CEM: More important to the Australian economy than automobile industry
Electronics Manufacturing has been a standard bearer for outsourcing since the early 1980’s. The main drivers fuelling this strategy, across all markets from telecommunications to IT through automotive and consumer products, are the same as those driving any other outsourcing process, namely specialization and economies of scale.
There was however a technological shift at the time that provided the trigger for the explosive growth experienced by the Contract Electronics Manufacturing (CEM) industry. (Electronic manufacturing services (EMS) is a term used for companies that design, test, manufacture, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs).
This was the advent of Surface Mount Technology (SMT), which required a much higher level of capital investment than the technology prevailing until that point. Furthermore it essentially eliminated the opportunity for start ups and small companies to manufacture their own products in house due technological constraints.
The golden years
In the golden decade between 1992 and 2002 the CEM industry posted average annual growth rates of 49%. This slowed to a still very healthy 15% between 2002 and 2007 and between 2007 and 2012 it slowed down further to 7.2%. This is due primarily to the law of large numbers; now that the CEM industry has virtually taken over all electronics manufacturing it is restricted to grow with the markets that it services and ultimately with the wider economy.
At present every big and small brand from Apple to Xerox and anybody in between outsource their manufacturing.
One of the processes whereby CEM’s win over manufacturing from an OEM (Own Equipment Manufacturer) is by acquiring the OEM’s manufacturing assets. OEM’s always carry substantial excess capacity, which will take some time to dilute. This process is still responsible for the excess capacity present in the industry.
Over the past thirty years the industry went through the typical cycles. Initially there were many players and new ones constantly appearing; a number of these companies went on to be very large and successful. The industry has now moved on to a mature state with virtually no new players entering the market and a very high level of consolidation taking place.
For the first twenty years American companies were the dominant force but now that has shifted to Asia. Foxcon is the standout performer and they claim to be the first corporation in history to employ more than one million people, generating annual sales of more than $50 billion.
In Australia, electronics manufacturing had its heyday in the ten years up to the 2000 tech wreck, at which point it was generating revenues in excess of $1 billion. The landscape was populated by a small number of local OEM’s, a substantial number of multinational OEM’s, such as NEC, Fujitsu, Alcatel, Ericsson, VDO and others, but also by a range of CEM’s that covered the spectrum of the market, with a few posting revenues of approximately $100M.
Times are changing
More than 80% of all this business has now migrated north, and the local CEM industry continues to consolidate. The latest example is the merger of Dayang and Tresmine to form Circuitwise, as the new leading Australian CEM. Most reports indicate that the industry has now found a new point of equilibrium and can start rebuilding on a more sustainable base.
The CEM industry provides an extremely valuable, even vital service to all local start-ups, small and medium technology companies, which would face much higher costs and logistic challenges if they have to go overseas during the product development stage and for small to medium production jobs.
While this industry receives virtually no air time, when compared to the car industry for example, its survival is far more important for Australian innovation and indigenous technology companies. Critically, it survives on its own, without taxpayers money wasted on American or Japanese multinationals.
by Carlos Piteira
Carlos Piteira has a career spanning thirty years in Engineering, Manufacturing, Product Development, Business Development, numerous roles as Chairman, MD, CEO, Director and consultant.
Original article published in The Sauce December 03, 2013