EMS/Distributors

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Market analysis

In Q1 2016, the EMS companies under study reported a year-over-year revenue decline of 3.6%. The decline was led by Ingram and Avnet. But the sequential revenue decline for EMS companies was more pronounced, at 15.2%. Quarter over quarter, Arrow Electronics and Ingram Micro reported dips of 18.9% and 17.5%, respectively. Ingram’s revenue declined year over year in part due to foreign currency exchange rates, which had a negative impact of 3 percentage points on worldwide sales. An overall sales decline of 6% was due to soft demand for high volume product categories. Arrow Electronics reported 9.4% revenue growth year on year, but a sequential decline due to the year-end holiday quarter having a stronger demand compared to the first quarter of the year. In terms of net income, all the companies under study showed significant decline both year on year and sequentially, except for Arrow Electronics and Avnet, both of which reported flat net income. Ingram Micro experienced the greatest decline in net income both year over year and sequentially. Ingram’s results were negatively impacted by increased costs due to the pending merger with Tianjin Tianhai, as well as higher reorganization, amortization and selling, and general and administrative costs.

With the life cycles of electronic products continuing to shorten and consumers demanding devices with more functions at lower costs, original equipment manufacturers (OEMs) are challenged to reduce production costs and streamline manufacturing. As a result, they are outsourcing manufacturing to specialized companies providing electronic manufacturing services (EMS). In recent years, EMS in the US has grown steadily. In 2016 it is expected to reach US$4.2 billion. With year-on-year growth of 1.06%, US EMS revenue will reach US$5.3 billion by 2020. The consumption of domestic appliances in the US, Canada and Latin America currently exceeds production, representing huge export opportunities for EMS companies.1

The EMS industry is also undergoing significant consolidation, although this is not deterring new entrants from entering the market. The financial and structural advantages of outsourcing have been well proven for many years, as evidenced by very few OEM companies planning or investing in manufacturing automation, thus leaving the expertise of electronics production to EMS companies. More recently, this trend is starting to apply to new Asian OEM companies as original design manufacturers and EMS companies line up to secure contracts to manufacture new hardware innovations from established OEMs.1

As part of its effort to expand in the next-generation display market, Foxconn Technology announced the acquisition of Sharp Corporation for about ¥389 billion (US$3.5 bn), significantly less than the originally anticipated price due to concern around the viability of Sharp’s financial performance. Foxconn will acquire 66% of Sharp.

1. Manufacturing Market Insider, March 2016