What’s the SCOOP – Thoughts for the C-Suite #7 of 8 – Scale & Scalability
Scale is important, but that’s not to say big is always beautiful. But let’s just say there’s a critical scale at which an EMS can exert influence on the supply chain and can also get the attention of the global brands they want to partner with. There are plenty of smaller EMS companies with big voices when it comes to negotiating deals with their supplier, but it’s really spending power that has the biggest impact.
Part of the scale issue is, of course, right-sizing. OEMs or brands should select their EMS partners with a view to their own size, spend and expectation. There’s little to no point in being with an EMS provider that has hundreds of companies that dwarf you in terms of spend. When times are tough, the big spenders will get the most attention. Some EMS companies tend to fish in smaller pools when business is tight, only to throw their catch back when the climate improves and their regular, larger accounts are ramping up their spend. Bad news for the OEMs or customers that get ‘fired’ and bad news reputational for the EMS. Conversely, an OEM needs an EMS that can grow with them and fulfill their products in the volumes they need as well as in the markets they expect to penetrate.
Recently many EMS companies have been chasing scale and the M&A market has been hot, but it feels like it may be cooling as some nervousness enters the market and cash gets diverted to working capital and inventory to cope with the component shortages. I suspect further acquisition this year will be more thoughtful in the main, although some might be opportunist as smaller less well funded companies find things more difficult.
In a MADE IN podcast last December I predicted that there could be three European EMS companies with revenues over one Billion dollars by the end of 2022. The recent merger of GPV and Enics has added a second, but who will be the third? Will it come as a result of a merger of through more organic growth from those players close to that mark? We’ll have to wait and see, but I am sticking to my prediction.
In terms of the trends within the medium to larger brands or OEMs, they are certainly looking to the EMS industry to reflect their geographical needs. Many are giving their contract manufacturers notice of more regionalized supply chains. Some OEMs are telling their partners that they plan to meet their Americas product demand from the Americas, their European demand from Europe and their Asian demand from Asia. This could make scale, in terms of footprint, even more important and could encourage some thoughtful developments as market leaders in one region invest in another.
Scaling globally is one challenge, scaling in terms of technology, or offering, is another. The winners in the EMS race in the coming decade will likely have scale, a global footprint and a broad and vertically integrated technology and service offering. Scale for scale’s sake rarely makes sense, but scaling to a critical mass, or scaling to meet the demands of the market does.
These blogs are also available in audio form on the “EMS@C-Level” podcast, wherever you get your podcast or at https://emsatc.buzzsprout.com