Speed Meets Perfection

Electronics lie at the heart of our modern world: They are in our smartphones, control industrial robots and are driving innovation in almost every sector. These electronics stem from a supply chain that is often very complex and at the same time is experiencing enormous growth. The market in electronic components is dominated by Asian and American heavyweights. European companies play a decisive role, particularly when it comes to development, but often struggle to take advantage of market opportunities. 

The global electronics industry is estimated to be worth over 5.7 trillion euros (as of 2022). Ninety-five per cent of that is earned in only 53 countries. Europe accounts for 17 per cent of the global market, or around 952 billion euros. European electronics manufacturing services (EMS) companies, which produce components such as printed circuit boards for electronic manufacturers, recorded sales revenue of around 57 billion euros in 2023, an increase of eleven per cent over the previous year. Over 80 per cent of Europe’s 2,230 or so mostly small and medium-sized companies were able to increase their sales revenue. Between now and 2030, the European EMS market is expected to see annual growth of 6.7 per cent (CAGR). This will also lead to a further increase in demand for skilled workers; the number of employees in the sector already rose by 14,000 in 2023 to a total of 254,000. However, these growth expectations are coupled with rising labor and material costs, which is why margins are expected to stagnate and even decline in some cases.^1-4

The European EMS Market Is Fragmented and Is Under Threat from the Asian Market 

Europe’s market for electronic assemblies is heavily fragmented within the SME segment. Manufacturers are often specialized in specific components (e.g. components for surface-mount technology, which enable particularly efficient printed circuit board assembly). At the same time, fewer than four per cent of EMS manufacturers are responsible for more than 70 per cent of the market’s sales revenue. This development continues to drive market consolidation. There were twelve mergers and takeovers within the sector in January and February of 2024 alone. In this environment, small and medium-sized companies are struggling to achieve economies of scale and must use the limited resources at their disposal for research and development efficiently. There is still considerable sales potential to be tapped as EMS companies currently only cover 43 per cent of Europe’s printed circuit board assembly (PCBA) market; the remaining 57 per cent are in the hands of OEMs.⁵

The increasing dependency on non-EU markets (despite initiatives on the part of the European Union) represents a growing risk for the European EMS sector. In the case of PCB manufacturing in particular, the non-EU share will rise from 82.5 per cent in 2023 to around 89 per cent in 2035. This will be accounted for by applications such as smartphone circuit boards, motherboards and control devices. The trade association IPC, which connects the electronics industries, expects the EU market share for critical electronics components, PCBs and advanced packaging to decline from the current 17 per cent to around 15 per cent by 2035. Asian suppliers are expected to increase the price pressure due to factors such as oversupply, product copies and technical twins.⁶

Increased Flexibility and Speed Needed

The short product lifecycles (such as those of engine control units in car assistance systems) and fast-moving market changes in the sector mean that ever-greater flexibility is needed both in production volumes and in meeting individual customer requirements, such as in prototype development. Reliability and precision are becoming more and more important as critical success factors among EMS manufacturers on the European market. Continuous compliance with and further advancement of quality standards is increasingly challenging SMEs in particular in terms of costs and resources when it comes to certification. Increasing material, energy and labor costs coupled with drops in orders and in capacity utilization in parts of the sector are additional factors squeezing margins. Companies’ finances are also being strained by costs relating to cybersecurity as well as the impact of inflation and rising interest rates.^7,8

Three Opportunities for European EMS Companies

To position themselves successfully in the long term and secure a competitive edge for themselves and their customers despite these difficulties, European EMS companies need to play consciously to their strengths and focus on three core areas: customer service strategy, technologies and resilience.

E2E Order Handling Boosts Customer Service Strategy and Operative Efficiency

Customer-focused collaboration is a key factor for success for small and medium-sized European EMS companies. A consistent focus on the customer means that individual requirements can be better understood and customized solutions can be offered. Companies that focus their structures and processes on flexibility are able to combine fast production cycles with high quality. In the EMS sector, this means being able to develop, test and dispatch prototypes within a few days. In order to fully exploit these advantages and secure them in the long term, it is essential to implement an order-to-delivery (end-to-end) process holistically aligned with the customer and consistently organized. This will allow reliable delivery performance, a high degree of flexibility and short response times to be combined with stable and profitable operations. The effectiveness of this process depends on three key factors: a clearly defined and unbroken process from sales to delivery, tailored and universal operative tools and an integrated collaboration model shared by all departments. A seamless and extremely well-designed order handling process can offer companies significant cost savings. Empirical evidence shows up to 25 per cent shorter throughput times, up to 5 per cent lower material and transportation costs as well as productivity increases and an improvement in replenishment times of over 15 per cent. For EMS companies that find themselves caught between being a component supplier and a system provider, this process forms the basis for sustainable profitability without compromising on customer satisfaction.

Digital First Movers Are More Successful at Implementing New Technologies 

European EMS providers are investing intensively in automation and digitalization to be able to work more efficiently, lower production costs and improve quality. A sound strategic approach is required to exploit the potential of automation in the long term. It is important, however, not to fall for any of these three fallacies: 

1. Automating inefficient processes that are not suited to automation.
2. Attempting from-scratch automation by applying expensive solutions that merely mimic human actions. 
3. Automating without the necessary capacity or specialist knowledge.

To avoid these problems and exploit the benefits of automation, it is first necessary to analyze and redesign the work processes. Exponential increases in productivity and overall performance can only be achieved if it is clear which processes can be automated both feasibly and cost-effectively. Successful automation projects demonstrate productivity increases of up to 30 per cent, FTE savings of up to 100 per cent in specific operations and significant improvements to quality and process stability. Improvements on this scale take manufacturing processes to a new level. The requirements placed on automation by EMS companies are particularly high. Automation solutions for applications such as populating PCBs or automated test systems must be able to operate extremely precisely to correctly handle the sometimes tiny components in enormously high numbers. This underlines the need to plan carefully when implementing automation projects. 

European EMS companies really come into their own with their research and development (R&D), work that continuously creates new products and solutions. These developments are driven by both internal R&D teams and cooperation with external partners. The use of new semiconductor materials such as gallium nitride and silicon carbide is particularly important with an eye to the future and with further development in mind. These materials play an important role in Europe—especially for e-mobility—but they also require adjustments to be made to manufacturing processes. Forward-looking innovations such as organic electronic components hold the promise of further gains in efficiency. A strong R&D focus and close cooperation with European universities will enable European EMS companies to quickly adopt and stabilize these technologies.

Resilient Supply Chains Increase On-Time Delivery and Price Stability

The dramatic events of recent years have made it considerably more important to ensure that supply chains are transparent and stable, especially for electronic components. In these times of geopolitical tensions and uncertainties, diversified and local supply chains are crucial to ensure supply capability in times of crisis. Regional production close to the sales market is also becoming more attractive as it also enables a faster response to customer needs. However, the trade-off between reduced dependence on global supply routes and cost control must always be actively managed. Companies that successfully balance this trade-off can use their locational advantage as a persuasive sales argument on the European market. 

Global Footprint Strategy Safeguards Profitability

The Asian market continues to play a central role when it comes to configuring production networks and supply chains. It’s a market that offers great sales potential, but is also characterized by growing, price-focused competition. By regularly scrutinizing their own market and footprint strategy and adapting their production network accordingly, electronics companies can maintain structured and profitable operations, even in an increasingly volatile business environment. Optimizing capacity utilization, improving capacity transparency in internal and external supply chains, leveraging economies of scale and stabilizing supply chains – these are the challenges that a footprint strategy must overcome. A footprint strategy helps to absorb cost pressure while at the same time increasing flexibility for the customer. Examples of efficiently configured production networks show an increase in profitability of up to 5 per cent, a reduction in labor costs of up to 8 per cent and a reduction in working capital of up to 15 per cent. Electronics companies should in particular factor in technological expertise and dedicated R&D centers when strategically placing sites. This ensures access to highly qualified personnel while also enabling complex components to be manufactured cost-effectively.

In Summary

On the whole, European EMS providers are currently facing major challenges, particularly due to an extremely volatile market environment with rapidly growing competition from Asia. Companies should adopt various strategic measures to future-proof themselves, strengthen their production capabilities and maximize their proximity to their customers. The aim is to establish a seamless order-to-delivery process, coupled with highly automated, flexible manufacturing that adapts new technologies by applying a first mover approach. A balanced production footprint with resilient supply chains and strong local partners is also crucial to success.These levers can help the European electronics industry to successfully navigate the major upheavals that lie on the path to e-mobility, artificial intelligence and the energy transition.