EMS/Distributors

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Market analysis

In Q4 2015, the EMS companies under study reported a year-over-year revenue decline of 6.6%. The decline was mostly due to Ingram and Avnet. Ingram exited the North American mobility distribution business in 2015. This business contributed US$500 million to revenues in Q4 2014. Avnet’s earnings declined year over year due to the translation impact of the strengthening US dollar and weaker demand in the Americas.

On a sequential basis, the EMS companies under study reported revenue growth of 7.8%. The jump was mainly due to Arrow, Flex and Ingram, which experienced better performance of their business units and lower operating expenses compared to Q3 2015.

The EMS industry is undergoing significant consolidation, though 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 original equipment manufacturer (OEM) companies planning or investing in manufacturing automation. They are leaving the expertise of electronics production to their contract manufacturing partners.1

For North American manufacturers that have chosen to outsource non-core tasks, the outsourcing strategy is slowly moving from offshoring to near-shoring of electronic assemblies and precision-machined parts. This is occurring due to rising wages in emerging economies like China. In addition, the transportation cost and complex supply chain of offshoring can no longer be overlooked, particularly when precision is required and the total cost of ownership is considered.2

In company news, Ingram Micro on 17th February 2016 announced that it would be acquired for US$6 billion by Tianjin Tianhai Investment Company Ltd, part of the Chinese aviation and shipping conglomerate HNA Group.3 Ingram’s Q4 2015 sales were US$11.3 billion, down 19% when compared to Q4 2014 sales of US$14 billion. This is due in part to the company benefiting from US$900 million from an additional week of sales in Q4 2014. Ingram also benefited from US$500 million in the North American mobility distribution business in Q4 2014, which it chose to exit this year due to low profitability. Moreover, in Q4 2015, the company recognized some of its high volume European fulfillment business on a net basis as opposed to a gross basis last year. This had a negative impact of US$300 million in Q4 2015 sales.

On 3rd November 2015, Avnet acquired Orchestra Service Gmbh, a German IT distributor of innovative storage solutions and services for EMC products. Later, on 29th December 2015, it acquired Pinnacle Data Systems, Inc, a leading provider of application-specific hardware and global support solutions for OEMs. The two companies were purchased for an aggregate price of US$36.6 million.

Avnet sales for Q4 2015 were US$6.9 billion, compared to Q4 2014 sales of US$7.6 billion. The US$703.8 million decrease in sales year over year was the result of a US$320.6 million decrease at its Electronics Manufacturing (EM) business and a US$383.2 million decrease at its Technology Solutions (TS) business. In both cases, the translation impact of a strengthening US dollar and weaker demand in the Americas impacted revenue.

 

1Manufacturing Market Insider, Dec 2015
2Manufacturing Market Insider, Nov 2015
3Reuters, Feb 2016