IoT, 5G and alternate energy will help drive the North American EMS market

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James Carbone – Contributing Editor

EMS providers say while the pandemic slowed production of equipment last year, demand is recovering and single-digit growth for many contract manufacturers is possible.

Electronic manufacturing services providers say they are optimistic that they will grow business over the next five years because of rising demand from companies making products for alternative and clean energy, industrial applications, 5G and Internet of Things (IoT) and an overall increase in outsourcing by OEMs in some industries.

Many North American EMS providers struggled last year as some industries shut down production for a time because of the pandemic, but many contract manufacturers still managed to post sales increases for the year when demand picked up in the second half. EMS providers say demand in the first three months of this year has been healthy and they believe demand for manufacturing services will continue through the year and in the near future. The North American EMS industry is off to a good start in 2021. Trade association IPC said EMS shipments grew 9.7 per cent in January over January 2020 and bookings increased 10.2 per cent from December 2020.

Contributing to sales growth will be the trend of OEMs and their EMS providers to build products in or near the markets where the products will be sold rather than in low-labor cost Asian countries. In fact, some manufacturing that had moved to China years ago has moved back to North America.

While year-in, year-out double-digit growth of North American EMS business probably is not possible, many EMS providers say that mid-single-digit growth is achievable and there will be double-digit growth in certain segments. The idea of single-digit growth would have been considered unlikely early last year after production of many electronic products and systems were shut down or slowed because of the pandemic.

Ed Smith, CEO of EMS provider SMTC, based in Markham, Ont., Canada, said when COVID hit last year, “some parts of our business went to zero but overall we are going to grow year on year even with COVID.” SMTC builds products and systems for a wide range of industries including medical, semiconductor, defense and aerospace, retail, test and measurement, telecom and networking and clean energy, among others.

He said SMTC’s avionics and restaurant payment systems business was hard hit especially in the second quarter of last year. Those segments are not back to pre-COVID levels but are recovering. Other EMS providers suffered sales losses early in 2020, but eventually recovered in the second half.

Shifting focus
“For some EMS providers, the pandemic had impacts on business other than lost sales. Rob Crawford, chief revenue officer for EMS provider Benchmark, said the pandemic resulted in Benchmark shifting “its focus in the connected point of care medical device space” because demand for certain medical products increased sharply last year.

“Technology trends related to patient-centric healthcare and healthcare solutions that don’t require a visit to the hospital or doctor’s office had been growing, but the pandemic accelerated the demand for it greatly,” he said. Benchmark, based in Tempe, Ariz., builds devices for medical OEMs including connected and portable medical products, medical resonance and imaging (MRI) systems, computerized tomography (CT) scanners, optical imaging products such as endoscopes, among others. It also services, aerospace, industrial, defense and semiconductor capital equipment markets.

While 2020 was challenging for EMS providers, many contract manufacturers are upbeat about 2021. One reason is industrial IoT. Some EMS providers think there will be strong growth for the segment in 2021 and for several years after because of the rollout of 5G networks, which many industry analysts and electronics executives say is pivotal to IoT growth.

IoT is not new, but it has not grown as robustly as many executives believed it should have. For instance, Smith said he had expected IoT products and solutions would have posted double-digit plus growth, but “it pretty much has grown at the same rate as the overall market. I think everyone was waiting for 5G networks to be built. Now that 5G is getting to be more in place and starting to become mainstream, IoT will pick up,” he said.

Analysts say 5G technology will be an enabler for many IoT applications. Once fully deployed, 5G will boost capacity. It will have data transmission speeds 10-100 times faster than 4G. It will also have very low latency, less than a millisecond compared to tens of milliseconds for 4G. It will allow more than 1 million devices per square mile to be connected to the Internet simultaneously.

When 5G infrastructure gets more prevalent, “ I think we will get to double-digit growth at some point,” said Smith.

IoT, 5G drive growth
Graham Scott, vice president of procurement for EMS provider Jabil, based in St. Petersburg, Fla, said enabling technologies such as 5G and IoT are already driving significant growth in industries such as automotive, connected healthcare, mobile, consumer packaged goods, retail (POS) and alternative energy.”

He said as 5G adoption increases over the next few years, so will the ability for connected and autonomous vehicles to take advantage of 5G’s high bandwidth and low latency benefits. Scott noted while 4G is well suited for most IoT applications in today’s automobiles, the “full promise of 5G remains a few years away for connecting into these high-speed networks and infrastructure. Scott is also bullish about alternative/renewable energy and smart power products used in data centers and electric vehicles. He said Jabil is finding opportunities in alternative energy. “We’re seeing an increased demand for renewables, microgrids and EV charging.” In addition, there are also opportunities in solar photovoltaic systems and energy storage, said Scott.

SMTC also builds battery charging products for the EV industry. “I think those markets will continue to grow for us faster than the rest of our markets,” said Smith.

Scott added that there are also growing opportunities building systems that support data centers, the cloud and the retail industry, which is shifting to digital, no-touch customer experience and the IoT. AI and data analytics heighten the levels of consumer personalization and inventory precision, he said.

Other opportunities
While alternative energy, electric vehicles, 5G and IoT will help drive EMS providers sales over the next five years, EMS providers say there are also opportunities for sales growth with traditional customer segments. Computing and telecommunications historically have been industries that have outsourced production.

“That model will continue,” said Crawford. However, higher value markets of medical, industrials, including semiconductor, and aerospace and defense “still retain a lot of internal manufacturing capacity,” said Crawford.

“By our estimates, these higher value market sectors are less than 50 per cent outsourced” to EMS providers. “We see future growth in the North American market primarily from these sectors as they re-evaluate their long-term investments in internal manufacturing,” said Crawford. In addition, the medical segment and some industrial markets tend to be highly regulated and some products can’t be built offshore.

Crawford noted in the recent past with more stringent tariffs, increasing international labor costs, and higher freight and logistics costs, some companies have rethought their entire global supply chain to balance flexibility, time-to-market, and overall costs.

“Some customers have chosen to maintain manufacturing in Asia for their Asian customers, and dual source those products in Mexico for their North American customers,” said Crawford. However, it varies by industry and by global strategy of end customers, he said. Crawford added demand for outsourced manufacturing operations in Asia remains strong for many industries that ship products within Asia and export as well.

Smith noted that SMTC had operations in China but closed the facility in 2019 because of customer concerns about uncertainties relating to the prolonged impact of tariffs and microeconomic factors.

Facing challenges
While EMS providers are optimistic about business in North America, there are some challenges they face that could impede sales growth this year and beyond. Tariffs, the possibility of higher interest rates and logistics issues could impact both sales and profitability of EMS providers.

Logistics has been a problem for many companies since the pandemic began. “There are fewer planes in the air going internationally and more things being transported by ships,” said Smith. “There’s less room on boats, so prices have gone up.” In addition, the time to “load and unload has significantly increased,” said Smith.

Smith said interest rates “make me very nervous. If inflation increases, the Federal Reserve could raise interest rates. The federal deficit is also increasing and some EMS providers fear taxes could be increased.

One challenge for EMS providers is building a supply chain in North America that is as strong as the Asian markets, according to Crawford. He noted many of the electronic components used for manufacturing will continue to be fabricated in Asia.

“There is still some work to do to build a strong supply chain in North America for custom and build-to-print items to support further manufacturing growth in the region,” he said. Transferring manufacturing takes much less time than moving a supply chain. So, suppliers will need to adjust to meet the rising demands in North America, said Crawford.

Attracting new customers
A key and continuing challenge for any company is attracting and retaining OEM customers. To do so, some EMS providers believe they have to offer customers more services and expertise to compete and grow their businesses.

Scott said Jabil will introduce value-added offerings, such as design services, and end-to-end supply chain services. He said offering such services will be important to the health of EMS providers.

Pandemics, trade policy uncertainty, climate change, geopolitical tensions and evolving macroeconomic conditions “will compel OEMs to re-examine their manufacturing and supply chain networks and continue to seek out EMS providers in support of their business initiatives.”

Flavio Magalhaes, senior vice president of operations for EMS provider Flex, said as product ideas become more complex, integrating more features and technologies is required. “Customers are looking for partners who have the advanced design and engineering capabilities to help turn these ideas into manufacturable products,” said Magalhaes.

EMS providers must have a deep understanding of the industry specific applications because “there are no one-size-fits-all solutions,” he said.” You must have specific domain expertise to apply to your customers’ challenges.

He said an example is Flex’s “homegrown battery backup module for data centers that was developed by our industrial business.” He said there is a trend away from traditional backup systems to battery backup systems. “We can combine this capability with our in-house developed battery management system technology and offer it to our automotive electrification platform,” said Magalhaes.

Crawford said OEM customers are looking for additional support in design engineering and solutions to get their products to market faster and at a lower cost. “There is an opportunity for North American EMS providers who can deliver on these needs through innovative technologies, state-of-the art manufacturing expertise, and an efficient supply chain, especially in medical, industrial, and A&D markets, said Crawford.