Many contract manufacturers in the hyper-competitive middle market contract electronics industry continue to face increasing pressures on various fronts. Whether from problems associated with finding customers, followed by challenges retaining and growing those customer programs (most top-line industry growth is from existing customers giving providers additional business – read more) to especially acute challenges for providers requiring frequent tapping into revolving lines of credit to operate in environments with increasing operating input costs such as energy and labor.
As some contract electronics providers face growing financial challenges (read more here and here), the industry is witnessing a resurgence of more acquisitions of distressed providers by more financially secure upstream vendors and suppliers serving similar markets and wanting to climb the value-add ladder.
As an example, solutions providers focused on specialized cable manufacturing and wire harnesses assembly are becoming interested in acquisitions of distressed contract electronics providers serving non-traditional markets and offering complex electromechanical and high-mix systems integration (box build) and engineering services for the medical and MedTech, avionics and aerospace, industrial electronics and automation, automotive, capital equipment, military and defense, and device OEM end-markets, which all require use of often specialized cable manufacturing and wire harnesses.
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Building costing modelers for contract electronics pricing and negotiations
These types of acquisitions and mergers allow acquiring solutions providers (and their investors) to expand manufacturing footprint while building out their vertically integrated business models at greater scale. On this note, one consideration to keep in mind is vertically integrated providers have higher operating costs, which can be troublesome in slow or soft markets.
However, the non-traditional contract manufacturing markets offer some of the best margins, and especially attractive margins for front-end design and new product introduction (NPI) and various supply chain services like distribution and logistics and back-end aftermarket services like warranty refurbishing and repair, reverse logistics. (Read this article on thin-margin myth in contract electronics industry)
Private equity has been active in contract manufacturing M&A for non-traditional contract manufacturers for decades with no waning interest anytime soon. A growing trend, given capital flows the macro economic environment is the increasing interest in cross-boarder, international investment transactions.
Other contract electronics provider service capabilities seeing growing demand include plastic injection and moulding and enclosure metal stamping, die-casting and CNC work and other tooling-related processes, especially for providers with unique and proprietary knowledge of process, procedure or equipment service capabilities.
Acquisition cost synergies and lessons learned
Some readers in industry may remember contract electronics provider, OnCore. This provider served the non-traditional markets and was lead by a former, successful sales person holding the CEO role and responsibilities.
Under the CEO’s leadership OnCore quoted a large British program at a BOM multiple below contract electronics industry average. And while OnCore won the business, OnCore was soon consumed by runaway costs and the CEO was unable to drive operational efficiencies to recover losses. This forced an OnCore acquisition by a competing provider also serving the non-traditional markets, saving both OnCore and the British customer from sinking.
Had the acquisition, presented to industry in a press release [inaccurately] as a merger, not involved cost synergies between OnCore and the acquiring provider, a dilutive acquisition might have lead to the demise of both providers.
This chart illustrates the chances for M&A success based on whether or not the buyer is acquiring a company with a technology that matches their own, or has technology that is an extension of their own or, has a completely new technology. The same can be said for market. For example, a contract electronics provider serving non-traditional end markets may not do as well should they acquire a provider serving the consumer devices market.
To emphasize likelihood of failure when a company goes outside its familiar technologies, and end markets, remember when software company Microsoft wanted to focus building a hardware devices and services business through acquisition? Microsoft ended up cutting 7,800 jobs and writing off $7.6 billion related to its acquisition of the Nokia phone business.
To read how Venture Outsource helps companies and investors with industry research and contract electronics mergers and acquistions, click here.
Handbook for non-traditional electronics manufacturing companies
Venture Outsource offers a free handbook for electronics OEM manufacturers and startup hardware portfolio companies serving the non-traditional market mentioned in this article. The 32-page handbook is divided into the primary topics below, with several topics going deeper, including detailed industry and specific program examples (with clear suggestions and actionable lists) plus, various links for readers to consider and gather additional information.
- OEM Outline for Electronic Prototype and New Product Development
- EMS Manufacturing Request-for-Proposal (RFP) Terms
- EMS Manufacturing Request-for-Quote (RFQ) Best Practices
- EMS Manufacturing Industry Quote Pricing Drivers
- EMS Manufacturing Program Workflows, Flowcharts
- EMS Manufacturing NPI Systems Integration (Box Build) Checklist
Electronics OEM and hardware startup portfolio company professionals can read more and request the 32-page handbook here.
Hardware startup professionals can read about hardware startup manufacturing plans and bringing new products to market, here.
Get a list of EMS manufacturers matching your program needs (Its free)
Venture Outsource has the largest, global database of contract electronics capabilities. Get a free list of contract EMS manufacturing companies matching your program needs.
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Advisors have access to detailed information on listings in our global database and can help you compare provider service capabilities to better match your program needs. Speak with a Provider Advisor. This free service is for electronic professionals working in OEM brand companies.
