Strategy, not size, determines growth
03 February 2008
Acquisitions and mergers have always been a part of how any industry evolves. Every business within that industry will largely be defined by its attitude towards growth. But where is it all leading to?
The electronics manufacturing industry really has gone through dramatic changes in the last 20 years. It has been like having one traumatic mid-life crisis after another before reaching a maturity that is still far from comfortable.
One of the biggest shifts in these past decades has been the shift towards outsourcing. The impact this had in the past was significant, grabbing headlines in the mainstream press as well as dominating the electronics magazines, as the most obvious beneficiaries of the outsourced model were those involved in high volume. OEMs rushed to outsource to EMS providers, who in turn bought their OEMs facilities in the race for capacity. Size was important. Much has been written on this trend and the business/geographical consequences of it.
However, different changes are now affecting the industry. But these do tend to be on a smaller scale than before and so the newspaper headlines are grabbed less frequently. Take two of our news stories this week – Asteel’s acquisition of MRP and the Sunburst EMS buyout of NEWire. Instead of the chase for capacity it is now the hunt for capability, and above all the quest for customers, that is driving the need for mergers and acquisitions.
The days of the old fashioned ‘board stuffer’ are as good as gone. While some EMS providers will undoubtedly have some customers who still work on a free issue basis, the vast majority of work will require some design for manufacturing input, component purchasing, logistics, and most of all technical ability. In fact, I suspect every specialist department within an OEM becomes increasingly more isolated as the outsourcing process continues. I am sure that when the first boards were put out to be stuffed, as it were, most test departments thought that they would be retained in-house as that would be the only way to guarantee quality. Such is the expanding competency of most EMS that this is not required – and sometimes a final quality control can be outsourced as well. Cable assembly, as NEWire brings to the Sunburst EMS portfolio, is just one example of complimentary functions that will increasingly benefit the EMS provider if he can offer everything the customer requires from the same stable.
The addition of MRP to Asteel seems a perfect fit in terms of trying to establish a sophisticated manufacturer local to the customer base as part of a global manufacturing group. And while MRP has four surface mount lines to add to the mix, that was not a major contributing factor given Asteel’s low-cost manufacturing facilities in Romania, Tunisia and China (partly as a consequence of the company’s recent acquisition of Flash Electronics).
Asteel, therefore, is directly building up its customer base while Sunburst is adding to its capabilities. But where will this trend end? It is possible that the destination is the same for these growing companies, it is just the journey that is different. The Tier One EMS providers have gone low cost for manufacturing and yet always retain design, prototyping and customer service facilities in their key geographies. Some of these local factories diversify into doing low volume local work, while concentrating on its core objective of fulfilling pre-production business before moving it offshore. All we are seeing now is this new breed of acquisitive smaller EMS companies, buying local capabilities and customers and investing in low-cost facilities to migrate the manufacturing too when it reaches production volume. So while the Tier Ones have started dealing with massive OEMs and have started looking back to the end markets for smaller, developing business, the new breed of EMS providers have started small and have grown their network of customers and capabilities and are now expanding to provide low-cost high volume manufacturing offshore. The same destination for a different journey.
As a last word on Anand Sethi’s column in this weeks newsletter (Hello Sunshine), there was an interesting story last week from the remote Scottish Island of Eigg. The inhabitants had thus survived by using unreliable diesel generators to supply electricity and had never had a mains supply. However, this week it opened up its new mains system, supplying all 87 inhabitants through a seven-mile mains network, with all electricity generated through renewable means. In the first week, on account of some extremely stormy weather, I assume that most of this came from wind farms, but there is also a small hydro project and solar system (not much use in Scotland during the winter!) Admittedly there have been huge grants for the £1.6 million ($3.2 million) project considering it is serving so few people, but it proves it can be done.
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