EMS@C-LEVEL
As Forbes, Entrepreneur, Fast Company and SCOOP writer, Philip Stoten, continues to talk to EMS (Electronic Manufacturing Services) executives he learns more about their individual and collective experiences and their expectations for their own businesses and for the entire electronic manufacturing industry.
EMS@C-LEVEL
EMS & The Economist: Industrial Action, Election Inertia, Automation, Trends, and the Global Supply Chain
How are EMS companies navigating the tumultuous world of electronics manufacturing and supply chain, as recent disruptions like port closures and hurricanes put the industry's resilience to the test yet again. Join Shawn DuBravac, IPC chief economist and futurist, as we tackle the resolutions of these challenges while dipping our toes in the ongoing debates surrounding automation and jobs.
Explore how this strategic industrial action, timed at year-end, may impact the supply chain landscape, especially with businesses keen on avoiding surplus inventory. We also emphasize the pressing need to attract younger talent by updating traditional labor roles, ensuring a balanced approach to efficiency and job security.
Venture further into the economic trends, like IPC's book-to-bill and in4ma's half year report, impacting the manufacturing sector amid the slow growth of bookings and the looming U.S. election. Shawn and I dissect how interest rate expectations influence investment decisions, alongside assessing the potential headwinds for market expansion.
Shawn briefly comments on the presidential candidates' strategies to enhance domestic manufacturing, including the decoupling from China and proposed tariffs and investment incentives. With insights from an international lens, we highlight the reliance on Mexico within the U.S. supply chain, bringing a comprehensive understanding of the interconnected global landscape.
I also provide some insight from the EMS leaders I talked to at IPC EMS Seminar in Gdansk last month.
Like every episode of EMS@C-Level, this one was sponsored by global inspection leader Koh Young (https://www.kohyoung.com) and Adaptable Automation Specialist Launchpad.build (https://launchpad.build).
You can see video versions of all of the EMS@C-Level pods on our YouTube playlist.
Hello, I'm Philip Stoke and welcome to EMS and the Economist. I am joined by Sean Dubravik who, as we all know, is the chief economist of IPC, but also a futurist and podcaster, speaker, author, general raconteur of the industry. Sean, how have you been and what's the latest from the IPC data?
Speaker 2:I think if you look at the recent IPC data, you definitely see a continuation of the trend that we've been watching. You continue to see things soften somewhat. In the last month, we've obviously had a number of uncertain events, you know, events that breathe uncertainty in the marketplace. Port closures on the East Coast and the Gulf Coast were the biggest by far, and the other element that's wreing havoc right now is a series of hurricanes who you know as, as we're recording this, we've got milton, uh hitting florida, so you've got, uh, you know, a series of um of damages to, you know just, different manufacturing areas and in the southeast, and uh, you've got, you know, lost electricity, loss of of property, plan equipment, obviously, and so um, not not to mention loss of life in, uh, in these storms. So there's been a lot of of damage there. The port closures ended up not being quite as damaging as it was pretty quick, wasn't it?
Speaker 1:yeah, because they were resolution which everybody wanted that's right.
Speaker 2:It was a relatively quick resolution. Now it really is just a pause because there's still some. They've they've made an agreement on wages and salaries, but not on automation. So the longshoremen want uh, no change in automation. They want to do their jobs the way they've always done their jobs for 100 plus years. That's problematic when what these ports really need is automation and they need faster throughput. They need higher throughput in order to move things more quickly. That's what everybody in this environment wants.
Speaker 2:The shippers want it because they want to be able to bring a boat in, bring a ship in, unload it quickly, reload it quickly and get back out to sea. They don't want to be queued up uh for any companies that have things coming through these ports. They want to be able to get it, get it quickly. So the, the automation uh element needs to have a resolution over the next 120 days or so. So the next three or four months we'll be telling to see what that looks like. Now in north america most of the electronics are coming through west coast ports because they're coming from asia. But there are uh, there is, you know volume that comes through the, the gulf and and Coast port. So it could have been very impactful.
Speaker 2:Partly because my sense right now is that a lot of companies are just not holding excess inventory of components if they don't have to, and so everything really is being built to order if at all possible, and so you will find yourself waiting for those components to come in and those inputs to come in.
Speaker 1:Yeah, I think it's fascinating. I think it's, you know, an incredibly well executed piece of industrial action. Timing was impeccable. You know the last quarter is where most of retail makes their profit through the year and this month is where a lot of that Christmas stock comes in. So they timed that really well. Fascinating timing that they've really pushed out a lot of the detail in the decision until after the election. So you know that negotiation can happen in whatever environment we find ourselves in.
Speaker 1:Then, and I think just a huge, huge topic that we're going to be talking about for years is how we manage automation and labor relations. I think it's insane to think a Luddite principle can prevail and we can maintain inefficiency as a way of combating job losses, but I think when you look at the position of the unions, you can completely understand where they are. So, as providers of automation, as people that are involved in the digital transformation and the technology revolution, we really need to think carefully about how labor is redeployed and how people's standard of living can be maintained whilst bringing the industry that working into a much higher level of efficiency. I think that's going to be a huge topic going forwards.
Speaker 2:Well, I think one of the challenges, ironically, is that you have an older workforce in that industry and so they're also looking at how do we bring younger workers in, how do we build up our ranks.
Speaker 2:And it's my impression that they see that you build up your ranks by creating an environment where those jobs are secure and where those jobs are protected and their jobs are promised.
Speaker 2:I actually think you build up your ranks by highlighting that these are not traditional high-labor jobs, that these have become more sophisticated, they're going to be more technology-oriented jobs, and I think that's how you attract the younger workforce. If you look at the tastes and preferences of younger workers, they don't want to be doing a lot of the physical labors that prior generations did. They'd much rather be working in a building and using automated cranes over 5G or overseeing digital infrastructure on a pane of glass. So I think that the real way that they could protect these jobs and to grow their ranks is by allowing technology to play a more defining role on what the future of that industry is and they're not alone, I think it's every industry. But the way you will bring in younger workers and ultimately replenish your workforce and help fill some of the gaps that exist in your labor demand is by bringing in workers that can do new things, do different things and not do things the way they've always been done.
Speaker 1:Yeah, I think, shaking things up and you know, I think that's critical. We're seeing other industrial action taking place, places like Boeing seriously challenged, and again the question of automation comes up there. And when you hear people on the picket line talking, they're talking about jobs they've had for a long time, very impressive protected pensions that they've had for a long time, and they're talking about their kids working for Boeing in 20 years as well. So I think there's a challenge in matching that very traditional, very strong work ethic, which is part of America, with digital transformation, and we've got to figure that out. That's something we could talk about all day and we shouldn't Just getting back to the numbers. It feels like the bookings and the billions are kind of I don't want to say bouncing along the bottom, but they're moving kind of in quite small increments over each month. It feels like there's no big change. Do you think we're waiting for the election? Do you think we're waiting for the Fed to maybe have another successive rate cut for the economy, perhaps to loosen up on the consumer side?
Speaker 2:There definitely is clearly weakness. If you look at the book-to-bill numbers whether you're looking at PCB or EMS, you do see weakness, not just in orders but also in shipment. So, ironically, there's a balance there, but it is at a much lower level. At a lower level, yeah, when you look at IPC sentiment data, the most recent month was actually quite weak, One of the weakest months that we've had on record since we've been doing that, and that goes back to the pandemic, the order flow. It just looks quite weak in that and we saw contracting order flow for the first time in the history of that survey. So you do get the sense that there is, I think, some really tangible weakness in the environment. Now, what's driving that weakness? Some of it is mean reversion and just going back to a trend line that existed. I do think that there is general trepidation in the marketplace, that there is a broad desire across all of manufacturing frankly to wait and see what the election brings.
Speaker 2:I think, if you look at monetary policy with the Fed, we obviously got our first rate cut, and then it was a slightly bigger cut than a lot of people were anticipating. We got 50 basis points instead of 25 basis points and so then, the expectations started to grow that we were going to see more aggressive cuts, but Chair Powell came out pretty quickly and said we don't think there's a need to rush. We just had really good employment numbers for September, so I think the Fed will take a very slow path unless something really changes in the labor market.
Speaker 2:If you look at the futures markets, it looks like it's pretty clear that we'll get another 25 basis points in November, another 25 basis points in December. So we're still talking like 4.5% at the fund set rate at the end of this year.
Speaker 2:We think we'd probably get another 125 basis points next year, probably five cuts or so of 25 basis points each, and so at the end of 2025, you'll probably still see interest rates in the threes, and that's twice as high as it historically has been over the last 10 years. We've averaged about 1.8 over the last 10 years. So I do think that this idea that, oh, the Fed is going to be aggressive, we're going to cut rates, we're going to move into a low rate environment, probably won't materialize, and so businesses really should get comfortable with a world where rates are higher and, as a result, I think if companies are waiting to make investments when rates are lower, that may not come as quickly as they think, and so I do think there are a number of headwinds.
Speaker 2:we did see that both candidates here in the US for president have come out with a better, clearer view of how they want to support manufacturing. They both are supportive of manufacturing. They have slightly different ways in some ways drastically different ways of supporting manufacturing, but there is a desire to build the future domestically and support the domestic manufacturing sector. And just looking at different ways of doing that, so I think there is a little bit of clarity on that front, but there's definitely still a wait and see here in the USS till November.
Speaker 1:Yeah, and I certainly saw that when I was in Mexico three or four weeks ago at SMTA Guadalajara. There was talk about the election there and some concern about potential tariffs coming from the Republican side of the race. What do you see as the main differences between the candidates in the way they intend to support manufacturing?
Speaker 2:Yeah, for both candidates. You definitely see a continued decoupling from China, and I think that is a trend that continues regardless of who's in office, and it is a trend that looks a little different than what we're seeing in Europe or elsewhere, where Europe feels to me like they're tightening their connections with China, whereas you see it decoupling here in the US, and that will continue. Clearly, president Trump plans to enact or at least he is talking about enacting very strong tariffs, as you noted, even tariffs on any vehicle made outside of the US, even if it's made in Mexico. Now, whether he would actually do that or not, I think, remains to be seen.
Speaker 2:We both know, and everybody who's listening to this knows, that Mexico is a key aspect of US manufacturing supply chain and that US auto manufacturers are using Mexico often to produce lower-priced models that they can sell into the US market and other markets, and so I think that industry would probably have influence over what that looks like. Last time, when you know President Trump was in office, he talked a lot about blowing up NAFTA agreement and rewriting the NAFTA agreement, and we did get a new agreement that came in the form of USMCA, but it's not significantly different and we didn't lose much of the benefits that we had from NAFTA agreement, so I would anticipate that same thing. I would hope that same thing exists for North America, but I would expect much higher tariffs from yeah, especially for China, what Vice President Harris is recommending.
Speaker 2:So there are subtle differences there where you see them looking at different ways of incentivizing investment. Vice President Harris has talked about trying to minimize some of the delay in construction. So construction permitting and other things like that. There's been a lot of investment that's gone into manufacturing construction and especially electronics manufacturing construction, including semiconductor commitments and so it, but it looks like some of those are taking longer than anticipated. They're delayed.
Speaker 2:I think vice president Harris is looking at? Are there ways that we can accelerate that Are there, you know, fermenting, or policy issues that are delaying construction in any ways that we might be able to drive some efficiencies into the process? So I think they both want to get to the same place, but just different, just slightly different ways of doing it, which is what you'd expect After.
Speaker 1:I was in Guadalajara and spent a little bit of time in the US afterwards, but I ended up in Poland with your colleagues at the IPC EMS Day. Sanjay, philippe and Dieter all did from Zona and do a panel with EMS leadership, so it was really nice to get that overview, particularly from Dieter and the stats he was able to present, was that we're seeing a consistent CAGR, consistent growth over the last 15 plus years of around about 5% in the electronic manufacturing services space. What we saw in 2023 was a huge jump above that, and what we're seeing now is kind of a ripple back down to what looks like a regular CAGR. So that idea that the market doesn't jump it tends to move at a steady trend, I think is really important and actually that seemed to resonate with the audience.
Speaker 1:What came up with the leadership that I spoke to was how do you realistically deal with these challenges, how do you manage your business in a way that works during this environment? And there were a few things that came up as really important. One of them was managing your team when you don't want to be an industry that lays people off and hires people because you know we've spent the last 18 months talking about talent shortages, so maintaining and keeping that talent available to you is really important. And one of the other topics that came up was again the idea of automation and how do we increase competitiveness and efficiency, which I thought was really important.
Speaker 1:But one comment that I really liked was just EMS companies remembering to stay in their lane, remembering that you know, if you can run an EMS company well and you can make 8%, 9% EBITDA every year, then that's where you should stay, and when you get too far outside of that, that's when customers tend to look and think okay, well, what's our relationship with these EMS companies? If they're making too much money, where should we be? So I really liked that. It was almost like the guy saying just remember what we do and what we're really good at and focus on that. So there was some interesting feedback, but I thought talent was a really interesting one, because in the past 10, 15 years ago, a downturn like this, you would have seen many companies laying off 20% of their workforce. Some have a buffer of contract workers that allows them a bit more flexibility, but there's a real desire to keep the talent they have.
Speaker 2:Yeah, I mean I think two things. One Europe obviously has unique labor laws, so they're able to manage downturns more.
Speaker 1:Also many different labor laws Sean. That's the interesting thing you know France, germany, that's one thing, that's right. Hungary, poland you know France, germany, that's one thing, that's right. Hungary.
Speaker 2:Poland, quite something different. Yeah, and I think your point does resonate that you know labor is still a very scarce resource around the world, especially skilled labor, and so there is a desire, I think, throughout manufacturing, instead of two or two shifts, instead of three shifts, and you're or you're, you know cutting back the hours across the board in order to keep everybody employed. I also think the market has changed, certainly here in the US. It used to be the case that if you were a manufacturer worker, manufacturer employee and you got laid off, you would look for a job in manufacturing, you would stay in that industry because you had a skill set. And now you see workers willing to go elsewhere.
Speaker 2:They're willing to go work at Starbucks, or they're willing to go work somewhere, a totally different industry they're willing to go work in retail, and you see retailers in the US like Walmart and Target and others who are promising additional benefits, like educational benefits that might be attractive to some of these workers. And so I think there's a number of reasons why manufacturers are trying to retain their workforce, even if things slow down, so that they can scale up. And I think what they realized during the pandemic is, when they had those layoffs in the early months and then demand came back and they had to scale up, they couldn't get the workers. Especially, if you look at the economics of an EMS company, it's all about leveraging that workforce and taking advantage of the hourly rate that you're paying that operator versus what you're charging the customer. So that differential is what drives the profitability for an EMS company, and you have to make sure you have somebody there to do the work To do that.
Speaker 1:Yeah, yeah, I think it's an interesting challenge, but I think it was interesting to see so much of European leadership actually had a good understanding that this is a.
Speaker 1:This is a correction in the in the market, partly because of the the supply chain bubble that went through and the growth that we had last year, and everybody does feel quite comfortable with this five plus percent annual growth, which is, you know, as an industry, is good, and if you can maintain your position within that, you know, I think there's a very, very solid business model and I think they were all pragmatic in their approach to weathering the storm.
Speaker 1:They felt they were closer to customers than they'd ever been. So they had that, you know, regardless of whether they were scheduling out or whether it was the EMSs telling the customers that they couldn't have product because they had a supply chain issue, they were able to, you know, resolve that in a positive way. There were still challenges around the other side of their supply chain way. There were still challenges around the other side of their supply chain. There were still, I think, broken relationships with distribution channels for components and for within the semiconductor industry, and I think there are some great opportunities for both efficiencies through digital transformation, but also, you know, improved relationships and everybody understanding where they live in the value chain as well as the supply chain, so I think it was pretty positive in that way.
Speaker 2:Yeah, and I also think that the technologies that we're making are becoming much more sophisticated. Just the natural progression of technology means that the devices or the systems that we are building are going to be much more complex, and I think there really is a great opportunity for EMS to be not just box builders but be real experts in how these systems come together. And so there will be, I think, growing opportunities in the future where an OEM isn't just going to push work to an EMS because of you know the economics or because they don't just build it?
Speaker 2:because they need the volume or whatever. I think that they'll be using these partners because they have intrinsic expertise and how to build these complex systems. So I think the EMS companies that really invest in that to build up their not just their assets but also their intellectual assets, I think they'll be well positioned for a future where the electronics that are being built are quite complex and will require really serious partners that understand that at a very deep level.
Speaker 1:Yeah, and I think that's exciting because it means they have the opportunity to participate in the EV revolution. Whether that's temporarily stalling or not, no-transcript, but yeah, I think it does create opportunity for them. So, yeah, I think that's where we are. I think where are we now? We're just at the beginning of October. I guess next time we speak we'll know who the next president will be. Hopefully there'll be an agreement as well.
Speaker 2:Yeah, we hope they all agree.
Speaker 1:Absolutely. We'll be able to explore what that means and if there's a market reaction, but in the meantime, sean, always a pleasure to talk. Thanks so much for your time, glad to be here.