Understanding how EMS companies view capital investment decisions

ema_companiesOne of the great benefits of outsourcing your manufacturing is that it can largely remove the need to continually invest in expensive capital equipment. On the face of it, it’s much easier for an EMS company to justify having the equipment because, after all, that’s their business, and the cost can be justified against work from many customers across multiple products.

From an OEM’s perspective, this can lead to quite high expectations about what equipment their EMS provider should have, in order that the OEM can eliminate the cost of having to purchase or contribute towards equipment for their own products- other than for dedicated tooling where non-recurring engineering charges (NRE) are expected.

Of course, all equipment still needs to be paid for one way or another, and for EMS companies working in diverse markets it’s not always an easy process to decide what to - or not to - invest in. This blog post will look at how EMS companies make these decisions and what you might expect when evaluating EMS providers’ equipment lists.

Basic equipment requirements 

Clearly, there is some equipment that an EMS company needs to have to be in business. This is usually driven by the markets they are serving and their resulting requirements. For example, those providing PCB assembly services will need to have the capability to manufacture surface mount (SMT) and through-hole (PTH) assemblies in appropriate volumes. This requires a lot more than just soldering irons and typically calls for several hundreds of thousands of pounds to be invested in SMT production equipment. Those focussing on high reliability markets might well have less assembly equipment as the volumes they need to produce are likely to be lower. But they may have specialist equipment that goes with their market focus, such as that for conformal coating or stress (HASS) and accelerated life (HALT) testing.

Increasing capacity provides a relatively straightforward justification for purchasing more equipment, provided the sales are there, of course! It’s usually then just a straightforward payback calculation - e.g. if I spend £100K it will earn me £50K per annum, so it will take 2 years to pay back and then it will make a profit for the rest of its life. In these circumstances, it might be said that an EMS company that is investing in equipment is supporting healthy growth and is fairly secure about what the future holds, which is a good trait for a prospective partner.

Replacements and repairs 

Leading on from this, all equipment has a limited life so capital expenditure ("Capex") may be required to replace equipment that is unreliable or can no longer be supported. However, it can be an interesting calculation: for a piece of equipment that has already paid for itself - maybe many times over - then keeping it going even with what seems to be expensive repairs can make more sense than replacing it with new equipment, provided any temporary loss of capacity can be accommodated on occasions when it breaks down. So older equipment doesn’t necessarily show a lack of investment; it can be seen as a sign of financial prudence.

Increasing capability

Another reason to invest in equipment could be to increase capability. This could be driven by technology (e.g. smaller components to place) – hence an evolution of an existing process - or by customer demand for something different. The latter often leads to the "chicken and egg" problem: the EMS provider not buying the equipment until a customer is signed up who needs it, and the customer not choosing the EMS supplier because they don’t have the equipment. In reality, no EMS company is likely to buy equipment "just in case". So where more specialised equipment is required, some thought may be needed from both the OEM and the EMS company as to how the equipment may be purchased and paid for in a mutually beneficial way.

Of course, new equipment can enable production to be easier, faster, more efficient and hence less expensive. This can provide a competitive advantage for the EMS company and may well attract more business. However, it’s a brave move to buy equipment purely speculatively. Instead, a collaborative approach with existing or potential customers or a justification to invest combined with one or more of the reasons we have already discussed is more pragmatic.

All that's in between 

Perhaps the hardest justifications of all are for those pieces of kit that are necessary, or even merely useful occasionally. For example, test or inspection equipment that is only ever used on prototype builds, or first-offs, or for QA investigations. It often makes much more financial sense to rent this equipment, or use third party services, so it is not always the case that an EMS provider is incapable of providing this service just because the equipment is not on-site. In fact, in some cases it can be beneficial to use other providers, as exactly the right processes can be chosen rather than being limited to a specific in-house solution. The key here is to evaluate how the EMS supplier manages these processes and takes responsibility for them.

When selecting an EMS partner, it is important to take a realistic view of their equipment list. Sure, they must have enough capacity and flexibility to do the "bread and butter" work, but sometimes a more creative approach is required, in order to accommodate more specialist requirements, which can provide both technical and financial benefits to the EMS provider and their customers alike.

Image by Tristan Martin

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Written by Russell Poppe

Russell describes himself as a Manager, Engineer, manufacturer, teambuilder, organiser, strategist, and occasional content writer. Russell loves to help businesses thrive and grow in the best way that he can and has a wealth of experience in the engineering and manufacturing industry, particularly within electronics. Russell’s previous roles have encompassed general management, engineering, development, manufacturing, quality, and marketing, always with a strong focus on customer service.