Electronics Manufacturing Services
Date August 2017
Approximate net recovery on cost
- Increasingly effective inventory management has resulted in higher values for finished goods and raw materials
- Printed circuit board equipment values have been steady, with older assets still marketable internationally
- Recent acquisitions reflect a maturing and consolidating industry
- Circuit board and electronic component manufacturing industry revenue is expected to decline 1.2% in 2017 as outsourcing of labor continues to accelerate; the industry outlook is for a steady decline at an annualized rate of 1.2% through 2022
Market tiers and regions define the marketplace: The electronic manufacturing services (“EMS”) industry is commonly divided into tiers by revenue. Tier one EMS providers have revenue of over $1 billion, tier two EMS providers have revenue of between $250 million and $1 billion, and tier three EMS providers have revenue of under $250 million. High volume, low complexity manufacturing is concentrated in low cost regions (e.g., China, Mexico). Most North American EMS activity focuses on low volume, high complexity manufacturing for industries such as aerospace, industrial, medical, and military. Original equipment manufacturer (“OEM”) customers in these industries often choose just one EMS provider to produce their products, which can lead to relatively high recoveries for inventory.
Automotive and lighting sectors growing: Despite an overall decline in U.S. circuit board and component manufacturing, spring 2017 market analysis by PwC noted that the Automotive and Lighting sectors were experiencing growth, driven by connectivity and “smart” electronics production. This growth is expected to continue until 2020, with a compound annual growth rate of 23.6 percent. Inventory values in this space, however, are dependent on the relationship between on-hand inventory and the inventory needed to fulfill current orders, with the assumption being that customers would be the primary channel for these components in a liquidation. With typical electronic component inventory, secondary market dealer/broker purchases tend to recover at a lower percentage of cost, so the assumption of a customer buy-back may result in significantly higher values. Ultimately, value is dependent on how much of a company’s on-hand inventory is needed to satisfy current demand.
Inventory dynamics determine value: Inventories are composed of finished goods, work-in-process, and raw materials. Valuation methodology focuses on the assumption of a sell-back to OEM customers based on provided orders/forecast. Other factors affecting value include the customers’ reliance on the EMS provider in their supply chain (when the EMS provider is a customer’s sole source, the desirability of the inventory increases), component lead times, and whether raw materials are proprietary or off-the-shelf since materials that are more difficult to replace have higher values.
Equipment is valuable: Equipment at EMS providers includes printed circuit board assembly (“PCBA”) lines, which typically consist of screen printers, high speed chip placement machines, reflow ovens, and automated optical inspection (“AOI”) stations. Other equipment groups can include test and measurement, and metal and plastic fabrication tools. The majority of PCBA equipment at EMS facilities is manufactured by a small number of vendors. Newer models are distinguished by increased speeds and the ability to produce smaller and denser products. Whereas each successive generation of equipment causes downward pressure on the value of legacy equipment, the useful life of PCBA equipment is long, with a strong market for legacy equipment in developing countries worldwide. These markets include Asia, Latin America, and Eastern Europe.
Many EMS providers are dependent on a few customers for a large percentage of revenue. When one of these customers suffers a downturn and delays or cancels orders, the result is often an EMS provider with excess inventory and lowered revenue in what is typically a low margin business. Frequent reappraisals, particularly of inventory, are highly recommended. Other events that should trigger an inventory and/or equipment appraisal update are the opening or closing of a facility since the asset mix is likely to change, and the addition of a significant customer since “fresh” inventory typically results in increased inventory value due to lower rates of excess material compared to legacy customers.