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Market analysis

As a group, the EMS companies in our sample posted a 7% revenue increase year over year and a 28% decline sequentially. The sharp sequential decline was led by Foxconn and Arrow Electronics. Net income also increased by a solid 27% compared to the prior year, but declined 47% sequentially. Avnet Inc had the highest growth in net income of 120% year over year and 736% sequentially. The sequential decline was led by Foxconn and Tech Data Corp, which declined 59% and 61%, respectively.

The rising demand and changing requirements for electronic devices and components across multiple industries has created a dynamic business environment for most OEMs and EMS providers. Primarily, OEMs within the Automotive and Lighting sectors are experiencing the highest growth, driven by connectivity and “smart” electronics this quarter. This growth is expected to continue until 2020, with a compound annual growth rate (CAGR) of 23.6%.

EMS companies need to adapt to changing requirements, while still remaining cost-efficient and lean. Current market developments require OEMs to advance their in-house development and design competencies further or, alternatively, to collaborate with EMS providers through joint design manufacturing (JDM) models. In some instances OEMs may completely outsource this to Original Design Manufacturers (ODMs), which enables service providers to be highly integrated into the OEM’s value chain. Another trend that is gaining popularity is cross-industry manufacturing services. Complimentary to the vertical integration though JDM and ODM partnerships, OEMs are looking increasingly for cross-industry, horizontally integrated service providers. This trend is mostly noticeable across the electronics, plastics and metal industries. Well-known players such as Jabil (acquired Nypro), Flex (acquired Riwisa) and Kimball (acquired Aircom Manufacturing) demonstrate the demand for cross-industry manufacturing services through acquisitions.1

In company news, Tech Data Corporation completed its acquisition of the Technology Solutions business from Avnet this quarter. The combination creates an IT distributor with end-to-end capabilities and the most diverse solutions from the data center to the living room. The acquisition of Technology Solutions has significantly broadened Tech Data’s value-add distribution business, increasing the company’s ability to help its partners capitalize on next-generation technologies while enhancing its go-to-market capabilities. The combined company has a larger and more balanced geographic footprint, including a presence in the Asia-Pacific region, a new market for Tech Data. The combined company has operations in 40 countries, with 14,000 employees serving approximately 115,000 customers in more than 100 countries. The total purchase price at close was approximately US$2.6 billion (subject to certain post-close adjustments), including US$2.4 billion in cash and 2,785,402 shares of Tech Data stock, representing approximately 7.3% of Tech Data’s shares outstanding (after issuance of the new shares). Tech Data financed the cash portion of the purchase price through a combination of US$1.0 billion from its recent public debt offering and US$1.0 billion of bank term loans, and the remainder from other credit facilities and cash on hand. They are targeting a cost savings of approximately US$150 million.

First-quarter net sales for Tech Data Corp were US$7.7 billion, an increase of 29% compared to the prior-year quarter. The increase in net sales was due to the two months of net sales attributed to the Technology Solutions business acquired from Avnet.

Flextronics announced that it has entered into a definitive agreement to acquire AGM Automotive (AGM). AGM is a supplier of automotive interior components and systems, including overhead console systems, interior lighting, electronic components and textile flooring solutions. Providing high quality and innovative automotive interior solutions, AGM is a trusted design partner of major OEMs around the globe. AGM is headquartered in Troy, Michigan, with additional facilities in the US, Mexico, Costa Rica, Austria and China. This acquisition is expected to complement and expand the companies’ automotive offerings, particularly in lighting, and will further strengthen certain key strategic customer relationships. AGM will enhance the ability to provide customers with more complete solutions for innovative interior lighting systems, from plastics through electronics, and drive growth of dollar content per vehicle. Flex intends to fund the acquisition from currently available resources, and remains committed to its target of returning over 50% of annual free cash flow to shareholders.2


1.http://evertiq.com, April 2017
2. http://www.prnewswire.com/, Feb 2017