Electronics Manufacturing Services (EMS): Unveiling Investment Potential in a High-Growth Industry

The Electronics Manufacturing Services (EMS) industry is a linchpin in the world of technology, underpinning the production and assembly of electronic components and devices. EMS companies offers design, manufacturing, testing, and logistics services, vital for various sectors like consumer electronics, automotive, and clean energy. 

Today we talk about this growing market, governments initiatives, global trends, and challenges ahead. Further, we have managed market places in the segment. But before this, let’s take a quick look at the types of companies in the space. 

EMS Market Size explained 

The EMS market on a global scale is on the cusp of a transformative growth spurt, with experts forecasting its valuation to soar to an astounding $3.1 trillion by the year 2025, marking a robust Compound Annual Growth Rate (CAGR) of 4.9%. Within this burgeoning market, the Electronic Manufacturing Industry (EMI) stands out, anticipated to grow at an even brisker pace of approximately 5.5% CAGR, propelling its value to about $1.1 trillion by 2025. 

India, a key player in this expanding landscape, is set to witness a remarkable surge in its market share within the global EMS arena – from a modest 2.2% to an impressive 7% by 2026. This upsurge is backed by a projected CAGR of over 25% in the coming years, fueled by strategies like import substitution and the increasing incorporation of electronic components across diverse sectors. 

Currently at a pivotal point, the Indian EMS market benefits from a unique combination of supportive domestic policies and favorable shifts in the global market. While the path ahead is dotted with challenges, the convergence of opportunities – stemming from a global manufacturing realignment and a robust domestic demand – positions India’s EMS industry on a trajectory of substantial and sustainable growth, reflecting both its resilience and potential as a global electronics manufacturing hub.

Government-Led Initiatives Fueling India’s EMS Growth

In the dynamic realm of India’s Electronics Manufacturing Services (EMS) industry, government initiatives such as the Product Linked Incentive (PLI) Scheme, Electronics Manufacturing Clusters (EMC 2.0) Scheme  and Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) are key drivers in its evolution. 

The PLI scheme encourages domestic production by offering incentives on incremental sales, leading to a significant uptick in electronic goods exports. Complementing this, the EMC Scheme aims to overcome infrastructure bottlenecks, fostering a conducive environment for the EMS sector. This includes the development of Greenfield EMCs, crucial for the Electronics System Design and Manufacturing (ESDM) sector. Additionally, the SPECS aligns with the National Policy on Electronics 2019, aiming to establish India as a global ESDM hub by offering financial incentives on capital expenditures for a range of electronic goods.

Shifting Dynamics in India’s EMS Market: From Global Trends to Sector-Specific Demand

Concurrently, India’s EMS industry is witnessing a shift towards domestic manufacturing, driven by a significant reliance on imports for PCB/PCBA and Box build products. The change is mirrored in the growing domestic EMS market, which, despite its large size, sees a relatively small revenue contribution from major players, highlighting the potential for import substitution. 

Moreover, geopolitical factors and trade tensions are leading to a global rebalancing of supply chains, positioning India as an attractive manufacturing alternative. The shift is supported by India’s competitive labor costs, contributing to a robust 25% CAGR in EMS exports. Parallel to these developments, the increasing electronic components across various sectors – from the automotive sector’s move towards electric vehicles to the surge in demand for PCB in consumer durables – is boosting the need for electronic components. This trend extends to the industrial sector’s transition to Industry 4.0, the telecom sector’s expansion with 5G, the reliance on sophisticated systems in medical devices, and the requirements of the aerospace, defense, and clean energy sectors, all of which are propelling the demand for advanced electronic systems and components.

Challenges Ahead: Navigating the Market Headwinds

A multitude of challenges weave a complex pattern of headwinds that the sector must astutely navigate. Foremost among these is the pervasive global semiconductor shortage, a phenomenon that has precipitated widespread production delays and starkly illuminated the EMS industry’s heavy reliance on these critical components. This shortage, stemming from a confluence of increased demand and supply chain constraints, which has not only magnified existing logistical challenges but has also laid bare the inherent vulnerabilities of global supply chains, underscoring an urgent need for diversification, strategic resilience, and localized sourcing strategies. The scarcity of semiconductors has invariably led to a surge in component prices, exerting upward pressure on production costs. This escalation not only threatens the profitability margins within the EMS sector but also portends the possibility of higher consumer prices, thereby straining the delicate balance between cost-effectiveness and quality in electronic manufacturing.

Compounding these challenges are the relentless, breakneck technological advancements characterizing the modern digital landscape. Innovations in the realms of the Internet of Things (IoT), Artificial Intelligence (AI), and 5G telecommunications have redefined the paradigms of electronic manufacturing, demanding increasingly complex electronic components and sophisticated manufacturing capabilities. For EMS providers, particularly the smaller entities grappling with limited capital, this represents a formidable challenge. It necessitates not just substantial investments in cutting-edge manufacturing technologies and research & development but also an overarching commitment to continuous learning and workforce upskilling. The rapid proliferation of smart devices globally further intensifies this challenge. With the EMS market size already substantial and projected to grow robustly, EMS providers find themselves in an ever-evolving race, needing to perpetually innovate and adapt to maintain competitiveness in a sector characterized by constant technological upheaval.

Another significant headwind is the EMS industry’s pronounced dependence on imports for key components, notably from manufacturing powerhouses like China. This reliance renders the industry susceptible to the whims of geopolitical tensions, trade policies, and global crises such as pandemics, which can unpredictably disrupt the availability and cost of imported components. Such a high degree of import dependency not only poses risks to the timely fulfillment of manufacturing commitments but also potentially stifles the growth and maturation of the domestic electronics manufacturing ecosystem in India. It discourages investment in local manufacturing capabilities and undermines efforts to develop robust, indigenous supply chains.

Furthermore, the specter of competition from other low-cost manufacturing countries looms large. Nations such as Vietnam and Mexico, with their competitive labor costs and increasingly favorable manufacturing environments, buttressed by government policies including attractive tax incentives, subsidies, and streamlined regulatory frameworks, have emerged as formidable contenders in the global EMS landscape. This reality exerts additional pressure on India’s EMS industry to not only maintain but potentially lower its labor costs to remain competitive. Such a dynamic complicates the operational and strategic calculus for Indian EMS players, who must balance cost-effectiveness with quality and innovation, all while navigating the intricate interplay of global market forces, technological evolution, and domestic industrial policy.

Managed Marketplace Models – A game changer in Manufacturing Services segment?

Managed marketplaces can be a game changer for the Electronics Manufacturing Services (EMS) sector by creating a one-stop platform that connects manufacturers with customers, making finding and engaging with manufacturers a breeze. They enforce quality standards ensuring the electronics produced are up to par, which is crucial in retaining customer trust. The transparency in pricing they offer could lead to cost savings for buyers and foster healthy competition among manufacturers. For local EMS providers, these marketplaces are a ticket to global markets, breaking down geographical and logistical barriers that were once a hindrance. They can simplify the whole transaction process, from order management to payments, making business dealings smooth. With the data they gather, these platforms can provide real-time market insights helping manufacturers stay ahead in the game. On the supply chain front, managed marketplaces can offer tools to optimize supply chain processes, a critical need in the manufacturing sector. They can also lend a hand in navigating through the complex legal and compliance landscape of international trade. By building a community of manufacturers and buyers, they promote knowledge sharing and innovation.

Types of Managed Marketplaces:-

1. Raw Material Marketplaces:

• Function: Act as intermediaries between raw material suppliers and manufacturers.
• Benefit: Ensure continuous supply of materials, essential for uninterrupted production.
• Economic Aspect: Enable competitive pricing by aggregating buyers and sellers.
• Business Model Characteristics:
  • Products are commoditized and generic.
  • High-value transactions with low profit margins.
  • Requires medium levels of working capital.
• Example: OfBusiness.

2. Maintenance, Repair, and Operations (MRO) Marketplaces:

• Purpose: Facilitate the procurement of supplies needed for the maintenance, repair, and operations of manufacturing facilities.
• Advantages:
  • Offer cost savings.
  • Provide a wide selection of supplies.
  • Streamline the procurement process.
• Business Model Traits:
  • Items are commoditized, generic, and catalogued.
  • Generally low-value goods with low to medium margins.
  • Require low levels of working capital.
• Example: Moglix.

3. High Precision Manufacturing Marketplaces:

• Target Industries: Cater to sectors requiring high precision manufacturing, such as aerospace, medical devices, and automotive.
• Service: Connect manufacturers with clients requiring high-precision services.
• Quality Assurance: Ensure adherence to strict industry standards and quality control.
• Financial Dynamics:
  • Specialized, high-quality products.
  • Higher prices leading to better margins.
  • Premium clientele with high client retention.
  • Stable revenues and repeat business due to critical precision needs.
  • Low defect rates, minimizing returns and costs.
  • High-value transactions with healthy profit margins.
  • Requires low working capital.
• Example: Karkhana.io, Elecbits

4. Low Precision Manufacturing Marketplaces:

• Industry Focus: Serve sectors with less stringent precision requirements, like furniture and general consumer goods manufacturing.
• Role: Bridge the gap between manufacturers and clients seeking cost-effective solutions.
• Quality Standards: Maintain acceptable quality while offering economical options.
• Economic Profile:
  • Products built to specifications.
  • Very high-value transactions with low profit margins.
  • Requires high levels of working capital.
• Example: ZetWerk.

What Lies Ahead for India’s EMS Industry?

As we look towards the horizon of India’s EMS industry, a landscape of boundless opportunities and challenges unfolds. Poised at the intersection of technological innovation, policy-driven momentum, and global market realignments, the industry is not just responding to change – it is actively shaping it. The future beckons with the promise of India emerging as a global hub for electronics manufacturing, driven by a surge in domestic capabilities and a strategic position in the international supply chain. The convergence of government initiatives, escalating domestic demand, and a shift towards high-value manufacturing presage a new era where India could redefine its role from a follower to a leader in the electronics manufacturing domain. Yet, this journey is not without its hurdles. Navigating supply chain complexities, technological advancements, and global economic shifts requires a concerted effort from all stakeholders. The resilience and adaptability of India’s EMS sector, however, are its greatest assets. As we stand at this pivotal juncture, the trajectory seems clear: India’s EMS industry is on the cusp of a transformative leap, poised to make a profound impact both domestically and on the global stage.

This piece is contributed by Upamanyu Chatterjee.