EMS@C-LEVEL

Book-to-Bills, Tariffs, Economic Uncertainty, and the Reshaping of US-Europe Relations: All on EMS & The Economist with Shawn DuBravac

• Philip Spagnoli Stoten

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White House policy shifts and tariff uncertainties are creating a complicated landscape for electronics manufacturers trying to plan their future. While recession whispers grow louder in media and economic circles, EMS and PCB industries are showing surprisingly strong book-to-bill numbers - though some of this strength may come from companies rushing orders to beat potential tariff implementations.

A fascinating dynamic is emerging between regional markets. US manufacturers maintain cautious optimism despite economic headwinds, while European companies expect modest growth following last year's significant decline. The unpredictable nature of tariff policies, particularly regarding México and Canada, has created planning nightmares for companies with cross-border operations. What was once a straightforward decision to invest or manufacture in Mexico now requires complex analysis of potential tariff exposures and exemption qualifications.

Perhaps most intriguing is the structural shift happening in Europe. With defense spending increases and raised debt ceilings specifically for military investment, EMS companies in the defense sector stand to benefit significantly. This represents more than a temporary boost - it signals a fundamental change in European defense strategy and reduced dependence on the US. 

Meanwhile, beneath all the geopolitical noise, technological innovation continues driving industry growth, with AI's massive energy consumption creating entirely new opportunities for electronics manufacturing. 

For industry leaders navigating these waters, staying informed and adaptable has never been more critical.

EMS@C-Level is sponsored by global inspection leaders Koh Young (https://www.kohyoung.com) and Creative Electron (https://creativeelectron.com)

You can see video versions of all of the EMS@C-Level pods on our YouTube playlist.

Philip Stoten:

Hello, I'm Philip Stoughton, from my House to Yours. Welcome to EMS and the Economist. I am joined once again by Sean Dubravec, who is traveling somewhere in the US. Sean, you have been on the road for a while. How are you feeling?

Shawn DuBravac:

We're doing good. Phil, it's good to see you. Yeah, we've been on the road for a bit.

Philip Stoten:

Yeah, it feels like we constantly talk about tariffs and I am going to get to that because the news is kind of moving so fast on that. I think it's really interesting for our audience to hear about that. But what I want to start it with is kind of where we are with the latest book to bills for EMS and PCB and what you're seeing in terms of change in the sentiment report.

Shawn DuBravac:

Yeah, I think the book to bill both for EMS and PCB have been pretty strong. We asked some questions in some recent surveys of members if there was some pulling forward of orders. They felt like some of this was being pulled out of sync just because of the fear of tariffs and trying to get in front of tariffs, and I think there's a really interesting dichotomy at play right now because, you know, the majority of IPC members that we spoke with suggested that they weren't necessarily pulling things forward. In other sectors of the economy it didn't feel like they were pulling things forward. If you look at retail sales, for example, in the US Easter shifts from March last year to April this year, and so there was some sense that retailers weren't pulling things forward as well because, with Easter showing up later, there really is a seasonal shift in the type of apparel that they would be bringing in, and so they probably didn't pull things forward.

Shawn DuBravac:

But if you look at the import numbers in aggregate, we've in the last month had very strong import numbers that are going to weigh on the GDP numbers in the first quarter as a result of how strong imports were relative to exports, and so I do feel like there is the risk that some of what you're picking up in book to bill is pulling forward as much as possible to get in front of tariffs and get in front of other things. But all in all, the numbers have held up okay and look pretty strong and certainly from the companies that I speak with and probably similar to you, the companies you heard from things are pretty good. They're seeing a lot of activity, seeing a lot of interest, and so I think there's a big question mark of how long that will sustain.

Philip Stoten:

Yeah, yeah, I mean it's quite fascinating where we see things at the moment. In the US, I think people are quite positive. In Europe, people are more positive about 25 than they were about 24. We saw that double-digit decline last year. We're looking at maybe a single-digit improvement this year, which I think everybody would be happy with. I think the challenge at the moment is that whole unknown, which we've talked about before. That slows people down in terms of their capital investment, in terms of planning their footprint, and that's created a bit of a challenge. And just in the news this week we had some really rapid movement in the stock market and news broadcasters were using the R word, the recession word again. Where do you see that influencing the industry?

Shawn DuBravac:

I think it's definitely a headwind. I think that there is a lot of uncertainty, and any time you see uncertainty, that causes companies to pause, especially when it comes to bigger, longer-term, longer-horizon investments, and so I do think that all of the uncertainty does have the potential to pause those longer investments. I think there is also that frenzy that happens right there at the beginning, where people are trying to pull things forward or close decisions quickly to try to get in front of it, and then you get this malaise that sets in as they reassess the environment, and I think there's a lot of reassessing going on now. I think you know, as you noted, it doesn't play out equally. Some of the shifts that you've seen in US foreign policy just in the last 45 or 46 days are beneficial for certain sectors in Europe, and so you see what is a headwind in parts of the US shifting to a tailwind in Europe, and so there is this global repercussions that are playing out now as well.

Philip Stoten:

Yeah, it's fascinating and I was going to say the elephant in the room is tariffs, but really the elephant in the room is White House policy. What's coming out is having a huge impact. You talk about that's based on a, you know, a negative meeting um with ukraine and a reduction in defense spending then, but then in the last two days we've got talk of a talk of a ceasefire that trump has agreed with uh zelensky and um support, at least with intelligence at the moment. So it just feels like the whole tariff situation and general policy situation is leaving people in this position where they cannot really predict what's going to happen next and it's really hard to make investment decisions or geopolitical manufacturing, geography decisions without that.

Shawn DuBravac:

Yeah, I think you're right, and I think when you look at the broader economy, though, at least in the US, it's holding up pretty well, at least for now, despite the fact that there is a lot more discussion about a recession. Things are holding up OK. The numbers last month were OK. They were a little bit stronger than they had been in January, a little bit weaker than we had anticipated, but not too bad. Not too bad.

Shawn DuBravac:

I think there's still some sense of will the significant layoffs we've seen within the government start to materialize, and will that weigh other sectors down? Will that impact hospitality? Will that impact retail and will that drag down unemployment? Ticked up a little bit, but still within a comfortable range. So there is still this sense that, despite all of the uncertainty, the underlying economy is holding up okay, and I think one could also suggest that the US economy was doing quite well and was in a position where it could potentially weather some of these dynamics. Now, to what extent it can weather that, I think, remains to be seen. Certainly, the uncertainty is weighing on the economy and you are seeing the probability of a recession over the next 12 months increase, and so I do think that the risk of a recession in the US has increased. Obviously, the correction you're seeing in the stock market isn't helping when it comes to that, and also the seemingly indifference from the White House around a recession doesn't seem to be.

Shawn DuBravac:

You know, that kind of fuels the fire as well, when what you hear from the administration is, yeah, you know, recession is an off table.

Shawn DuBravac:

Maybe there's some short-term pain that we're going to feel and maybe that looks like a recession, but we'll get through it. So it's.

Philip Stoten:

It's a big challenge when we, when we look at tariffs, obviously there's the. The tariffs have been on and off with the, with the near neighbors, and that one seems to have been the hardest to predict. You know, we get a, we get a tariff that comes on, it's delayed for a month, we get a month down the line, it goes back on again and then we get exemptions for everything that was inside the USMCA. It's really hard. If I'm a contract manufacturer in Mexico or a contract manufacturer just across the border in Toronto, I don't know what to think. It's a big challenge in terms of planning their business and if I'm a European and I'm looking to invest in the Americas, mexico would look like a really great hot option. Now a lot of those companies are having to think well, actually, maybe we need to be in a lower-cost state, but we maybe actually need to be in the USA.

Shawn DuBravac:

Yeah, I think you're right and I think if you look at the exemptions that were put into place for USMCA, that creates this whole area where there's some uncertainty, because there were a lot of products coming through Mexico and Canada. A significant share of products coming through Mexico and Canada that weren't certified USMCA because they didn't need to be. They were already coming through tariff-free. Things like computers and Mexican beer Beer was already coming through tariff-free, so it's not necessarily coming through.

Shawn DuBravac:

And so there are all kinds of dynamics now where beer from other places is coming through tariff-free but through Mexico theoretically should have a 25% tariff added to it, or Canada should have a 25% tariff added to it because they weren't claiming USMCA exemptions because they didn't need to, because they were already coming through with very low tariffs. So USMCA only covered up about 50% of the imports that were coming through Mexico and even less coming through Canada. And so now there's this gray zone of well, what does this mean for things like Mexican beer or Canadian beer and what does it mean for computers or mobile phones or some other categories that now get kind of caught up in that gray area?

Philip Stoten:

Yeah, I'm curious when we go broader and we look at the tariffs and the tariffs that are being placed back on the US in the opposite direction, it feels like the relationship with Europe has changed quite a lot. We've also had the elections in Germany. We've had this news that there's going to be more spending on defense. There's been debt ceiling raised in a lot of the European countries, including from the EU itself, as to what can be rules on what can be borrowed and if it's being borrowed for defense, that seems to be pretty limitless at the moment, which is great news if you're an EMS and that's your big sector in Europe. But it just feels that it's a time where we've just got to be really sensitive and keep a very close eye on that kind of US-European relationship. How do you see it from your side of the pond?

Shawn DuBravac:

Yeah, I think you're exactly right, and I think it's clear that the tariff narrative is not over. We're nowhere close to the end and so, while there have been some exclusions, everything feels very temporary. It's hard. I think it's hard to imagine that at some point the Trump administration doesn't turn more attention to Europe and look to impose tariffs on Europe. I think there's still a lot of unknowns, but I think that the administration is certainly changing its historical relationships with Europe and I think that will materialize in things like tariffs still to come.

Shawn DuBravac:

So the focus lately has been North America with USMCA, canada and Mexico. It's been focused on China. It's focused now on in more recent days on steel and aluminum, but I do think that you will see Europe get swept up in the tariffs and we'll find out what that looks like the tariffs and we'll find out what that looks like, but I think there's still a lot more to come. It is clearly the negotiating leverage that the administration wants to use and you've seen them use it in other ways as well to negotiate terms for certain things, and so I think it in many ways is the easy button that the administration wants to use to achieve broader objectives, and I think that will impact the Europe-US relationship directly.

Philip Stoten:

Yeah, I think it will. And it's kind of the Europe's very sensitive to not just what the US says but the way it says it, and the way it's saying it now is somewhat different to, perhaps, the way it said things in the past. And I think from the other side of the pond it kind of feels a bit of a strained and strange relationship and I think it's going to take some time for that to play out and maybe the stance that's been taken on things like the war between Russia and Ukraine feels a little bit uncomfortable for Europeans. But what we have achieved potentially is a ceasefire, at least from the Ukrainian side. Hopefully we'll get the same from the Russian side and it may well be that that kind of approach actually delivers some value. So it is really a watch this space situation with that relationship.

Shawn DuBravac:

Yeah, and I think it'll be interesting to see if, as you pointed out, that Europe has shown a renewed interest in investing in defense. Will that continue or will that wane? Will a ceasefire remove some of the wind from that sail, or will Europeans continue to want to invest in defense? Invest in defense.

Shawn DuBravac:

I think there is potentially less willingness to trust a Russian ceasefire over a longer term, and so I think there has been, as you've noted, a clear shift in European policy to some certain things that they have frankly neglected in recent decades, and now there's renewed interest there, and so I think the question will be does that renewed interest continue? And if so, I think it means a structural change in the industry in Europe, because as certain categories continue to experience headwinds you think about automotive, or you think about even industrial and some other sectors you see a clear tailwind when it comes to defense, and so I think that will continue for at least the coming years.

Philip Stoten:

Yeah, I think it will, and I think, actually I think it's a little bit of a realization that Europe has perhaps depended on the US for defense, and actually it's. You know, it's got to do its own thing. The one thing that always upsets me is that it just seems that when governments are increasing spending on defense, they're reducing spending on aid and it just feels like it's being pulled out of the wrong column to put in the other column. But it's kind of one of those things we're going to see each other live next week. We'll be at APEX together on Tuesday. Have you got anything big scheduled? Are you presenting at APEX or are you just getting everybody together and getting all your data ducks in a row and making sure you've got all the pieces of the jigsaw together?

Shawn DuBravac:

Yeah, I'm not presenting myself, but I'm looking forward to all the great conversations that take place at Apex and I do think we will get a much clearer view on the sentiment in the industry and how people are feeling about growth broadly in the industry. So I'm looking forward to those touch points.

Philip Stoten:

Yeah, and Sean, much as I see you as the economist guy, I also see you as the AI guy. So in our scheduled conversation perhaps we'll put economics and tariffs to one side just for a change, just for a day, and talk and dig deep into another topic. That would be fascinating.

Shawn DuBravac:

Yeah, I was going to just add. You know there's so much happening in that space, I mean as far as a real momentum in technology. I'm just back from MWC as well and you see tremendous appetite and tremendous growth in new devices, new applications, new hardware. So there is a lot happening in technology right now, which also can sometimes be overlooked because of all of the geopolitical dynamics, but we are seeing, I think, real progress in a lot of areas there and a lot more to come.

Philip Stoten:

Yeah, you're right, the wave that sits on top, the actual steady growth in the industry is all about the ingredient technologies and the game-changing technologies that are out there, and clearly AI is probably one of the biggest of those and its huge consumption of energy is creating another important sector for electronic manufacturing. Sean, safe travels back home. Enjoy your weekend at home. I'll see you in Anaheim next week and thanks so much for your time on the show today. See you soon.