Obsolescence Insurance, a New High-Margin Business for EMS Companies
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The electronics industry is changing in fundamental ways and the shifts taking place are raising questions about whether the industry is less cyclical than it used to be. It’s a topic of conversation increasingly being discussed among analysts and corporate executives who are looking at the past as a way to understand today’s electronics landscape.
The electronics industry has always been considered a cyclical industry that prospers during economic growth and stagnates during periods of economic recession.
Examples of the ways in which the electronics industry was impacted by two significant economic shocks – the economic downturn of the early 2000s, and the great recession that began in December, 2007 and ended in June 2009 – reveal how sensitive the electronics industry is to macroeconomic activity. In both recessions, electronics companies saw slow sales and revenue declines that pushed them to lay-off workers and restructured their business. Many companies filed for bankruptcy or succumbed to mergers and acquisitions.
Since the turn of the century, the industry has adjusted to electronics manufacturing being shipped overseas to take advantage of lower labor rates and cheaper production costs which translate to affordable devices. Additionally, new technologies such as smartphones and other mobile devices, smart TVs and wearable devices have created new markets.
This confluence of these events has had the effect of developing technology on different form factors that are affordable to the consumer and easy to use. This shift drives consumer demand, which, in turn, should help original equipment manufacturers, contract manufacturers, component suppliers and semiconductor manufacturers to improve their position in times of economic volatility.
“Overall, the industry is a lot less cyclical than it used to be, and what’s driving this is the consumer,” said Tom Dinges, CEO of research firm Carriage Group International.
Looking back, Dinges said the 1990s was a period of over investment in technology. At that time, people were buying two desktop computers for their homes – one for the parents and another for their children – as well as printers and monitors. Companies invested heavily in these items along with servers, storage and networking equipment and a flush of purchasing occurred when companies and government agencies bought the necessary hardware and software in preparation for the Year 2000 computer date change.
“There was this firm belief that if you didn’t invest in technology you weren’t going to be a winner in the industry,” Dinges said. “Demand really bottomed because for a lot of enterprises there was still very low capital spending on new technology in ‘02 and ‘03 because they had spent so much money back in the ‘90s on a combination of software, servers, storage devices and so forth. Many companies were still trying to figure out how to put this stuff together.”
The first 15 years of the 20th century has seen a technological shift that involves the manufacture of mobile devices, smart TVs, cars with electronic gadgets, robots, computerized machines on the factory floor and a whole host of electronic sensors and measurement equipment used in industrial settings.
Additionally, purchases are within reach of the average consumer who can buy a TV, a smartphone and purchase or lease a car outfitted with electronic gadgets.
Dinges believes the shift to a more consumer driven demand for electronics is a fundamental change that guards against macroeconomic cycles.
“Collectively, consumers don't put the brakes on purchasing. Individuals do when they lose their job or move to a new place, and they’ll make the decision not to buy a TV, but if you think about consumers as a whole, and you lump everything together – phones, TVs, and other types of devices such as electronics in cars – all these products creates more and more demand,” Dinges said.
Today, as technology becomes more sophisticated and new markets such as health care, auto, and the Internet of Things (IoT) create new revenue streams, the electronics industry has its best chance yet to develop recast itself and move away from being classified as a cyclical industry.
Companies such as Texas Instruments, Analog Devices, Intel, Cisco, TE Connectivity and others have diversified their customer footprint in recent years and their quarterly earnings reports suggest that they are actively growing their businesses in many sectors of the economy.
Kevin March, CEO at Texas Instruments Inc., recently said his company’s broad portfolio in the industry has helped it build a competitive advantage that “helps us deal with any notion of cyclicality or non-cyclicality.”
The Dallas-based company serves more than 100,000 customers that in the industrial sector. Officials say industrial includes areas such as factory automation and control, medical, healthcare, fitness products, building automation, smart grid, energy test equipment, motor drives, display, space avionics, appliances and other segments.
“We play in an extremely diverse set of markets with long-lived products that enjoy significant cash returns to our shareholders for a long time,” March said during Texas Instruments’ first quarter earnings call in April. “We think that's what's really important to deal with, whatever may be happening in market cycles.”
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