Electronics Manufacturing & Circuit Boards
Date July 2020
- There will be continued uncertainty within the industry given the fallout from the COVID-19 pandemic; however, the majority of electronic manufacturing services (EMS) providers have stated that component shortages have recently receded as China reopened its economy.
- After seeing a slight decrease in revenue in March and April, many EMS providers have indicated that revenue budgets have stabilized. Although it is expected to decline, total 2020 revenue will not take as drastic a hit as previously thought due to the pandemic.
Approximate net recovery on cost
Electronic Component Market to Decline in 2020: The global semiconductor and other electronic component market is expected to decline from $943.9 billion in 2019 to $901.2 billion in 2020, representing a compound annual growth rate (CAGR) of negative 4.6 percent, based on a June 2020 forecast from The Business Research Company. The decline is primarily driven by the economic slowdown across countries due to the COVID-19 outbreak and the measures to contain it. However, the forecast is for the decline to be temporary, as the market is expected to recover and grow at a CAGR of 6.0 percent from 2021 through 2023, reaching $1,057.6 billion in revenue by 2023.
In terms of the book-to-bill ratio (the ratio of new orders to completed sales) for the semiconductor industry, the book-to-bill ratio for printed circuit boards (PCBs) was 1.10 for May 2020, per data published by electronic interconnection trade association IPC. Total PCB shipments in North America for May were up 1.0 percent over May 2019. However, as compared to April, May shipments decreased 3.0 percent. PCB bookings in May increased 0.4 percent year-over-year but were down 20.2 percent from April. “Orders continue to outpace shipments as supply chains adjust to disruptions and demand shocks caused by COVID-19. Strong orders for North American PCBs in recent months have led to longer lead times,” said Shawn DuBravac, IPC chief economist. “Orders in May suggest global supply chains might now be recalibrating to adjusted levels of demand.”
Tariffs on components remain: In July 2018, a U.S. 301 tariff of 25 percent went into effect on a range of Chinese imports, which affected EMS manufacturers and customers. As noted by technology company and contract manufacturer MacroFab, these tariffs covered a wide array of products used in PCB assemblies, including:
- All capacitors (including tantalum, aluminum electrolytic and ceramic)
- All resistors (including thin/thick film, radial, potentiometers and rheostats)
- All switches
- All connectors and terminals for making electrical connections
- Any printed circuit assembly
- All integrated circuits (including processors, controllers, memory, and amplifiers)
- Low-voltage insulated wiring
In December 2019, as the U.S and China reached a Phase 1 trade agreement, tariffs were lifted or reduced on many consumer electronics items heading into the holiday selling period. In exchange, China agreed to purchase more agricultural products from American farmers along with other U.S exports. In light of the agreement, the U.S. suspended new tariffs on approximately $160 billion of Chinese products that had been set to take effect on December 15, 2019 - tariffs that included consumer electronics items considered prime holiday gift items. While this benefited holiday sales, the 25 percent tariffs on another $250 billion worth of Chinese imports, including electronics components, remain in place. George Whittier, president and COO of U.S. electronics design and manufacturing firm Morey Corp., recently noted that, at the outset of tariffs being levied, “we were concerned about the first round of tariffs, but when we saw the actual impact, we could almost brush it off.” However, by October 2019, the impact of tariffs had become more serious, and EMS firms were implementing plans to discharge tariffs to their customers. To date, tariffs have affected procurement costs, product design and production timing.
Given the situation, original equipment manufacturers (OEMs) may have to consider redesigning their products if the tariffs continue long term. In addition, tariffs have caused procurement costs to increase and partnerships have been severed, forcing companies to relocate manufacturing. As such, global procurement operations are shifting away from China-reliant suppliers.
Market Tiers and Regions Define the Marketplace: The 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 such as China and Mexico. Most North American EMS activity focuses on low-volume, high-complexity manufacturing for industries such as aerospace, industrial, medical and military. OEM customers in these industries often choose just one EMS provider to produce their products, which can lead to relatively high recoveries for inventory.
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 and forecast. Other factors affecting value include 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.
Industry Volatility Necessitates Close Monitoring: Many EMS providers are dependent on a few customers for a large percentage of their 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 include 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 when compared to legacy customers.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: macrofab, circuits assembly, ems now, eps news, fusion worldwide, ibisworld