EMS Providers and the Struggle Against Dwindling Profit Margins

Electronics manufacturing service (EMS) providers pride themselves on their adaptability. Many industry experts, in fact, would claim this as an EMS provider’s most important attribute.

As the technological landscape continues to change and their OEM partners continue to pursue new, exciting frontiers with their products, they must constantly evolve their business model to provide competitive services attractive to a wide breadth of industries.

Examples of these evolutions can include adding capital investments in technical operations, as well as investments in new product implementation processes to combat rapidly decreasing product lifecycles. Each of these can carry significant financial risk if there’s no guarantee of future business.

As competition continues to increase, however, and prices continue to be driven down to attract more OEM partners against such riskier advancements, EMS providers today must survive year-to-year on razor-thin profit margins.

In the 2012 fiscal year, Flextronics Corp., one of the world’s largest and most respected EMS providers, posted $29.4 billion in total sales. While this represents a very successful year in context, this still reflects a gross profit margin of 5.2 percent. Fiscal years 8-9 percent profit margins are exceptional, while 10 percent profit margins are almost unheard of. Compare this to their OEM partners, who can operate on gross profit margins as high as 30-32 percent.

Flextronics is not alone in this struggle. Jabil Circuits, Sanmina, Plexus, and even the world’s largest EMS provider Foxconn all face an annual dilemma of pursuing either higher revenue through more OEM contracts, or higher profit margins through decreased capital investments. Both options come with significant risk; higher revenue requires even greater investment against reduced costs per capita, while higher profit margins require increased costs that may prove unattractive to prospective OEM partners. This doesn’t even include the significant financial pressures EMS providers face warehousing and fulfilling OEM inventory, which often is done as a courtesy to their customers in an effort to maintain healthy relations.

Ideally, of course, EMS providers would prefer to offer their customers the best of both worlds – a way to offer industry-leading manufacturing services at a competitive cost without sacrificing the precious working capital that keeps their books balanced. But facing limited options, they must often find other ways to maintain working capital, such as charging OEMs a WAAC adder – an inventory holding fee that could be as high as 15 percent annually based on total inventory value.

This is the kind of dilemma EDX’s Custom Storage & Fulfillment Solution seeks to resolve. For over 26 years, we have collaborated with EMS providers to ensure a smooth transition of inventory to meet production demands, including features such as a secure warehouse environment designed for electronic components and semiconductors that can save companies an average of 42 percent in annual carrying costs.

For EMS providers who handle last time buys on behalf of their OEM customers, EDX also offers a Last Time Buy Solution capable of purchasing all necessary LTB inventory on the customer’s behalf. Then, on a schedule determined by the customer, we will distribute it anywhere in the world as needed. If the LTB inventory needs to be stored and carefully distributed over a 10-year period, then that equates to 10 years’ worth of usable capital the EMS provider can keep on their books to hire new employees, design new products, and even expand into other markets.

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