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Aftermarket Services Gaining More Respect

(September 2010)

    For years, repair was the last and perhaps least item listed for many a full-service offering in the EMS industry. This aftermarket service satisfied customers who wanted their EMS provider to repair the assemblies it manufactured. But aftermarket repair for the most part remained an adjunct to manufacturing. Today is a different story. More and more providers are treating repair and other aftermarket services as a growth business in its own right rather than a service add-on. As a result, these companies are placing greater emphasis on aftermarket services (AMS).
    • Take Celestica. In early 2010, the company acquired an AMS firm, Invec Solutions. The deal gave Celestica proprietary software for reverse logistics and an AMS center in the UK (Jan., p. 7). Celestica is also backing its AMS business in other ways. The provider recently put an executive VP, John Boucher, in charge of its aftermarket services business. His previous position at Celestica was executive VP, Sales and Supply Chain Solutions. The company believes that his supply chain expertise matches up with the need for supply chain capabilities on the AMS side.
In addition, Celestica is investing in people, processes and tools for serving not only the OEM market but also new markets, such as carriers, that are called out on Celestica’s AMS roadmap. The roadmap also brings the company into another new market, retail, and Invec software will pave the way for that market entry.
    • AMS has taken a prominent role in a new organization going into effect next month at Elcoteq. The company will basically consist of two business segments, EMS and AMS. By putting AMS operations in their own segment, the company aims to establish stronger and more focused management for its AMS business. Elcoteq plans to expand both the geographical footprint and service offering of its AMS business. Currently, AMS represents about 10% of Elcoteq’s sales.
Under Elcoteq’s redefined strategy of providing a full scope of life cycle services, the company will place special emphasis on growing aftermarket services, supported by its engineering and fulfillment services. One of the company’s goals is to increase the relative weight of AMS customers. Elcoteq signaled its pursuit of AMS business in the first quarter of 2010 when it qualified to be an AMS supplier for Nokia devices (Feb., p. 8). Elcoteq’s life cycle services approach applies to both product and service companies, indicating that the company will not restrict its sales efforts to OEM markets.
    • With about $1.5 billion in revenue and 18,000 to 20,000 employees, Flextronics’ AMS business is the largest one in the EMS industry. That is, with the possible exception of behemoth Hon Hai, which of course has said nothing about its AMS operations. Flextronics’ AMS operations benefited greatly from Flextronics’ 2007 acquisition of Solectron, which had a large AMS organization of its own, perhaps the largest AMS business at that time. A May presentation by Flextronics showed that it expects its aftermarket services revenue to increase by 10% to 20% in its fiscal 2011 (ending March 2011) over fiscal 2010. Flextronics is not only focused on growing its AMS business, but also differentiating it.
    The company’s Retail Technical Services unit is used by Flextronics as an example of how its AMS offerings differ from others. According to the RTS website, the unit has 5,000 employees providing service in 1,100 retail stores. (In May, Flextronics reported 4,000 in-store employees.) Recently, Flextronics made a move that further differentiates its offerings within the RTS unit. The company launched Firedog, an RTS division specializing in technical installation and maintenance for home and office equipment (July, p. 7).
    • Jabil Circuit was among the first EMS companies, if not the first, to put its AMS organization on a separate footing. The provider’s Aftermarket Services Division employs about 12,000 people across 15 facilities. For fiscal 2010 ended Aug. 31, the division’s sales, which represented 6% of company revenue, increased 12% from a year earlier. Jabil pointed out that it did not rely on multiple acquisitions to grow its AMS business, but followed a strategy of building one facility at a time from scratch. The company reported that every one of its AMS facilities is adding business and people, albeit at different rates.
     Jabil is planning to expand its AMS suite of services. “When you execute well, customers ask you to do more and more and expand your service offering. And that’s what we’re experiencing here,” Hartmut Liebel, Jabil’s Aftermarket Services Division president, told MMI.
    • Large providers are not the only ones with an interest in AMS. In 2009, Sweden’s PartnerTech announced that it was planning to reinforce its logistics and after-sales offering to better serve its customers. The plan is paying off as many customers are seeking solutions for final assembly, distribution and service near their own customers. For example, Axis Communications, a provider of network cameras, chose PartnerTech to set up and run a distribution and service center for all Axis products intended for North and South America. What’s more, PartnerTech’s new plant in Myslowice, Poland, serves as a hub for rapid distribution throughout Europe, according to the company. In addition, PartnerTech has strengthened its customer service operations in the U.S., which include distribution for the U.S. market.

Why the interest in AMS?

    The appeal of aftermarket services is multidimensional. They offer EMS providers a large market of potential business beyond the traditional EMS space. Jabil estimates the size of the AMS market at about $200 billion to $210 billion. The company’s research indicates that about 20% to 30% of the market is outsourced, with significant variations among market segments. According to Jabil’s Hartmut Liebel, the mobile segment is about 80% to 95% outsourced at the high end of the spectrum, and the medical segment is about 2% to 5% contracted out at the low end. Not only is the AMS market large, but it offers outsourcing-driven growth, especially from the least penetrated segments. This is music to an EMS provider’s ears.
    Providers also like the financial metrics of AMS activities, which typically offer a favorable margin mix. Take Flextronics. Its AMS business generates operating margins in mid-single digits, which are greater than corporate average margins, Flextronics reported during its Investor and Analyst Day in May. The business generates more than 15% of the company’s free cash flow. Then there’s Jabil. For the quarter ended Aug. 31, Jabil’s AMS Division produced a non-GAAP operating margin of 8.2%, compared with 4.1% for the entire company.

    AMS business tends to be sticky, another characteristic that EMS providers look for. “It’s very difficult to switch providers. Clients make significant bets for multiple years,” said Liebel.
Landing an AMS order such as board repair job can also start a relationship with desirable customer, especially for a smaller provider that otherwise might have a tough time getting the customer’s attention. Once inside the customer’s organization, the provider is then in a position to seek production orders. Repair work “gives us a shot on production,” said Mike Thompson, CEO of I. Technical Services in Georgia (and an MMI adviser). He reported that 80% of ITS’s business started in the back end.
    Aftermarket services also complete an end-to-end offering at the back end, giving providers the ability to sell a life-cycle solution for a customer’s product. The life-cycle concept has been around a long time, and some OEMs have adopted it. But they are the exceptions. For the most part, EMS providers today do not have end-to-end responsibility. On the back end, the reason has to do with how outsourcing decisions are made within OEMs.
    Jabil’s customers offer an illustration. “The vast majority of Jabil’s customers, all players in the broader outsourced world, still make separate decisions as to who their manufacturing partner is and who their aftermarket outsourcing partner is,” said Liebel. He feels confident that with some exceptions the same is true for other AMS providers as well. Still, Jabil pointed out that some of its larger customers do take advantage of its end-to-end services.
    John Boucher, Celestica’s aforementioned executive VP, sees a convergence trend in OEM decision making, where COOs are increasingly taking ownership of AMS in addition to manufacturing. If you pull the organization chart of the top 10 OEMs, “you will find more and more [COOs] have responsibility of service operations than say three years ago,” he said.
    Another AMS trend involves the purchase of spare parts. Much of the business done by AMS providers, many of them small shops, is consignment-based with respect to spare parts. “To me, the aftermarket business in the electronics space is where the EMS business was some 10 to 15 years ago in terms of supply chain,” said Boucher. Just as the EMS business emerged when it converted from consignment to turnkey, the aftermarket business “is now going to more of an end-to-end turnkey [solution],” he said.
    The conversion to turnkey is one more incentive for EMS providers who are pursuing AMS as long as they can handle spare parts management.

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