Electronics Manufacturing & Circuit Boards
Date July 2019
- 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 but having decreased demand internationally; over the past year, demand has increased for late model Surface Mount Technology equipment
- Following two years of severe component shortages, demand is weakening, and vendor inventories are high
Approximate net recovery on cost
Tariffs impact electronics manufacturing: In July 2018, a U.S. 301 tariff of 25 percent went into effect on a range of Chinese imports affecting electronic manufacturing services (EMS) and customers. As noted by Macrofab, these tariffs cover a wide range of products used in printed circuit board 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
One year later, companies are feeling the impact of higher costs on passive componentry, which are those components that do not control current by means of another electrical signal. Passive components including resistors, capacitors, and diodes have all been impacted by recent tariffs. Macrofab notes that the primary impact tariffs have had on U.S. electronics production is to have driven the cost of these components higher, while providing little relief in a tight supply market. For most designs, price increases on passives do not contribute significant additional cost to the overall cost of goods sold (COGS), as these components are minor contributors to the overall cost for most designs. However, as competition for supply in high-volume production increases, it may result in some orders seeing a substantial COGS increase to ensure adequate supply. For electronic components, the most significant current issue in the industry is the undersupply of products such as capacitors and resistors, with the tariffs complicating the issue further.
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 (e.g., China and 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.
The electronic component market is unstable: The new normal these days includes a level of instability. The growth in board-level component consumption, along with increased demand across growth sectors, including the Internet of Things (IoT) and automotive, has further complicated the supply chain. In general, the hyper-shortage issues of 2018 have subsided, and an increase of excess component levels has followed.
Although a typical pattern after a prolonged shortage, distributor Fusion Worldwide’s management recently noted that “the excess is the result of double bookings, aggressive pull-ins and over buying to create safety stock.” As a result, many are optimistic about the second half of this year given expected strong component 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 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 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.
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.