Fitch: New Trends Counter Electronic Manufacturing Credit Risk

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Three evolving trends have the potential to strengthen EMS companies' credit profiles over the long term, according to Fitch Ratings. These include electronification of everything, design collaboration with customers and internally across businesses and product agnostic strategies.

Momentum in these three areas would be significant because they address several key credit concerns for investors around the EMS sector - cyclicality, customer concentration and low margins.

As automobiles, glucose monitoring devices, washing machines and other non-traditional products add electronic content, the addressable market for electronics manufacturing rises. These products often involve longer lifecycles, helping to reduce the volatility associated with handsets, PCs, servers and other traditional electronics products. EMS providers are often able to extract higher margins from non-traditional products due to the increased complexity required to manufacture them.

Revenue diversification improves from exposure to new end markets (aerospace & defense, medical, auto, industrial and retail) and from the increase in the number of products and programs. Industries such as medical and A&D bring unique regulatory, compliance and geographic location requirements that increase already steep barriers to entry for larger players.

Traditional EMS services involve manufacturing, assembly, distribution and repair of electronics for technology original equipment manufacturers (OEMs). Today, EMS providers invest in design capabilities, adding engineers and sleek Silicon Valley innovation centers, where cutting-edge technologies are on display for customers, and capabilities are shared across business units.

Larger EMS providers with diverse industry exposure have a greater opportunity to leverage technologies across seemingly unrelated end-products (e.g. cell phone camera technology used to create a less stressful feeding tube for patients), bringing a level of design capability that customers would not have on their own. Embedding themselves into the design process elevates EMS providers from contract manufacturer to strategic partner. This deeper engagement model provides an opportunity for long-term margin enhancement and stickier customer relationships.

EMS providers are finding that their manufacturing and supply chain expertise can be leveraged to any product, even ones without any electronic componentry (hence Flextronics dropping the "tronics" from its name). This expanded addressable market is largely due to increasingly sophisticated manufacturing capabilities and data capture, opening the door for EMS providers to accelerate time to market and reduce cost for virtually any product company in the world.

For example, Flex's engagement with Nike involves sneakers with no electronic content. Flex's value proposition with Nike is based on: time to market - setting a record for the fastest new Nike factory ramp of 150 days from start to first ship; manufacturing capability - complex weaving design; and regionalization and customization. Leading with innovation and prioritizing deeper engagements with blue chip customers irrespective of the underlying product's electronic content should help reduce customer concentration and provide high-quality revenue streams.

Fitch believes that the largest, most reputable EMS providers with capabilities across a variety of traditional and non-traditional industries are primed to benefit from higher growth and margins, reduced cyclicality and lower customer concentration over the long term. Fitch publicly rates two of these companies - Flextronics International, Ltd. (rated 'BBB-'/Positive by Fitch) and Jabil Circuit, Inc. (rated 'BBB-'/Stable by Fitch). We expect the effect of these trends on Flex and Jabil's financials to be gradual given the measured pace of adoption of EMS services by non-traditional customers. However, with their massive scale, a small change in margins can have a vast impact on FCF.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160616006245/en/

Fitch Ratings
Matt Hankin, CFA
Director
Corporate Finance
+1 646 582-4985
33 Whitehall Street
New York, NY
or
Jason Pompeii
Senior Director
Corporate Finance
+1 312 368-3210
70 West Madison Street
Chicago, IL
or
Zack Schroeder
Associate Director
Corporate Finance
+1 312-368-2056
or
Kellie Geressy-Nilsen
Senior Analyst
Fitch Wire
+1 212-908-9123
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• New Chemotherapy-Free Immunotherapy Combination for Follicular Lymphoma Listed on the PBS
• Julien Frascadore Named Team Canada 2026 Closing Ceremonies Flagbearer
• The Shift from Fast Fashion to Intentional Luxury Purchasing: What It Means for Brands