EMS/Distributors

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Market analysis

EMS companies under study reported marginal year-over-year revenue growth of 1.7% in Q3 2016. On a sequential basis revenues were up by 7.5%. The growth was led by Foxconn which posted 5.6% year-over-year revenue growth and 21.6% sequentially. As a result of net income declines in at Avnet and Flextronics, the EMS sector net income showed a sharp decline year over year of 14%, but sequentially, due to strong quarter-over-quarter growth at Foxconn, it grew by 46.8%.

With the rise in growth of Internet of Things (IoT) there is a new trend of module manufacturing, which includes IC packaging and compound semiconductor assembly. The recent success of system-in-package (SiP) and multichip module (MCM) solutions is leading top-tier EMS and ODM companies to look at partnering with IC packaging and optoelectronics firms. The logic behind this is clear: IC packaging firms have operating margins more than double those of EMS firms—averaging around 18% to 20%—whereas EMS firms have gross margins of only 2% to 10%. Foundry chip companies that are farther up the supply chain maintain gross margins of 40% to 50%, and may offer attractive opportunities for EMS providers to improve earnings through outsourced semiconductor assembly and test.1

However, EMS companies are being adversely impacted by the macroeconomic headwinds in the global economy. There is a third class of contract manufacturer—the hybrid provider—who have faired marginally better than the pure play EMS companies.1

Avnet has announced that it acquired a majority interest in Hackster, Inc. as the first step of a two-part transaction in which Avnet will acquire the remainder of the company in January 2017. Hackster.io is a global online community that helps users learn how to design, create and program Internet-connected hardware. Hackster.io engages with nearly 90 technology partners, and maintains 100 HacksterLive ambassadors who support a network consisting of close to 200,000 engineers, makers and hobbyists.

Ingram Micro’s global revenue decreased 3% year over year to US$10.2 billion in Q3. Additionally, in Q3, sales were negatively impacted compared to 2015 by nearly US$120 million, or one percent, related to the company negotiating a favorable change in contract terms with several customers in Europe. With respect to its acquisition by the Chinese company, Tianjin Tianhai, the end date has been extended to the end of 2016. The company said the extension was made pursuant to the merger agreement among Ingram Micro, Tianjin Tianhaiand GCL Acquisition LLC, and will allow for completion of the previously announced review of the transaction by the Committee on Foreign Investment in the US (CFIUS). Upon completion of the transaction, Ingram Micro will become a part of HNA Group Ltd., a Chinese conglomerate headquartered in Haikou, Hainan, China. Founded in 2000, it is involved in the aviation, real estate, financial services, tourism, logistics, and other industries.2

Flextronics, renamed as Flex Ltd, reported Q3 2016 revenue of US$6 billion, as three out of the four business groups met or exceeded expectations. Revenue declined year over year by approximately US$300 million, due to the impact of exiting Lenovo Motorola China operations, a process that concluded in its June 2016 quarter. Q3 2016 GAAP net loss was roughly US$3 million, primarily as a result of recognizing a non-cash impairment charge of US$93 million. The SunEdison Chapter 11 bankruptcy in April resulted in Flex taking a bad debt reserve charge of US$61 million back in the March quarter, which amounted to its entire outstanding receivables balance. The company also retained various exposures for inventory and assets from its SunEdison relationship. Beginning in the March quarter Flex had executed successfully and mitigated roughly 50% of the total exposure with no negative financial impact. However, during the course of Q2, the solar panel market experienced unprecedented declines in pricing, significantly impacting SunEdison’s remaining inventory balance. As a result, the company had to write down the remaining SunEdison solar panel inventory and assets to current market values and expects to sell the remainder of this inventory this fiscal year.

1.Manufacturing Market Insider, Oct 2016
2. www.arnnet.com, Aug 2016