone every day having heated discussions about price increases. If at all, customers are only accepting the price difference of the components. Some sly buyers send the new price calculations of their EMS suppliers to other EMS companies in order to have them check the validity of the calculations. EMS management is well advised to check the NDAs with those customers, as such practices are not legal. Quoting calculation documents are normally privileged confidential documents.
Those EMS companies receiving such requests should realize that if they do it to others today, they might be doing it to you tomorrow. If the OEMs want to create real turmoil, they will get it. However, just forwarding the extra cost for the components on to the OEM is not good enough. The latest half year survey for the European EMS industry jointly performed by IPC and in4ma showed that only the big players were able to exceed the revenues of the first half of 2020 and the question has to be asked, how much of this is just the extra charge for components?
We are all in the same boat. Predatory practices to beat down component price increases will kill the EMS industry
If only these extra costs for components are passed along to customers, the EMS industry is making a big mistake. Revenues may increase, but profit does not: profit margins are declining and have been since before the pandemic. In 2019 it was on average 2.6% for EMS >50 mil. euro, 2.8% for smaller EMS. This is unsustainable.
In addition everybody is building up stock. Inventories are increasing again, raw materials are exceeding the high level of the last allocation problem 2018/2019 (2018/2019 it was 14.5% of revenues for EMS >50 mil. euro, 16% for medium sized companies and 18% for small companies), and material turnover is again far below 5 turns.
The cost increases are not caused only by component costs, but also by the inefficiencies created by the shortages. Often component orders are incomplete — in some cases just small strips rather than rolls are being supplied, which increases the workload for the EMS by a lot: There are more individual incoming pieces which need to be documented; the handling of components is less efficient, including reeling the incomplete strips; attempts are made to manufacture orders in smaller batches because insufficient components are available and companies are trying to please the customer at least with a part delivery — all these practices are increasing the cost structure of the EMS companies tremendously. Such increased costs need to be forwarded to the customer. This is not just some commercial negotiation, we are talking about the financial future of the EMS industry and for some smaller EMS, financial collapse is already a reality.
Price discussions need to be held immediately as the allocation problems will further increase in the second half of 2021 and last long into 2022, if not longer. If you allow your customer to threaten you with transferring the orders to another EMS, you already lost. We are all in the same boat, nobody has better or cheaper component supplies.
You want to know more details, more numbers? German speaking companies are invited to come to the EMS Tag in Wuerzburg/Germany (www.EMS-Tag.de) on September 2, 2021, organized by Vogel Verlag and sponsored by IPC. English speaking companies are invited to attend the EMS workshop in Tallinn/Estonia on December 2, 2021 organised by the Estonian Electronics Industries Association (EEIA) and sponsored by IPC.