1. Tier-1 EMS Shifting to the HMLV Market Segment | June | 2013 Abstract: The Electronic Manufacturing Service (EMS) Industry comprises two categories: HMLV (High Mix Low Volume) and LMHV (Low Mix High Volume). The HMLV market is fragmented and primarily catered by mid-size Electronic Manufacturer Services (EMS) whereas the LMHV market is primarily catered by large tier-1 EMS. The supplier landscape will change as tier-1 EMS players increase their focus towards the HMLV market. This will escalate the competition and enable buyers to consolidate their spend. Tier-1 EMS Shifting to the HMLV Market Segment Copyright Beroe Inc., 2013. All Rights Reserved Author Ravi Shankar Singh | Research Analyst

2. c Introduction The HMLV market segments (Industrial, Medical, Aerospace & Defense) have been primarily been catered by Mid-Size EMS players (with 55%of revenue coming from HMLV segment). The LMHV market segment (Computers and Peripherals, Consumer Device, Telecommunication, Storage devices) is predominantly catered by large size tier-1 EMS. In the HMLV/LMHV, mix symbolizes the complexity or the customization of the product and volume means the number of units manufactured. "Tier-1 EMS players are increasing their focus towards HMLV market segment as it is growing at approximately 50% faster rate than LMHV market Mitigating Risk: In a dynamic EMS industry, mitigating risk is necessary as the competition in the LMHV EMS industry is increasing is increasing as the product life cycle matures which is resulting in lower profits. Tier-1 EMS depends on a limited number of large customer comprising a significant portion of their revenue. For Jabil Circuit and Flextronics, their five largest customers account for close to 50% of the net revenue thus the loss of a big client can result in loss in profits and EPS. Adding focus toward the HMLV segment will help mitigate and/or reduce risk. EMS Classification based on Revenue Tier-1 (> $2 Billion, large EMS players) Tier 2 ($ 500M to $ 2 B, Mid-size) Tier 3 ($ 100M to $500M, Mid-size) Tier 4 (Less than $ 100M, Small) Why are Tier-1 EMS shifting their focus? 3. Competitive Advantage: Mid-Size EMS players have regional presence with no end-to-end solutions for the buyers and their procurement model is transactional which acts as a bottleneck. Tier-1 EMS players have a global presence with a wide product portfolio and end-to-end solution moreover they have centralized procurement which helps them to procure in bulk thus passing on the benefits to the buyer giving tier-1 EMS players a competitive advantage. Global presence of tier- 1 EMS players makes it viable to manufacture HMLV products in the regions having high labour rates as the HMLV manufacturing is labour intensive Profit Margins: Tier-1 EMS players are motivated to move towards HMLV segment as they earn 45- 50% more profit margin as compared to LMHV segments as these are more customized products thus supplier have more negotiation power. HMLV offers higher margins for smaller quantities, but the challenge is in adapting the framework to meet the customer's expectations, rather than the EMS's needs. Shareholders demand continued EPS growth; HMLV offers an opportunity to grow EPS. High velocity clients are by their nature very volatile so HMLV helps spread risk -Director Business Development, Tier-1 EMS 4. Motivation Factors Profit Margins Growth rate in HMLV market Risk Mitigation High labour rates in Developed countries LMHV Market HMLV Market Introduction Few Competitors in the industry Early Adopters of the product Growth Entry of more competitors and market share cannibalization Products and services have less differentiation Increase in demand from end consumer market Maturity Price competition and acquisition The selection for product/services becomes more niche and very selective by end-users Phase Competition End-use Decline The market is highly competitive and is difficult to gain market share thus the exit of some competitors Decline in usage of product Time HMLV is viewed as a potentially higher margin activity, however it comes at a cost, for example the additional accreditations, facilities, skill levels add to overhead -Aerospace & Defense Director, Tier-1 EMS LMHV market is at the peak of its maturity stage and has low growth rate. This lag between the two markets segments makes the HMLV market attractive for tier-1 EMS 5. Tier-1 EMS players like Flextronics, Celestica, and Jabil Circuits are shifting their focus from the LMHV market towards HMLV market. Tier-1 EMS Growth in HMLV segment from 2009-2011 Strategic moves to focus on HMLV market in 2012 Jabil Circuits 40% Jabil continues to focus on under-penetrated, rapidly growing areas like the industrial, medical, defense and aerospace verticals. Customer engagements in these sectors tend to be much deeper with longer product life-cycles and increased opportunity for cross-selling services. Flextronics 25% 1) In 2012, Flextronics acquired Stellar Microelectronics. This acquisition underscores Flextronics' strategic commitment to expand their service offering in the aerospace, defense and medical markets. 2) Flextronics expanded its Romanian medical operation in November 2011. Celestica 23% Celestica acquired D&H Company in 2012. This acquisition supports Celesticas strategy to grow and diversify its revenue base in the Industrial, Aerospace and Defense, Healthcare end markets. 12% 88% Tier-1 EMS Player 2012E Focus on HMLV segment Focus on LMHV segment 18%-20% 80%-82% Tier-1 EMS Player 2014 (F) Focus on HMLV segment Focus on LMHV segment Industry Shift- Who is Moving? Source: IDC, Annual Report Source: IDC, Annual Report 6. Buyers face challenges while engaging with mid- size EMS players as they have, poor supply chain visibility, lack of recognition and goodwill, limited financial strength. For buyers like medical device manufacturers it is necessary to get the right fit supplier as the products required are highly customized and critical involving human interface. Buyers face challenges in identifying the right supplier in the HMLV market as it is highly fragmented. Consolidating their spend with few suppliers is difficult as these EMS players do not have a wide product portfolio. The shift of tier-1 EMS players will facilitate buyers like medical device manufacturers to centralize and consolidate their spend by having a complete end-to-end solution. HMLV Buyer Current Scenario (2012) Future Scenario (2014) Who controls the market? Mid-Size EMS players Large Tier-1 EMS players Spend Consolidation It is difficult as buyers need to engage with many suppliers to procure product. Buyer will engage with one supplier across all regions having wide product portfolio. Supply chain visibility Low High Relationship between buyer and supplier Short-term relationships as mid-size EMS players are not strategically aligned to buyers need. Long-term relationships as tier-1 EMS players prefer strategic partnership. End-to-End solution Difficult to get due to narrow product portfolio. Tier-1 EMS players have wide product portfolio. Customers may wish to move away from having a large number of smaller EMS suppliers, to consolidating spend with fewer suppliers to gain better advantage/leverage. But, Tier-1 EMS are also astute, they are also looking to have a critical mass of important customers, ones who are looking for a partnership arrangement, preferably long term, ability to grow in terms of value and able to achieve a level of spend aligned with the EMS's strategy. Director, Tier-1 EMS Impact on the Buyer Conclusion 7. Metadata Industry to be impacted Pharmaceutical Food, Beverage & Tobacco Aerospace and Defense Chemicals Oil & Gas Medical Devices Manufacturers Bank & Financial Services Hi-tech Domain to be impacted Medical Devices Fleet Management Travel and MICE IT and Telecom Software & Hardware Management Consulting HR Services Legal Focus Area Sourcing Opportunity Supplier Intelligence Technology Substitute Opportunity Supply Chain Risk Input Cost Price Outlook Sustainability Keywords Used Electronic Manufacturing Services (EMS) High Mix Low Volume (HMLV) Low Mix High Volume (LMHV) References http://www.ventureoutsource.com. http://www.prlog.org/11787470-electronics-manufacturing-services-industry-to-grow-125-to-2015-says-report.html investors.flextronics.com/phoenix.zhtml?c=98555...reportsannual www.celestica.com http://jbl.client.shareholder.com/annuals.cfm insidechina.onehotspots.com/flextronics-acquisition-of-motorola-factory-squeezed-into-the-andrews-camp/8599 Disclaimer: Strictly no photocopying or redistribution is allowed without prior written consent from Beroe Inc. The information contained in this publication was derived from carefully selected sources. Any opinions expressed reflect the current judgment of the author and are subject to change without notice. Beroe Inc accepts no responsibility for any liability arising from use of this document or its contents. For more information, please contact: contactus@beroe-inc.com