Industry research
Scope
Europe
Companies
58
Table of contents
Key takeaways
Electronics manufacturing services (“EMS”) market comprises contract manufacturers that offer outsourced manufacturing and adjacent services to electronics OEMs. European players cater to a wide variety of B2B sectors including automotive, industrial, defence & aerospace, aviation, telecommunications and medical sectors.
The European EMS players are vastly different from their Asian counterparts in terms of production volumes and end-markets due to labour costs and different regulations. European providers focus on high-mix low-volume products (high emphasis on quality, small production runs and embedded systems), while Asian peers are prevalent in the low-mix high-volume segment (fewer types of assemblies and larger production runs, inherent for stand-alone electronics). This leads to a higher level of fragmentation in the European market with ~2,000 active players, of which ~80% generate less than €10m in sales. Nevertheless, the share of large-scale businesses is steadily increasing with ~60% of European EMS output attributable to businesses with >€250m in annual revenue.
Investor-led interest has been moderate, with >40% of identified players being sponsor-backed (February 2024). Investors are primarily attracted to (i) stable demand from the continued adoption of electronics and electrification globally, (ii) profitability improvements from investments in automation and AI and (iii) increasing outsourcing rates for electronics manufacturing driving demand for their services. On the flip side, (i) rising inventory levels for raw materials and (ii) structural labour shortage may act as detractors for investors.
ESG topics primarily relate to environmental and social aspects. Herein, environmental topics relate to greenhouse gas emissions generated by electricity-heavy manufacturing operations and transportation. As such, players are implementing low-emission manufacturing processes and adopting the materials of recycling and recovery schemes. On the social side, the key topics relate to responsible supply chain and safe working conditions.
Company benchmarking
Market growth
The global EMS market was valued at ~$880bn in 2021 and is expected to surpass ~$1.1tn by 2026 with a 5.4% CAGR (Frost & Sullivan, January 2023)
According to industry executives (interviews by Gain.pro), the European EMS market will grow at a 5-7% CAGR in 2023-2030
The global electronics industry was valued at ~$2.5tn in 2021 with a projected CAGR of 4.9% in 2021-2026 (Frost & Sullivan, January 2023). LED technology, automotive and defence are expected to be the fastest growing segments, while consumer, computer and communication electronics will demonstrate the slowest growth during the period (in4ma, November 2022)
Positive drivers
Continued adoption of electronics and electrification globally securing steady demand for outsourced manufacturing services (interviews by Gain.pro). Herein, the European players will especially benefit from the growth in the automotive, industrial manufacturing, aerospace and defence sectors (interviews by Gain.pro; Clearwater International, March 2023)
Profitability improvement potential from investments in Industry 4.0 and AI (Clearwater International, March 2023; Frost & Sullivan, January 2023). In the industry characterised by low margins (~6-9% EBITDA in 2018-2022), the introduction of novel technologies is expected to bring significant efficiency gains and drive OPEX down (interviews by Gain.pro)
Increasing EMS penetration rates as market pressure forces OEMs to focus on their core competencies related to product development and commercialisation (interviews by Gain.pro). In turn, the outsourcing businesses also benefit from higher production efficiency, reduced overhead and labour costs due to specialisation (Frost & Sullivan, January 2023)
Negative drivers
Structural shortage of skilled labour and rising salary costs will hinder organic growth opportunities and profitability (Frost & Sullivan, January 2023). Training and upskilling of employees are financially challenging given high direct costs and high turnover rates with some players reporting an annual workforce turnover of up to ~30% (IPC International, July 2023)
Rising average inventory-to-sales ratio warrant inspection, with the ratio growing from 17% in 2019 to 25% in 2022 (Roland Berger, April 2023). Furthermore, in Germany, inventory levels for raw materials are at ~29%. This puts in question the short-term production and sales forecasts and might create a bullwhip effect leading to financial challenges (Roland Berger, April 2023; EMSNow, February 2024).
Short-term headwinds in the end markets given the uncertain economic environment stemming from high interest rates, energy prices and geopolitical tensions. Herein, the backlog might remain lower than in previous years, especially in infrastructure and construction verticals (interviews by Gain.pro)
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Electronics manufacturing services industry.
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