We expect the global contract manufacturing market to reach USD 2.7 trillion in 2023, with a cumulative annual growth rate (CAGR) of 6.6% in 2018-2023. This result is awe-inspiring, but considering the ubiquitous presence of electronics both on the consumer market and in the industry, the growing demand for PCB assembly services should come as no surprise. An unmistakable trend in the EMS market until 2000 was the transfer of PCB assembly outsourcing of a large part of the electronics industry from Europe to China. This trend has ceased, and the EMS industry is rapidly developing in Europe, especially in its eastern part.
After returning to the old continent, the EMS industry did not develop uniformly in all European countries. A downward trend is particularly noticeable in Western Europe, with fewer and fewer EMS companies. That is most noticeable in the UK and France, where EMS organizations fell sequentially by 25% and 30%. On the contrary, the situation is in the eastern part of Europe, where more and more entities providing electronics production services appear, both in terms of quantity and quality. For example, there was an increase of:
- 27% in the Czech Republic
- 40% in Bulgaria
- 42% in Romania
These figures show that the EMS industry is re-entering the European market, especially in Eastern Europe. What causes of these changes have made manufacturers increasingly outsource to European companies rather than using EMS services in China? The geography of business is behind it.
The economy rules the geography of business
The economic situation in the world has a significant impact on the entire geography of business, especially distribution. The economic realities of the 1980s meant that almost all massive electronics companies manufactured their products in Asia. However, after 2000, the situation gradually began to change. Producers intensified their efforts to search for new entities outside Asia that could offer relatively low production costs. Thus, a significant part of the EMS industry entities moved from the USA and Canada to Mexico. At the same time, Eastern Europe has become a base for contract production for Northern and Western Europe countries.
There is no doubt that the general trend has not led Eastern Europe to take over the entire European EMS market within a few years. Still, over 80% of all companies in this industry have their headquarters in Western Europe. Nevertheless, companies located in the central-eastern part of the old continent are starting to play an increasing role in the actual contract production. As a result, the growth rate in the East is twice as high as in the West. The proof of this thesis’s truth is that only 20% of Central and Eastern organizations are already approaching 50% of the value of all EMS production in Europe. Therefore, it is a matter of time before the importance of output in the East exceeds the Western revenues of the EMS industry.
Eastern Europe – a new global location for EMS Industry
Low margins characterize the EMS industry, and material prices are at a similar level regardless of the production location. Therefore, the total cost of EMS services is now largely dependent on labor costs. Consequently, it is not surprising that in the countries located in Eastern Europe, these costs are much lower than in the rest of Europe.
Moreover, in recent years, the countries of Eastern Europe have become an exciting location for outsourcing centers due to the access to educated staff, the possibility of using public aid, relatively low costs of the center, and the availability of office space. For entities that intend to create an outsourcing center in Eastern Europe, the possibility of obtaining additional financial benefits may be intriguing. Such benefits may arise from operating in a special economic zone. Working in a particular economic area based on a permit allows you to take advantage of the corporate income tax exemption.
In recent years, there has been a noticeable increase in salaries for employees in the former Eastern Bloc countries. For example, Romania recorded a very high wage growth of 19%. Still, in absolute terms, such change is relatively low compared to the 4% growth in some Western countries. Employment costs in Romania still account for only 25% of labor costs in the West. Therefore, it is not surprising that since 2000, thanks to this cost advantage, new EMS companies have appeared more and more often in Eastern Europe.
Logistics and transport
By outsourcing EMS production to Europe instead of Asia, manufacturers can save significantly on transport costs with the exact production costs. Furthermore, because the product is much closer to the end recipient, its transport and distribution cost is minimized. Moreover, the construction of factories in Eastern Europe guarantees free trade in goods within the Schengen Area and duty-free access to European Union markets.
Central and Eastern Europe countries have a well-educated workforce, which enables them to compete not only with cheap labor. In these countries, specialists with better than average education rates in the field of science are employed. Moreover, the staff of these European countries is distinguished by a high pool of talents in technology, mathematics, and engineering. Thus, the East can provide highly qualified technical specialists in addition to regular employees.
Poland – a leading supplier in the Central European EMS market
Poland is characterized by well-educated engineering staff and the fact that employees working on production lines ensure excellent quality of production. Poland also has other advantages, such as legal stability, predictability, presence in the EU, and, above all, geographical location. As a result, many foreign investors treat Poland as a hub for the region and even the world. Moreover, from 1990 to 2019, the Polish economy developed the fastest among all Central and Eastern Europe countries. Thus, Poland is the only country in the region included in the developed markets, making it the leader of Central and Eastern Europe in the EMS industry and one of the largest contract electronics manufacturers among the Eastern countries.