HEC104

Volume 13
Issue 2
June 2015

Market Expansion at cms electronics
Case prepared by Professor Dietmar STERNAD 1

Michael Velmeden, managing director of cms electronics gmbh, 2 headquartered in Klagenfurt,
Austria, was just returning from a visit to China with a German customer in the automotive supplier
industry. The customer’s company had built a new facility in China for which it required the same
engineering and manufacturing services for electronic components as cms electronics had
previously supplied for its main production site in Europe.

The Austrian electronics company had no facility in Asia, however. Velmeden therefore
recommended that cms electronics manage the entire project for the customer, including the
engineering, but outsource manufacturing to a local service provider. The proposed model had
functioned well with another customer.

Velmeden and his customer visited two factories owned by the proposed subcontractor, one in
Shenzhen and the other north of Shanghai. The customer seemed impressed by the production
facilities but somewhat skeptical about the idea of having his electronic manufacturing services
(EMS) provider subcontract to a different service provider.

Although the trip seemed to go well, the customer later informed Velmeden that he was not
prepared to conduct business with cms electronics under such conditions: “He rejected the plan to
involve a third partner for the manufacturing end and said he could hire the external partner himself
and forego the engineering competency of cms electronics. The additional service provided by us
was simply too insignificant for him.”

If cms electronics had had its own local production facility, the customer would have been prepared
to collaborate immediately in the Chinese market based on his many years of positive experience
with cms electronics in Europe.

Velmeden faced a dilemma: for his mid-sized company, an investment in its own production
facilities represented too high a risk in a completely new market. On the other hand, he realized
that he might lose important customers if cms electronics was not able to offer the required services
at all its customers’ locations worldwide.

1 Dietmar Sternad is Professor of International Management at Carinthia University of Applied Sciences in Villach, Austria.
2 The company writes its name in lowercase letters only, as can be seen on its website at the following address: http://www.cms-
electronics.com/home.7.0.html.
© HEC Montréal 2015
All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited.
The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 00 2015 002 with the HEC Montréal Case Centre, 3000, chemin de
la Côte-Sainte-Catherine, Montréal (Québec) H3T 2A7 Canada.
This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera, ESIC Business & Marketing School from September 2016 to March 2017.

Market Expansion at cms electronics

Beginnings, Crisis, and Management Buy-Out
Since the 1960s, the Royal Philips group (Amsterdam) had maintained a components plant at its
Klagenfurt facility in which individual electronic components were produced and combined. In
1999, a section of that plant, responsible for manufacturing and assembling circuit boards (boards
for mounting and electrically connecting electronic components), was sold to the German industrial
company AIK as part of a change in Philips’ global corporate strategy.

In the following years, the explosive growth of the mobile phone industry triggered a boom in the
electronics industry. To meet this demand, the industry invested heavily in expanding its
manufacturing capacity. Since many companies did this simultaneously, overcapacity developed.
At the same time, production of mobile phones and consumer electronics shifted from Europe to
Asia. Between 2001 and 2003, these combined circumstances led to a major crisis in the European
electronics industry, with sales revenues falling by about 30 percent.

The crisis affected AIK-Electronics in Klagenfurt, forcing the company to file for bankruptcy. 1
Managing director Michael Velmeden, who was sent by the group’s German headquarters to
restructure operations in Klagenfurt, tried to develop a concept to save the company and protect
jobs. He explained:
Before the management buy-out, it was only a small department with expertise in assessing and
building electronics. As a former Philips factory, we came from the consumer goods and household
equipment business, but we knew that we had to leave that area due to the relocation of that industry
to Asia. So we looked into how we could transfer our expertise to other markets.

One possible target market was the automotive supplier industry, which was geographically close
and offered favourable growth prospects. However, it was a customer segment with high
expectations, which Velmeden described as follows:
The automotive industry is very demanding in terms of price/performance ratio, methods, and quality.
Furthermore, there is a high level of risk since there are many safety-relevant areas. At that time, we
did not have the confidence to take this on. We therefore tried to find an analogy to our household
electronics products and focused on body control applications – the areas in the car that are connected
to switches. As with household devices, cars have a lot of switches with hidden electronics that are not
located in safety-relevant areas such as brake assistants or airbags.

Since the electronics manufacturing facilities and a skilled workforce were available and an
attractive market had been identified, a management buy-out was arranged. Velmeden succeeded
in enrolling both his former boss (as financing partner) and significant elements of the management
team (including the heads of the production and the development & sales departments) in the new
business concept of becoming an independent electronic manufacturing services (EMS) company.
EMS companies such as cms electronics are specialized contract manufacturers in the electronics

1
Holley-Spiess (2002)

© HEC Montréal 2
This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera, ESIC Business & Marketing School from September 2016 to March 2017.

trying to persuade potential customers of our expertise. After the management buy-out. While in some contexts it is used to describe companies that supply complete components or subsystems for another company’s end products. Then we also had to find the right window of opportunity and have some luck. Our objective was to address only a few customers that had a core competency in the area of mechanics and a unique selling proposition in their market – with all the attendant risks. of which we were aware. labour is significantly cheaper in Hungary than in Austria. that figure had jumped to 30 . 1 In 2003. while Klagenfurt is the competency partner for automated processes. the management buy-out resulted in the creation of cms electronics gmbh. On the other hand. As a result. For Velmeden. 3 The company was again operating in a growth market. We have a high degree of automation in Klagenfurt and qualified people in Hungary who can handle the more manual labour- driven processes. In the meantime. We persistently worked the market with a very small team. 2 Mallok (2008) 3 Verband der Automobilindustrie (Automotive Industries Association of Germany) (2011). Due to the on-going crisis. It ensured survival in a competitive environment in which cheap labour was increasingly superseded by comprehensive process competency (especially in the areas of integrated finished solutions and logistics) as a critical success factor. labour-intensive processes were outsourced to Hungarian subcontractors. the company did not immediately achieve its financial goals (generating sales of €8.40 percent twenty years later. in the electronics industry OEM refers to a company that offers the branded end product. 2 but Velmeden systematically pursued his strategy: At that time there were many EMS companies around. but extensive use of existing infrastructure and minimized sales risk on the other. Market Expansion at cms electronics industry used as outsourcing partners by original equipment manufacturers (OEMs). depending on the industry. with cms electronics retaining 51 percent of the company’s shares. we have built a complementary structure. which allows us to make better offers than our competitors. and that was reflected in steady increases in sales (see Exhibit 1 for revenue growth and Exhibit 2 for major milestones in the company’s history). Joint Venture in Hungary During the Philips period. this alliance was beneficial for the following reasons: On the one hand. a joint venture was formed with an existing Hungarian partner. The newly formed company acquired and continued the activities of the business segment owned first by Philips and then by AIK for components and systems production. there is competency in hand soldering and wave soldering. this meant a high level of dependence on the one hand. We thus need just one specialist to control four 1 The term OEM is used in several different ways. we have a combination of both. ESIC Business & Marketing School from September 2016 to March 2017. © HEC Montréal 3 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. companies that sell end products under their own brand name. While electronics’ share of value added to automobiles was about 16 percent in the early 1990s. This means that we can be significantly more efficient in supporting process technologies such as process setup or maintenance. .8 million in the first year). For the partner. electronics continued to make rapid strides in the automotive industry. In Hungary.

Both production locations in Austria and Hungary were also certified according to various quality. The Klagenfurt plant (see Exhibit 4 for the organizational structure) made use of various highly automated production lines and robot-based manufacturing machines for the assembly. i. and environmental management standards. the use of testing procedures for quality control (“design for test”). In all processes. and conformal coating were also offered. Market Expansion at cms electronics wave soldering machines. Since cms electronics had only a small development department.g. transport. Additional production processes such as soldering (primarily at the Fonyod location). Quality Control. mounting. purchasing was a key activity for companies in this industry. In addition to the NPI process.. cms electronics also offered product development support. Purchasing and Supply Chain Management Since material costs could account for up to 80 percent of sales revenues of EMS companies. For legal reasons. and keeping costs as low as possible (“design for cost”). cms electronics continued to conclude internal subcontracting agreements with the Hungarian subsidiary (see Exhibit 3 for the corporate structure of the cms electronics group). As part of its “one-stop shop” philosophy. the complete development of electronics for specific applications using state-of-the-art technology. i. for adjusting conventional machines to specific processes. with the plant in the Hungarian town of Fonyod responsible for specific production steps. heating controls or LED lighting systems). cms electronics was also able to handle materials management for its customers.. we achieve greater economies of scale for support processes. The two locations in Austria and Hungary were connected as one integrated manufacturing facility.. . This included finding the most efficient solutions for the layout. and logistics processes required for the manufacture and just-in-time delivery of electronic components. this included serial production (“design for manufacturing”). and testing of electronic components and devices. reproducible quality requiring only a small number of employees (thus also optimizing costs). As a result.e. cms electronics differentiated between © HEC Montréal 4 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. Production. in which an existing product is optimized for manufacturing. some customers were also interested in new product development. to keep track of cross-border transactions between the two separate legal entities. In a process called NPI (new product introduction). ESIC Business & Marketing School from September 2016 to March 2017. The self-developed automated solutions for components manufacturing were seen as a major core competency that guaranteed consistent. the design of an electronic product was optimized with a customer. and for materials used.e. cms electronics’ main business was the contract manufacturing of electronic components and systems. security. storage. all purchasing. which are really expensive. cms electronics pursued a zero defects strategy supported by the use of quality management systems. pin insertion. and Product Development As in a typical EMS company. it collaborated with external partners experienced in developing electronics for specific applications (e.

“It’s difficult to evaluate the quality of suppliers from a distance. while the buyer is simply responsible for unloading them). Previously. significantly higher than the usual 1. import customs clearance. This Asian presence enabled the company to achieve price advantages due in part to the fact that global companies offered certain product groups (e. facilitating the fast and clearly structured selection of best offers. America. electronic data exchange was gradually set up between the ERP systems of cms electronics and respective partners. purchases were made “Delivered Duty Paid (DDP) Klagenfurt” (an export contract clause under which the seller is responsible for delivering goods to the stipulated destination and must pay all costs associated with transport.” After the necessary infrastructure had been built in Hong Kong. unloading. and further transport to the final point of destination). Individual orders could thus be placed quickly and immediately confirmed by management through a pre-established approval process. Quendler and his Asian colleague visited potential suppliers in Asia and. import duties. In addition. import taxes. insurance.” Quendler explained. At the Hong Kong office. selected the most suitable ones. “We decided in favour of Hong Kong because the people there are well educated and understand international business – especially compared to [mainland] China. depending on the urgency. Under the new arrangement. semiconductors) at different price levels in Europe. a product catalogue with annually negotiated prices was integrated in a supplier database. Certain suppliers were also unable to export directly to Europe because of territorial protection issues. For larger suppliers. and Asia. © HEC Montréal 5 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. all Asian suppliers delivered “Free On Board (FOB) Hong Kong” (FOB means that the seller is responsible for transporting the goods to the specified port and loading them onto the vessel while the buyer pays the cost of sea transport. after doing quality checks. Markus Quendler. The materials were bundled at an external logistics warehouse and sent to Europe by sea or air freight. there is greater company loyalty– employees don’t change jobs as quickly if they can get five more euros somewhere else – as is the case in China. Purchasing was also optimized with an award-winning electronic supplier management system. . Individual projects were tendered among potential suppliers via an Internet portal..g.5-2 percent in Europe). who also spent much of his time in Asia. ESIC Business & Marketing School from September 2016 to March 2017. Furthermore. This arrangement was relatively expensive because suppliers imposed high surcharges to create a safety margin on transport costs due to fluctuating transport prices (the cost of transporting electronic components to Europe accounted for roughly 8-10 percent of the total costs. and taxes. a local employee served as the Asia Pacific purchasing manager to support the company’s purchasing manager. Hong Kong also established itself as a logistics hub. Since the largest suppliers of electronic components were located in Asia. and a local office is also important for building trust. cms electronics opened a trading office in Hong Kong in 2012. which had been opened within a week. Market Expansion at cms electronics operative purchasing (order processing and procurement) and strategic purchasing (supplier management and price negotiation).

The company managed to compensate for decreased sales in energy systems thanks to positive developments in other customer segments: “with a little bit of luck. I don’t believe. this figure would have been about 25 percent. The threat is always there. 2 At the turn of the century. If they wanted to. this rarely happens because it’s not that easy to change suppliers due to complex product-specific production processes and special tools. The company saw this as the first step to offering a broader range of local services to German customers. Since no materials were involved (customers required pure manufacturing services without sourcing or supply chain management services). that a customer would do that if it felt it was well served. the energy systems (then known as “renewable energies”) sector accounted for significantly more than 10 percent of cms electronics’ sales revenues. it concentrated on smaller units in the premium segment of the automotive industry (with usual batch sizes between 500 and 50. “We must offer system-solution competency and added value.” Many customers demanded complete transparency in the offer. cms electronics established a sales office in Kassel. the solar industry was a booming market from which cms electronics wished to profit. Since cms electronics was not competitive in areas involving large volumes due to its mid-sized structure.com (2014) © HEC Montréal 6 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. however.” as Velmeden noted (see Exhibits 6 and 7 for the company’s financial situation in 2011 and 2012). industry. Porsche. At the height of the boom. if materials were included. possibly at a lower price. Due to reductions in subsidies and massive competition from Asia.000 units). Mercedes. however. there was a constantly growing share of electronics. To win tenders. the European solar industry tumbled into a severe crisis in 2012. primarily Germany. However. which also plays a role. The most important customer group was automotive suppliers that produced components or systems for the automobile industry. and medical technology (see Exhibit 5). . because of extreme price competition. Market Expansion at cms electronics Customer Segments and Sales Strategy cms electronics operated in four different market segments: automotive.” said Velmeden. even without materials. energy systems. ESIC Business & Marketing School from September 2016 to March 2017. Ferrari. Most of cms electronics’ large customers were located in Europe. It’s a constant sword of Damocles. and Rolls Royce. 1 In this segment. 1 cms electronics (2014) 2 assembleon. they could then implement the “open-book” calculation of one provider with a competitor. an EMS company generally had to beat up to ten competitors by making an attractive offer combining low prices with high flexibility and quality: “Customers look for more than just the lowest price. particularly in the area of new product development. To get closer to its German customers. BMW. this sector had different determining factors than traditional automotive or industry sectors. The company’s electronics were found in car makes such as Audi. The disadvantage in our business is that added value becomes a public good after we have created it – the customer can then implement it with another partner. leading to a massive decrease in this customer segment for cms electronics. and fluctuations in the economy had less impact than in the mass market.

The business environment had changed considerably since the decision to enter the Turkish market. intra-Asian deliveries were facilitated by the ACFTA free trade agreement between China and the ASEAN countries. however. That is the fate of small players: Will it really pay to go to China if we still lose our biggest customers because we can’t cover other regions in which they do business?” The Hong Kong trading office was also supposed to serve and support customers in the Asia- Pacific region outside China (partly because it was much easier for Hong Kong Chinese to travel than it was for residents of mainland China). This development. . however. Of course. it was a way to enter the market with minimal risk. a second sales and engineering office was opened in the Chinese city of Shenzhen. we must go where they go. although they don’t meet our customers’ quality criteria and 1 Kade (2014) 2 ACFTA = ASEAN-China Free Trade Area. where the company saw opportunities in the automotive sector. the branch office did no business. Exports from China to Europe were less profitable due to strict Chinese rules and high transport costs. the automotive industry was forced to produce locally due to restrictive import and export rules and the legally required minimum shares of local production. and developed and produced the measuring equipment while subcontracting the manufacturing services to a local competitor. However. A local engineer was hired to work in that office. We were able to carry out our first project. we would no longer be able to keep up. “If they should also go to the U. there are also similar providers in China. Market Expansion at cms electronics In 2012. 1 In addition. They require progress reports and want to know exactly what steps we are taking. which focused primarily on supporting existing European customers that were doing business in China. cms electronics also established a sales office in Turkey. However. For us. transferred the product. customers still doubted that a small supplier could successfully move into China. although it was not a major one: We handled all of the engineering. Velmeden explained: The customers reacted positively to this move. after jumping some bureaucratic hoops. Many automotive suppliers and their subcontractors had relocated to China to supply the large factories of major European car manufacturers. “Since we don’t want to lose our customers. or Mexico. making the purchase of products from Eurozone countries unattractive.” explained Velmeden. in turn. Driven by increasing demand in China. In its first two years of operation. ESIC Business & Marketing School from September 2016 to March 2017. In 2013. forced cms electronics to offer its own services there. “Follow-the-Customer” to Asia The massive migration of end-product manufacturers to Asia also forced many of cms electronics’ direct customers to follow their own customers there (see Exhibits 8 and 9 on global developments for electrical and electronic equipment). the Turkish lira was down 25% in the spring of 2014 compared to the previous year. This arrangement was still profitable for our partner because he did not have to deal with the customer. Government decisions made in Ankara – particularly restrictions on freedom of speech – had been watched closely in EU countries. ASEAN = Association of Southeast Asian Nations © HEC Montréal 7 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.S. 2 The initial results were encouraging.

4% in 2012. Hewlett-Packard. original equipment manufacturers (OEMs) in the electronics industry began to outsource their production of electronic components and systems to contract manufacturers. ESIC Business & Marketing School from September 2016 to March 2017. low mix: HVLM). there were also smaller EMS companies offering services in niche markets as outsourcing partners in an industry characterized by medium-sized enterprises. I always admit openly and honestly that we are small. EMS companies specialized in optimizing purchasing and manufacturing processes. Dell. In addition to traditional manufacturing services.6%). The subsequent wave of consolidation in the EMS industry resulted in the emergence of major global corporations such as Hon Hai/Foxconn (a supplier to Apple. 3 These “big players” in the EMS industry. but also because it was viewed as an industry trend that could not be ignored. More and more OEMs sold their manufacturing facilities. Market Expansion at cms electronics requirements. Characteristics of the EMS Industry At the end of the 1970s. We must remain realistic. and consumer electronics. Apple. They were now able to replace fixed costs with variable costs. .com (2014) 3 Flextronics (2013) © HEC Montréal 8 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. the EMS concept prevailed worldwide. generated a return on sales of 26. So-called electronic manufacturing services (EMS) companies bundled production capacities and component purchasing volumes for OEMs across various industries. they could also generate significantly higher margins than in manufacturing (while EMS industry leader Foxconn generated a return on sales of just 2. 1 Worstall (2012). Fortune. economies of scale effects and higher capacity utilization were achieved in the production of electronic components. In any case. with factories around the world. These services ranged from development and design support for electronic components to the handling of materials management and logistics (see Exhibit 10 for an overview of the different value-added areas of the EMS industry). 1 Due to the clear efficiency and flexibility advantages. smaller EMS companies such as cms electronics were characterized by greater flexibility and the ability to manufacture customized small-scale batches (high mix. EMS companies also began to offer an entire spectrum of additional services to meet market demand. Besides the two global market leaders. Most of them also had production facilities in Europe. Closer to the end customer. and simultaneously concentrate on their core competencies in the end products business. OEMs were thus freed of manufacturing and storage responsibilities and problems connected with fluctuations in capacity utilization. personal computers (including tablets).com (2014) 2 Fortune. its largest OEM customer. there were also a handful of other companies in Asia and North America that dominated the global market. While the global players manufactured fewer products in large production quantities (high volume. it generated sales of over US$132 billion in 2012) 2 and Flextronics (over US$23 billion in sales in fiscal 2012- 13). Microsoft and Sony. low volume: HMLV). especially in the 1990s and 2000s. In Europe. particularly Central and Eastern Europe. As a result. purchase electronics more cheaply. primarily in the large markets of mobile phones. handled the entire production of complete product lines for their customers.

with forecast annual growth rates of 4 percent for global car production in 2013-2018 (see also Exhibit 11). 1 Current Developments in the EMS Industry The 2008-09 global economic crisis also had a strong impact on EMS companies. leading to a substantial reduction in “time to market. thereby creating greater competition for the mid-sized EMS companies operating in that segment.. safety systems. the ODM model made it possible to buy finished product designs. Many contract manufacturers had to accept double-digit declines in sales. short-time work was introduced in many companies. this often led to a loss of competitive advantage in terms of uniqueness and innovation. original design manufacturing (ODM) emerged as an alternative business model. 7 If this were the case. 4 There were also positive prospects in the automotive industry. The industry recovered slowly from the crisis and returned to a growth trajectory. 5 In addition. although great potential was still seen in the development of some target markets (e. ODMs also developed and manufactured end products on a contract basis for brand companies. albeit with a stronger focus on design and engineering competency. ESIC Business & Marketing School from September 2016 to March 2017. industry experts assumed that the automotive electronics market would grow faster than car sales due to the increased use of sensors. Globally operating brands such as Apple and Samsung produced such large quantities of devices that they were already wondering whether the significant cost advantages offered by global EMS companies as outsourcing partners (through specialization and aggregation of production capacities) were actually still effective. 3 For the regional European market. ZVEI (2014: 45) 7 EETimes (2012) 8 EETimes (2012) © HEC Montréal 9 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. For OEM companies. CBA (2013) 4 evertiq (2014) 5 ZVEI (2014: 35) 6 ZVEI (2012: 24). although with significantly lower rates than in the past.” However.g. the EMS industry had to prepare for short-term changes in its customer structure. there was a danger that the major EMS players in the consumer electronics sector would also switch to industrial markets. 8 As demonstrated by the rapid collapse of the solar industry. or whether the very small margins generated by contract manufacturers would be viewed as potential additional savings by OEM companies. Customers could launch products under their own brand without building their own production facilities. the industry still faced significant challenges such as a raging price war and low profit margins. slightly negative growth rates were forecast for 2014. . Market Expansion at cms electronics Alongside EMS providers. 2 In Austria. medical electronics and the aerospace industry).com (2012). 6 However. and new electric and hybrid drive systems. Industry experts recommended that EMS providers 1 CBA (2013) 2 Andreae and Mallok (2010) 3 EETimes.

3 Within China. ESIC Business & Marketing School from September 2016 to March 2017.com (2012) 3 Keith (2013) 4 Ibid. as occurred.” 2 said Michael Pollinger. and niche markets and limit their share of individual customers as a percentage of total sales. 4 In its 2011-2015 Five-Year Plan. 6 Mike McNamara. “Future developments also depend on end markets. since higher transport costs. the Chinese government aimed to improve innovation levels in the electronics industry and make a leap toward the higher end of the value chain. however that: “[i]t might be a little more expensive to produce in China for export. The swamping of the European market with Asian products. we will no longer have the same overall growth. When ordering from EMS companies. (2013) 5 CBIChina (2014) 6 WSJ (2012) 7 WSJ (2012) © HEC Montréal 10 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. disadvantages in terms of flexibility.” Even in saturated markets. But the Chinese have also made rapid progress in areas such as mechanical engineering. and lack of local engineering expertise could not be completely offset by the lower labour costs of Asian EMS providers (which were significantly below 10 percent of sales. in Europe. the industry was strongly concentrated in the regions surrounding Shanghai and Shenzhen. The markets here are saturated. noted. production manager at cms electronics. We have to accept that. “The question is how many markets will relocate to Asia. CEO of Flextronics. however. growth. . but it also means an expanding consumer base. leading to uncertainties regarding materials supply and requiring greater flexibility in all areas. then it may make more sense to produce only there than to split up operations in different locations” 7 1 Andreae and Mallok (2010) 2 assembleon. there is a trend toward greater manufacturing flexibility: higher product diversity with smaller batch sizes. In recent years. for example. companies must be prepared for change.” said Velmeden. was not feared at the time. too. In the electronics industry. labour costs had been rising steadily. 5 China was traditionally seen as a low labour cost country. customers expected shorter lead times and the fastest possible delivery. whereas in Europe – particularly in the HMLV area – it was common for HR costs to account for 20 percent or more of sales ). in the photovoltaic industry. “In Europe. the average hourly wage had increased from US$0. I think that many industries will remain in Europe. Market Expansion at cms electronics reduce their dependency and minimize their risk through a mixture of core. EMS Industry Trends in China In 2012. 1 Another trend was the on-going shift of the electronics industry’s focus to Asia in terms of both production and demand. China accounted for more than 50 percent of the worldwide production value of EMS companies.50 in 2012.60 in 2000 to US$2. So if you’re selling in China.

2 One of the focal industries in China’s 2011-2015 Five-Year Plan was that of energy-efficient cars. Industry experts also reported improving productivity levels. was not convinced this strategy would work: Offering design and development services is important because it gives us the opportunity to win customers and manufacture products. Many industry players believed it would be possible to achieve greater added value. Market Expansion at cms electronics In addition to a growing consumer market in China.gov (2014) © HEC Montréal 11 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. many EMS companies of all sizes tried to offer customers more comprehensive services. these related to intellectual property protection. there are no longer any development expenses. but rather economies of scale. lack of transparency. The customer demands it. and comfort systems on the rise. 4 With intelligent safety. car electronics were seen as one of the industry’s main growth sectors. especially in China. a further advantage of manufacturing electronics in China’s coastal region was also low logistics costs due to the high concentration of suppliers in the area. If singular designs are sold. 3 Although a slowdown in car sales was predicted. double- digit annual growth rates were still forecast until 2015. Real added value can only be generated if you offer unique designs that can be transferred to various solutions. 5 Despite the opportunities offered by the Chinese market. electronic control (including energy efficiency). Velmeden. from development and engineering to repair. 6 New Challenges Due to increased demand.96 percent between 2007 and 2012. . You receive the payback through manufacturing. However. 1 Industry observers also noted that the big players in the Chinese EMS industry. for example. the added value that lies in development is overvalued in my opinion. as local companies profited from the ever-increasing experience base in the Chinese electronics clusters. Many OEM companies were already so used to optimized EMS costs that their willingness to pay more for additional competencies and services (which they now expected from their suppliers) was 1 Keith (2013) 2 Ibid 3 Deloitte (2011) 4 Ibid 5 Ibid 6 export. information. international companies still voiced concerns about doing business in China. had also begun supplying small and medium- sized enterprises after the global economic crisis in 2008. but does not want to pay for it. you have no multiplier effect and are selling a service. however. In that case. China’s auto parts and accessory market experienced a compound annual growth rate of 29. where electronics’ share of the total value of cars was still considerably below the global average. not a product. ESIC Business & Marketing School from September 2016 to March 2017. and high levels of protectionism and bureaucracy – with regard to getting official approvals. which had traditionally concentrated on high-volume business.

in the design and development area). translated by the author. Velmeden was convinced that EMS companies needed a minimum size to ensure their long-term survival: Customers demand both traditional manufacturing services and an increasingly broad spectrum of other services. Velmeden was aware. . while we must simultaneously offer more competency – which can only be achieved through growth. In his major work. he wrote. That is one of the reasons we want to establish ourselves among the top twenty in Europe. customers wanted to have local contacts and services. Many European companies in the industry had already embarked on a growth course. 1 This trend could lead not only to even smaller margins but also to increased liability risks for EMS companies since there were warranties and producer liabilities connected with the new services (e. we should be able to achieve additional economies of scale and. To realize his company’s growth strategy.. ESIC Business & Marketing School from September 2016 to March 2017. such as liability insurance.” 2 2015-03-27 1 CBA (2013) 2 Laotse (2005: 86). however. However. Velmeden had to decide whether and how cms electronics should take another major step in China. Since many European customers did business in China. Tao Te Ching. Market Expansion at cms electronics low. I believe that it is not a linear curve. The greatest challenge we face is offering manufacturing services to our customers in China and bringing them to the level of basic capacity utilization relatively quickly without overexposing ourselves. The lack of willingness to pay for these services means that we EMS companies lose added value. Deliveries from Europe were slower and more expensive. “He who shows courage without daring lives on. trying to achieve a critical size through mergers and acquisitions. © HEC Montréal 12 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. we can’t finance a factory with a two-year lead time. it was particularly important for him to bind existing customers to cms electronics. Perhaps the Chinese philosopher Lao Tse could offer some guidance. If we have sales of around 100 million euros. above all.g. but rather that there are level effects here. become more visible in the market and meet all the necessary secondary conditions that are expected by customers. Moreover. that company mergers came with many risks. but must proceed gradually. We can’t immediately allocate a large amount of money for that purpose. he thought that cms electronics should also be able to offer its full range of services there. Velmeden did not want to take too many risks: As a small company. which our larger competitors can easily do.

6 20.0 10. Market Expansion at cms electronics Exhibit 1 2009-2013 revenue growth of cms electronics group (including 2014 forecast) in million euros In million EUR 70.0 0. .0 41.0 59.0 54.5 40.0 42.0 64.0 26.0 30.8 60.4 50.0 2009 2010 2011 2012 2013 2014 FC Source: cms electronics (2014) © HEC Montréal 13 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. ESIC Business & Marketing School from September 2016 to March 2017.

2014 © HEC Montréal 14 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. accessed April 29. Germany • Investment in three additional SMT production lines in Klagenfurt and two new soldering lines in Fonyod • cms electronics wins BEST EMS Award in the categories of “Flexibility” and “Product Quality” and takes 2nd place in the category of “On-time Delivery” 2011 • Implementation of an e-purchasing tool for the optimization of supply processes • cms electronics wins the E2MS Award in the “Corporate Management” category and the Austrian Supply Excellence Award for “e-Business Excellence in the Supply Chain” 2012 • Opening of sales office in Çorlu.html/.0. China • Expansion of production site in Klagenfurt by 700 m2 • cms electronics wins Carinthian Export Prize 2012. and 2nd place in the “Flexibility” category • cms electronics receives the Quality Award Austria for 20 years of ISO 9001 Certification 2013 • Opening of engineering and sales office in Shenzhen.) with a former manufacturing partner in Fonyod (Hungary) under the industrial leadership of cms electronics 2006 • cms electronics wins the Carinthian Export Prize 2006 2007 • 900 m2 expansion of the production facility in Klagenfurt to include a new hall 2008 • Investment in two new production lines for the insertion of surface-mounted components (surface mount technology. Germany 2002 • Bankruptcy of the Klagenfurt subsidiary of AIK Electronics 2003 • Management buy-out and founding of cms electronics.com/Milestones. robot-based production line • cms electronics wins the BEST EMS Award in the category of “Flexibility” and 2nd place in the category of “Product Quality” 2010 • Opening of sales office in Kassel. Turkey • Opening of trading office in Hong Kong. SMT) 2009 • Investment in a fully automated. . Market Expansion at cms electronics Exhibit 2 Milestones in corporate development of cms electronics gmbh Year Milestones 1962 • Opening of the Klagenfurt production site of the Dutch Royal Philips group 1979 • Opening of the circuit board and component plant at the Philips site in Klagenfurt 1999 • Philips sells the circuit board manufacturing and assembly plant to the AIK Group from Kassel. China • Construction of a 400 m2 warehouse in Hungary • cms electronics wins BEST EMS Award in the “Development Expertise” category and E2MS Award in the “Business Processes” category Source: based on http://www. BEST EMS Award in the “On-time Delivery” category.461.cms-electronics. ESIC Business & Marketing School from September 2016 to March 2017. acquisition of components manufacturing business segment 2005 • Joint venture (cms manufacturing Kft.

. logistics. ESIC Business & Marketing School from September 2016 to March 2017. testing systems. component and devices assembly. testing.200 m2 manufacturing space in the German market Development. automation 51% cms electronics cms electronics kft Fonyod/Hungary sales office türkiye Çorlu/Turkey (since 2012) 135 employees Business development 3. purchasing. materials handling. end product assembly. prototypes. component and devices assembly. end product assembly cms electronics asia pacific ltd Hongkong/China (since 2012) Far East trading Customer service in the Asian market Purchasing activities cms electronics china trading ltd Shenzhen/China (since 2013) Customer service in the Chinese market New Product Introduction (NPI) and engineering Source: cms electronics (2014) © HEC Montréal 15 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.000 m2 manufacturing space in the Turkish market Materials handling. prototypes. Market Expansion at cms electronics Exhibit 3 Corporate structure of cms electronics group cms electronics gmbh Klagenfurt/Austria MANUFACTURING SALES AND SITES TRADING OFFICES cms electronics cms electronics gmbh Klagenfurt/Austria sales office Germany Kassel/Germany (since 2010) 136 employees Business development 4.

Quendler O. Pasterk M. Müller Supply Chain IT Development Management G. Market Expansion at cms electronics Exhibit 4 Organizational structure of cms electronics gmbh M. Stöckinger H. Engineering Key Account Management J.Skerjanz T. Velmeden S. Rom E. Skjellet PRODUCT CREATION PRODUCT REALISATION E. Velmeden S. Pollinger Sales & Marketing NPI / Development Business Services Production Services Production / Technology U. Lippautz Subcontract Material Handling Company management Environmental & Work Safety Extended company management Source: cms electronics (2014) © HEC Montréal 16 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. Forst S. Singer H. Bertoncelj Head of Purchasing Development Ind. . Stöckinger H. Skjellet Business W. Rom Assistant Quality Management T. ESIC Business & Marketing School from September 2016 to March 2017. Toth Production Fonyod M. Velmeden General Manager cms manufacturing J. Engineering Quality Assurance Controlling / HR A. Höferer H. Pasterk Finance & Marketing Proj. Skjellet M. Stanta M.

inverters. Market Expansion at cms electronics Exhibit 5 Market segments of cms electronics Market segment Share of Applications End products (examples) total revenues (2013) Automotive 72% Actuators/sensors Lighting systems. cooling devices. control Actuators/sensors systems for ventilation and heating systems Regulators/controls / heat exchangers Medical technology 3% Power/power supply units Power supply units. blood analysis Regulators/controls equipment. sound systems. air volume control Industry 22% Power/power supply units Sensors. LED communication units Assembly Energy systems 3% Power/power supply units Power supply units. ESIC Business & Marketing School from September 2016 to March 2017. blinkers. Regulators/controls motor controls for radio transponders. steering Assembly control elements. . laser measuring. transmission control. electronic controls for medical Assembly equipment Source: taken from cms electronics (2014) with adaptations and additions © HEC Montréal 17 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. motor sensors. diesel preheating. Regulators/controls electrically operated windows. climate LED regulation. power supply. heating Actuators/sensors technology.

Depreciation -0.6 .9 -30.1 -0.4 42.Cost of goods sold / cost of external services used & changes in inventory -40.5 12.Other operating expenses -2.3 4.3 .7 -2.0 Other operating income 0.4 Net financial income/expenses -0.5 Operating revenue 13.0 Source: Austrian Commercial Register.5 . ESIC Business & Marketing School from September 2016 to March 2017. Market Expansion at cms electronics Exhibit 6 Profit and loss statement of cms electronics gmbh (structured as required by Austrian accounting standards. .7 -0.0 -5.4 . in million euros) 2012 2011 Revenues 54.3 0.HR expenses -6.1 Profit from ordinary activities (EBT) 4. Revenues: cms electronics (2014) © HEC Montréal 18 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.

2012 31.799 1. Market Expansion at cms electronics Exhibit 7 Balance sheet of cms electronics gmbh (structured as required by Austrian accounting standards.871 Other liabilities 612 598 Total liabilities 7.656 Accounts payable 2.267 Investment grants 0 30 Provisions/accruals 1.063 1.079 9.910 Financial assets 514 6 Fixed assets 2.080 Accounts receivable 6.035 Source: Austrian Commercial Register © HEC Montréal 19 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.751 4.864 4.710 6.613 Bank debt 4.000 500 Accumulated profits 3. .313 1. in thousand euros) 31.817 2.267 Own funds 4.12.2011 Long-term tangible and intangible assets 1.524 Cash/bank 513 364 Current assets 11. ESIC Business & Marketing School from September 2016 to March 2017.524 12.524 12.12.702 5.125 TOTAL EQUITY AND LIABILITIES 13.251 3.281 2.916 Inventory 3.035 Share capital 500 500 Untaxed reserves 1.968 Prepaid expenses 132 151 TOTAL ASSETS 13.

ESIC Business & Marketing School from September 2016 to March 2017. . Product group 85 Electrical. Market Expansion at cms electronics Exhibit 8 Largest exporters of electrical and electronic equipment (in billion euros) Exporting country 2009 2010 2011 2012 2013 1 China 216 293 320 379 423 2 Hong Kong 102 136 140 160 n/s 3 USA 90 114 114 126 125 4 Germany 81 101 107 108 107 5 Japan 77 99 93 98 81 6 South Korea 64 83 85 93 102 7 Singapore 63 89 86 92 93 8 Taiwan 54 78 80 85 n/s 9 Mexico 43 54 51 58 59 10 Malaysia 32 42 44 46 46 24 Austria 10 12 13 13 12 Source: trademap.org (2014). electronic equipment © HEC Montréal 20 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.

electronic equipment © HEC Montréal 21 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. ESIC Business & Marketing School from September 2016 to March 2017.org (2014). Product group 85 Electrical. Market Expansion at cms electronics Exhibit 9 Largest importers of electrical and electronic equipment (in billion euros) Importing country 2009 2010 2011 2012 2013 1 China 175 237 252 297 331 2 USA 156 198 203 230 229 3 Hong Kong 105 142 148 171 n/s 4 Germany 75 95 101 99 95 5 Japan 47 65 66 75 73 6 Singapore 47 65 63 70 71 7 Mexico 40 53 54 60 63 8 South Korea 38 47 50 52 54 9 United Kingdom 34 41 42 44 44 10 Taiwan 29 41 42 43 n/s 31 Austria 9 11 11 12 15 Source: trademap. .

Manual or automatic assembly. . Logistics concept Logistics & distribution . Market Expansion at cms electronics Exhibit 10 Value-added areas offered by EMS companies . Materials logistics . Delivery to end customers . Supply chain management Materials management . Development of products and components for electronic Development devices and systems . Manufacturing mounting. Circuit analysis Testing concept . Design for Manufacturing. Customized design of circuit boards and electronic devices Design . Customer service After sales service . ESIC Business & Marketing School from September 2016 to March 2017. Spare parts supply Source: Based on ZVEI (2008) © HEC Montréal 22 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. Labeling & packaging . Supplier selection and materials procurement . Testing processes . Design for Cost. Repairs . and testing electronic devices . Prototypes . Design for Test .

S.4 30 24.0 20.7 9. Market Expansion at cms electronics Exhibit 11 2013-2018 Regional automotive production forecast according to factory location (in million units per year) 50 47. . 35 © HEC Montréal 23 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera.5 2013 Million units/year 2018 40 34.0 10 0 America Europe Japan Asia Source: ZVEI (2014). ESIC Business & Marketing School from September 2016 to March 2017.7 20 9.2 25.4 20.

accessed 2 April 2014. 2014. HOLLEY-SPIESS. VERBAND DER AUTOMOBILINDUSTRIE (2011). EXPORT. “Wie sah das EMS-Jahr 2013 aus?”.und Elektronikindustrie e.COM (2012). “Five Emerging Trends Impacting Asian Manufacturing”. Beck. Hubertus and Claudia MALLOK (2010).export.COM (2012). CBA (2013). München. WORSTALL.DE (2014). Fachverband Electronic Components and Systems im ZVEI – Zentralverband Elektrotechnik. Foxconn: The importance of profit over turnover and the low value of manufacturing jobs”. accessed 8 April 2014. Ron (2013). ZVEI (2014). © HEC Montréal 24 This document is authorized for use only in MITB_Jes?s Centenera by Jes?s Centenera. ASSEMBLEON. Frankfurt am Main. Deloitte China. ESIC Business & Marketing School from September 2016 to March 2017. FORTUNE. ZVEI (2012). Claudia (2014). “Das bestgeeignete Maschinenkonzept”.de. V. http://www. accessed 17 April 2014. “Firmenprofil 2014”. accessed 24 April 2014. accessed April 17. Progress Report of the Application Group Automotive 2011/2012. October 13. IndustryWeek. EVERTIQ. accessed 25 April 2014. Market Expansion at cms electronics References ANDREAE. March 16. LAOTSE (2005). EETIMES.gov. .com. KADE. “Fortune Global 500”. TRADEMAP. Fortune. Published 24 April 2014. International Trade Center Trade Map. January. Published 16 September 2012. 2014. ZVEI (2008). beyond- outsourcing-post-2-10-global-trends-and-implications-for-oems. accessed 16 December 2014. www. http://www. WirtschaftsBlatt. “Wie sich EMS-Firmen krisenfest aufstellen”. 2014. Elektronik Praxis. Elektronik Praxis. Mikroelektronik – Trendanalyse bis 2018. accessed April 17. July 12.html. 2014. “AIK Electronics ist insolvent”. Services in EMS. “Doing Business in China”. accessed December 16. May 28. CBICHINA (2014). 2014.und Elektronikindustrie e. 2014. 2013. accessed 8 April 2014. 2014. DELOITTE (2011). accessed April 2. February 3.COM (2014). Tim (2012). Form 10-K Annual Report 2013. “Das mitdenkende Auto ist keine Zukunftsmusik mehr”.com/articles/SB10000872396390444318104577587191288101170. http://evertiq. MALLOK. accessed 17 April 2014. May 6.ORG (2014).com. Part I: Transforming growth pattern.und Elektronikindustrie e. 2014. FLEXTRONICS (2013). accessed April 17. “Österreichischer EMS-Anbieter hat Umsatz nach fünf Jahren verdreifacht”. “EMS industry at the crossroads?”. Fachverband Electronic Components and Systems im ZVEI – Zentralverband Elektrotechnik. September 23.H. July 19. C. Evelyn (2002). Frankfurt am Main. “Gauck zeigt Erdogan sein Missfallen – ohne Worte”. V. Fachverband Electronic Components and Systems im ZVEI – Zentralverband Elektrotechnik. “Apple vs. Claudia (2008). accessed April 1. Tao te king: Das Buch vom Sinn und Leben. Case study. For Mexico.welt. November 2.wsj. create a new scenario for scientific development. accessed March 25. Frankfurt am Main.de/politik/deutschland/article127227516/Gauck-zeigt-Erdogan-sein- Missfallen-ohne-Worte. WSJ (2012). Forbes. an Edge on China.GOV (2014). accessed 16 December 2014. accessed December 16. accessed 17 April 2014. October 9. “Beyond outsourcing post #2: 10 global trends and implications for OEMs”. Gaining Momentum: Recent trends in China’s Automobile Parts Market. CMS ELECTRONICS (2014). KEITH. Shanghai/Beijing. V.