EMS requirements can be challenging for distributors
By James Carbone -- Purchasing, 10/16/2008 6:00:00 AM
For many distributors, electronics manufacturing services (EMS) providers represent about 40% or more of their annual revenue, so many distributors are concerned when there is consolidation in the EMS industry because they could lose customers and revenue.
However, some see consolidation in the EMS industry as healthy in the long run for distributors and for the entire electronics supply chain.
"Consolidation is necessary for the EMS industry," says Gerry Fay, senior vice president, global and strategic accounts at Avnet Electronics Marketing, headquartered in Phoenix. "One reason the EMS industry is struggling is because there is quite a bit of capacity in the channel, so it is difficult for EMS providers to charge a premium. The more the EMS industry can consolidate and reduce capacity, the better its operating model will be," he says.
A healthy, profitable EMS industry would be good for OEM buyers who are involved in outsourcing decisions and for distributors who sell to the industry. If the EMS industry thrives, OEM buyers will have plenty of choices of EMS providers. If the industry is unprofitable, more consolidation in the industry is likely and that means fewer outsourcing choices for buyers and fewer customers for distributors.
Some distributors say that EMS is a growing portion of their business because of the growth of outsourcing. While distributors welcome EMS business, they also note that requirements of EMS providers are different than OEM requirements and sometimes are challenging.
"EMS firms have more stringent requirements because they run at razor-thin margins and they can't afford to have any glitches," Fay says. In the electronics industry, EMS providers have the lowest margins, followed by distributors, OEMs and OEM suppliers, he adds.
"From that perspective, they are more challenging and because they are trying to squeeze the nickel out of everything they can to make a profit," he says. "They are more challenging and unforgiving than an OEM."
An OEM has different requirements than an EMS provider because with an OEM more business is focused on demand creation and engineering. With EMS, it is fulfillment and supply chain services, Fay says.
Large distributors have engagements with large EMS distributors. However, they also do a lot of business with second- and third-tier EMS companies.
"Most people talk about the top seven or eight EMS players when it comes to distribution because of the significant purchasing volumes they have," says Brian McNally, president of Europe, Middle East, Africa and South America (EMEASA) for Arrow Electronics, which is headquartered in Melville, N.Y. "But in North America, there are around 800 other small and medium-size EMS companies that we do business with." He estimates that about 60% of Arrow's EMS business is with second- and third-tier EMS providers.
Smaller electronics distributors also do a significant amount of business with second- and third-tier EMS companies. Gene Conahan, senior vice president North American sales and president of the European division of Texas-based TTI says his firm is highly dependent on the EMS segment, which accounts for about 40% of its business today. "Our focus is not tier one, but tier two and three," he says.
Such EMS providers have different requirements than tier one EMS providers like Flextronics or Foxconn. Sometimes it is just a matter of scale.
Most EMS providers use distributors for quote support. "For a large EMS provider, a 5,000-line item quote is not uncommon," says McNally, adding that for a small and medium-size EMS, that would be an exception.
However, smaller EMS providers often call distributors not only to get prices, "but so we help them cleanse their bill of materials," McNally says. "Often a part they quote is not perfectly specified," says McNally. "When we put it through our quote process, they get the proper supplier part number out of that. It is an enormous value added service," he says.
Another difference is smaller EMS providers often have less volatility in manufacturing than large EMS providers so their business is more steady.
"They are focused on a narrower customer set and have been engaged with that customer set for a long time," says McNally. "They tend to build for those customers in the same place at the same site."
With large EMS providers, "we see more volatility in where they build products for OEM customers," he says. Large EMS providers may move manufacturing from one low-cost region to another.
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