Lack of core IP leaves EMS firms vulnerable to market shifts

ONE major manufacturing sector in Malaysia is electronics manufacturing services (EMS).

In this sector, local companies assemble parts to created end products, sometimes even producing the plastic and metal components.

The core intellectual property (IP) of the product belongs to the client for whom the product is being assembled.

The EMS sector has been on a roll in Malaysia, playing a significant part in the electrical and electronics industry, which in turn is a key contributor to the country’s gross domestic product.

However, cracks are starting to show.

Some listed EMS companies are struggling to improve their profits.

Two bellwether EMS players on Bursa Malaysia, VS Industry Bhd and SKP Resources Bhd, are the largest homegrown EMS providers in the country.

While still profitable, these companies have not shown consistent significant growth in their bottom line over the past few years.

Other EMS companies in the same boat include Aurelius Technologies Bhd, Globetronics Technology Bhd, Ge-Shen Corp Bhd, with some performing even worse.

In 2022, Dyson, a key customer of several EMS players in Malaysia, terminated its contract with ATA IMS Bhd following allegations of forced labour and poor working conditions.

Similarly, Nationgate Holdings Bhd, which assembles artificial intelligence (AI) servers for Nvidia and was a hot stock riding the AI wave, has been impacted by US regulations and the clampdown on the export of AI technologies worldwide.

Then there’s the curious case of Cape EMS Bhd, which experienced an unexpected decline in earnings soon after its listing, spooking investors and causing them to dump the stock.

The lesson here is that EMS companies will always be subject to competitive pressures, customer demands and regulatory changes.

This is largely because they don’t own the core IP of the products they assemble.