Rarely today do electronics OEM decision makers leave a current EMS partner because a competing electronics solutions provider lured them away. One saving grace for EMS providers is, in general, EMS firms are notoriously bad marketers of communicating EMS differentiation and any business wins are theirs to lose.
It’s no surprise most EMS industry sales is driven by OEMs outsourcing more programs to existing EMS partners and has little to do with EMS sales efforts. We estimate the majority of EMS sales professionals close less than 15% of new customer opportunities.
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We estimate the majority of EMS sales professionals close less than 15% of ‘new” customer opportunities. OEMs remain with an EMS provider because there’s either nowhere else to go or, until pricing pressure becomes too much or EMS execution falters.
In an industry known for operations and supply chain inefficiencies size (vertical integration) can matter more and as the EMS industry becomes increasingly more competitive it’s becoming apparent the majority of EMS providers with $300 million in sales or less are looking for an exit.
EMS providers with dedicated electronic prototyping or an NPI offering have more choice about how they might exit. Options improve even more depending on industries served, facility location(s) and, technical capabilities per location.
Some trends we’ve noticed with EMS industry M&A recently include:
- EMS acquisitions are often motivated by interests to expand depth in existing markets or enter new markets and/or, to expand current technological capabilities or acquire new technology capabilities.
- Its better to be found than to announce you’re looking to be acquired. (latter can be viewed as a sign of weakness)
- EMS firms wanting to be acquired often have a higher than industry average debt-to-equity ratio (may or may not be distressed)
- Finding suitable partners for a JV is key and most JVs are typically more than they seem from the onset
- Management buyouts (MBO) lean more toward EMS firms offering solutions to customers with complex, high-mix assembly needs and serving non-traditional markets
- Smaller EMS companies interested in JVs with larger EMS firms are likely seeking to exit the business. Conversely, larger EMS firms interested in JVs with smaller providers are likely thinking of eventual acquisition
To the last point above, a Northeast EMS firm formed a JV with a much larger European EMS firm. The US EMS firm can count automotive electronics, industrial plus, other strategic, non-traditional customers and now can offer these customers additional capacity in lower cost parts of Europe and Asia should current customers need to scale production or need manufacturing closer to markets/bases of consumption.
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As for the European EMS provider they can leverage US-based NPI services to help attract and springboard North American/western business into their facilities.
The Northeast EMS firm will eventually sell to the European EMS firm provided the two parties work well together. This outcome is even more likely because the European firm also took an equity position in the US firm.
Beyond joint ventures allowing both sides to test the waters of a possible merger or acquisition, JVs let both sides leverage synergies from combining technical capabilities, geographies plus, being able to say they have a presence in certain markets they didn’t have before the JV.
Claiming a more robust EMS business model helps both sides attract more prospective customers.
Suitability
Deals Venture Outsource has been involved in included working with limited partners and private equity groups and/or directly working with contract electronics service providers. Deal size ranges from $5 million to $1 billion with the majority of deals in the middle market.
EMS providers bottom-feeding sometimes can get good results. Sometimes not. Saving near-term on a multiple of current year’s earnings or future earnings can have long-term consequences.
As one professional with years of experience working in EMS facilities with different EMS firms says, “…customers are getting shocked how huge the differences are between the same company’s factories even within the same region or city. They imagine EMS providers as one big company but in reality…most of them have been acquired from broken [EMS] companies.”
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Venture Outsource knows EMS operations, balance sheets, cash flow and P&L statements and has data on thousands of EMS providers around the globe serving every industry end market. EMS owners and investors wanting more info about expanding your business and investment opportunities learn more or start a discussion here.
