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Strip mall ownership of a high tech industry

Low tariff contract electronics manufacturing presents other challenges for OEM decision makers seeking China alternatives, reshoring, or manufacturing inhouse

By Mark Zetter

China-based EMS manufacturing operations are feeling the pressure by recent tariffs based on talking with electronic OEM decision makers seeking electronics solutions in Asia, OEMs currently outsourcing in China, plus feedback from non-Chinese EMS provider execs with operations in China, and feedback from China-based EMS provider execs with operations in China (and elsewhere).

OEMs are more interested in low, or no tariff contract electronics solutions than they were this same time last year but how long this interests lasts depends on a number of things, not excluding how long these new sanctions last.

Whether or not you support protectionism, the world is one big marketplace. The European Union has been struggling for some time, with the greater EU, individual member nations, and other non-EU nations all dependent on trade to varying degrees for the EU’s, and respective individual economies, to sustain and flourish.

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In Graph 1 the lower the percentage (left axis), the less that nation or union is dependent on foreign trade, and that country or union has built up domestic demand.

Graph 1: Trade as a percentage (%) of GDP for the European Union, USA, Germany, France, United Kingdom, Spain, China, and Mexico 

You can see the United States is less dependenat on trade as a percent of the USA’s GDP, and that China has moved considerably in creating its internal/domestic economy (demand), especially since 2006.

What’s also interesting about Graph 1 besides the EU is too dependent on global trade for its current well being, the issue with the EU’s reliance on its total value of all goods and services it produces (GDP) extends into its member states.

Example, the EU’s largest contributor to EU GDP (Germany) is also heavily dependent on global trade.

Comparing to EU, Graph 1 puts Mexico and Canada into perspective, both also heavily dependent on trade and their situation likely contributing to President Trump having the upper hand in USA-trade and -NAFTA negotiations with both nations.

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But where China has taken measures to build its internal economy, other nations have long been too dependent on trade for their economies. Add to this the rising dollar, combined with many (emerging) nations borrowing against the US$ at a lower rate, it is possible some nations already dependent on foreign trade will default. Readers should keep an eye open for high external dollar debt relative to GDP.

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OEM decision makers seeking to address tariff concerns for their contract electronics solutions should also take into consideration a nation’s economic and financial stability, and whether that nation is taking measures to build its on domestic economy as China has been doing.

China, Asia outsourcing, re-shoring, in-house manufacturing

For electronics OEM companies manufacturing in China but feel recent changes regarding Chinese tariffs will hold long term you might justify acquiring or building a factory, or re-shoring (outsourcing or in-house) where you reside.

When outsourcing to contract electronics solutions provider (e.g., CMs, CEMs, ECMs, ODMs, EMS firms) know that many Asian providers will form JVs or place small (or majority) investments in EMS provider locations to grow their global footprint in hopes to expand sales, marketing and manufacturing capabilities.

EMS strip malls

EMS providers sub-contracting with other EMS providers, and EMS providers creating greenfield factories, and EMS firms selling/buying shared interest in existing factories with EMS providers holding equal amounts, or one EMS provider holding majority interest creates a true strip mall of EMS capabilities that can spring up anywhere.


EMS strip mall arrangements are more common than most OEMs and customers realize, and strip mall owners range from industry tier-1 electronics solutions providers to the smallest EMS tier.

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Its not easily clear to OEMs who the primary EMS shareholder is with most EMS provider factories where shared interest exists so directly ask providers directly, and be specific. When in doubt you can mandate your contract service level agreements are signed by EMS provider corporate headquarters. Should EMS providers will be less likely to honor your request you can then use this as leverage should you move forward with signing with the managing director/CEO for the jointly-owned EMS location.

Asia hunts Western OEM customers

Asian EMS providers have long been interested in Western OEM customers, and in particular, USA-based OEM companies. The latter because the EU has been in trouble for a long time and many countries in Europe have not recovered economically despite quantitative easing from the European Central Bank (ECB) deployed in the bond market. Refer also to Graph 1 above and Graph 3 below.

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Many Asian EMS providers with heavy factory footprints in China years ago began expanding outside China to attract western executives fearful of Chinese IP theft, knockoffs, and counterfeits.

Even today, EMS providers create additional presence outside their home nation and stip mall EMS is exist today, and continues to sprout up, in the Philippines, Cambodia, Vietnam, Malaysia, Indonesia, Japan, Hong Kong, Taiwan, Ukrain, France, Czech Republic, Poland, Hungary, and across Europe to the USA: New York, Nevada, California, and even Silicon Valley.

EMS providers create greenfield factories, they sign JVs with other EMS providers to leverage someone else’s factories and employees, they hold shared interests as shareholder in other EMS factories…

 

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Its important you know who is accountable and where they’re located. Below some nations in Asia how their domestic economies might be compared.

Graph 2: Trade as a percentage (%) of GDP for Vietnam, Malaysia, Cambodia, Thailand, Philippines, India, Indonesia, and China with USA for comparison

And beyond Asian EMS providers, many European EMS providers, as well as North American EMS providers, will create delicately-crafted partnerships and JVs with other EMS providers just to say they have a presence in a particular geography. Again, its common and not always apparent to OEMs.

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Do your due diligence when approaching how to select EMS providers and consider the provider specific factories and local and regional economics. You can also ask us for a free list of EMS providers in any target geography matching your program needs.

And while its important OEMs partner with EMS providers with no or low tariffs, depending on the OEM’s business objectives, OEMs cannot lose site you of the importance you choose EMS providers in good financial shape, and partner with EMS providers able to manage your MCOGs, and S,G&A to optimize manufacturing supply chain efficiency, timeliness, and productivity execution. Because you’re paying for it.

Europe, European Union

Add to this, ECB and Brussels have taken additional steps recently that can be interpreted Europe is in financial trouble. We believe this makes some USA OEMs, v their European OEM counterparts, more attractive as customers to EMS providers. But rest assured every EMS provider wants your money if your program fits their business objectives.

As a result, European-headquartered EMS providers have also been chasing USA OEM customers for some time.

And like Asian EMS providers, many European EMS firms have created partners with US-based EMS providers and factories so the European EMS provider can claim they have a US presence/to tap into US OEM opportunities. This is paricularly true with European EMS providers serving automotive and industrial markets.

And similar to Asian EMS providers, sometimes, ownership distribution of these jointly-invested, Euro-USA EMS factories are transparent to OEMs and some times shared ownership is not. Finding out can be the difference between EMS provider disclosure and discovery by the OEM as a result of more thoughtful due diligence.

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Graph 3: Trade as a percentage (%) of GDP for Hungary, Czech Republich, Estonia, Poland, Ukraine, Romania, and United Kingdom with European Union for comparison

Another common practice among EMS providers is one EMS provider sub-contracts portions of your OEM program to another, third-party EMS provider.

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