Electronic OEM equipment manufacturers want to sleep at night knowing their contract electronics provider partner is taking care of the OEM’s business interests, yet every industry has its risks and the contract electronics industry is no different. Risks for contract electronics providers can be amplified by many factors and with today’s focus on containing costs, below are a few reasons why some contract electronics manufacturers may find themselves facing financial woes if business is not effectively managed.
1.) A decline in the demand for electronics products can lead to a decrease in revenue and profits, resulting in financial difficulties. Some industries and market sectors served by some contract electronics providers are typically more cyclical than others.
The same goes for contract manufacturer (CM) profitability – customer programs in some industries afford providers greater margins than other markets. For example, non-traditional market sectors like medical device, automotive electronics, industrial electronics and aerospace are typically more lucrative for providers vs traditional markets, like consumer devices.
The same can be said for the range of services offered by providers in contract electronics industry. Front-end services and back-end services typically bring higher margins for providers compared to surface mount technology (SMT) and printed circuit board (PCB) assembly – core manufacturing services.
2.) The contract electronics industry is hyper-competitive. An increase in competition from other CMs can lead to a decline in market share and revenue, resulting in financial difficulties for some providers.
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3.) Increases in the cost of labor, components risk, consumables plus other inputs can lead to a decline in profitability, resulting in financial difficulties. High overhead costs, such as factory and property taxes and equipment maintenance, energy and utilities, and insurance can make it difficult for contract manufacturers to remain profitable.
Vertically integrated CMs providers have higher operating input costs than providers not vertically integrated. Costs for vertically integrated providers can be spread across multiple customers and production shifts, which is good during good economic boom times, but these higher operating input costs can be a drain on cash reserves during periods of slow economic times.
Below are some rough estimates on contract manufacturing industry cost buckets and comparisons in vertically integrated providers.
4.) Customer concentration can be an issue for some providers. Contract electronics providers too heavily dependent on one or just a few customers may lead to a decline in revenue if one, primary customer stops paying for contract manufacturer fees and services. Reduced cash flows can result in inability for the provider to service remaining customer programs. On this note, many electronics OEM equipment customers of contract electronic service providers have supplier development and management mandates in place prohibiting working with providers where the OEM’s annual program spend is beyond a certain percentage of a provider’s annual revenue.
5.) Poor operational efficiency can lead to waste and inefficiencies, resulting in higher costs and lower profits for some contract electronics providers.
6.) Economic downturns can usher in declining demand for services from providers and less demand for electronics products resulting in financial difficulties for manufacturers. For European manufacturing industry, the European Union offers a wide variety of programs to help offset challenges facing manufacturers and persons employed in manufacturing industry.
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