Executive summary of the EMS and ODM industry
The global EMS and ODM market is forecasted to reach a size above €500bn in 2018 with expected growth rates of approx. 6% in the next years mainly driven by increased demand for technology across different sectors including automotive and industrials (IoT and AI).
With the positive growth prospects, there are a number of challenges the EMS industry currently faces, particularly supply bottlenecks of crucial components and the need for a sustainable and strong market position in an industry with ongoing consolidation and high level of competition.
Valuation level of EMS players worldwide
Towards mid of November 2018 the valuation level of the EMS industry decreased approximately to the levels of beginning of 2018.
Based on an average analysis, small and medium-sized EMS companies are remaining to show significantly higher valuation levels (approx. EV/EBITDA 9x) in comparison to large EMS providers (approx. EV/EBITDA 6x), mainly due to highly specialised focus of small and medium-sized EMS players.
M&A activity in the EMS industry
In 2018, there were 17 EMS transactions recorded up to the end of October 2018 an increase to last year’s period. Transactions are mainly driven by consolidation and acquisitions of trade buyers. In terms of geography, the majority of transaction were cross-border acquisitions.
Denmark’s largest EMS company GPV, which is owned by Danish industrial conglomerate Schouw & Co., has agreed to acquire Switzerland-based EMS company CCS Group. The transaction will lift GPV’s revenue to more than €325m.
Clearwater International exclusively advised GPV International and its shareholder, Schouw & Co, on this landmark cross-border acquisition of the Switzerland-based CCS Group. The acquisition further drives consolidation in the industry and creates one of the largest EMS players in Europe.
Clearwater International Germany has advised Danish industrial conglomerate Schouw & Co., on the acquisition of Switzerland-based CCS Group by its portfolio company GPV.
The deal creates a major European electronics group with over 3,700 employees, production facilities in Asia, Europe and the Americas and combined revenue of more than €325m.
GPV and CCS have both successfully served the HMLV (High-Mix/Low-Volume) segment of the Electronics Manufacturing Services (EMS) market. Both GPV and CCS provide electronics sub-assembly solutions and finished products (box-build) to their customers in high and low volume series with growing demand for this type of electronics supplier. The acquisition allows GPV to access new customers, industries and end-markets.
The global EMS and ODM sector is expected to maintain a growth of 6% reaching a market size of more than €500bn. Main market growth impulses are digitalisation, innovation in electronics and further penetration of electronics in non-technology sectors.
Additionally, the outsourcing trend continues. OEMs are increasingly moving production, design and development processes to EMS companies. Vertical integration is assumed to be a key to success in the EMS industry. The services often include all steps along the value chain from product development to after-sales or re-design and lifecycle services.
With more than 2,000 companies the market is still highly fragmented, but with a continued consolidation trend (see M&A Activity). Key drivers for consolidation are economies of scale, access to know-how and end-markets as well as expanding the customer base.
Recent challenges and market drivers of the EMS and ODM industry
Due to drastic increase in demand for passive components in the automotive, IoT, and industrial sectors, in 2018 the EMS sector experienced a severe shortage in the procurement of passive components (resistors, capacitors). Especially the sourcing of ceramic-based R-chips (resistors) as well as the MLCCs (Multi-Layer-Ceramicchip-Capacitor) can be considered as one of the greatest challenges for EMS companies in 2018. The shortage is expected to continue until the beginning of 2020, although analyst’s opinions vary.
In the wake of the shortage of components, another factor is expected to shape the EMS industry: Further digitalisation of the supply chain between the components manufacturers, distributor, EMS provider and the OEMs by consolidation between distributors and EMS providers, in order to improve the transparency of the real demand for components. Hence, components manufacturers could adjust efficiently the production according to real demand.
The “book-to-bill” ratio, a ratio of orders received to the amount billed for a specific period, is an indicator of mid-term developments.
In the DACH printed circuit board segment, the ratio decreased from 1.06, in Q4 of 2017 to 0.96 by the end of Q2 2018.
EMS in the automotive sector and other non-technology sectors
While growth of the EMS sector in the past years was mainly driven by the technology sector, non-technology sectors including the automotive, industrial and medical sectors are expected to offer more attractive growth opportunities for EMS players with an expected growth of approx. 8%. The rise of autonomous driving fuels the growth of EMS in the e-mobility sector.
Nowadays cars consist of numerous electronic components, such as 100-300 micro processors, more than 50 complex control units and 5-20m lines of software code with an increasing requirement for complex design of electronics in highly specialised application areas.