HEC104-PDF-EnG Case Study Market Expansion at Cms Electronics

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 customers 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.
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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 Montral Case Centre, 3000, chemin de
la Cte-Sainte-Catherine, Montral (Qubec) 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.
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 groups 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)
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industry used as outsourcing partners by original equipment manufacturers (OEMs), companies

that sell end products under their own brand name. 1
In 2003, the management buy-out resulted in the creation of cms electronics gmbh. 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.
Due to the on-going crisis, the company did not immediately achieve its financial goals (generating
sales of 8.8 million in the first year), 2 but Velmeden systematically pursued his strategy:
At that time there were many EMS companies around. We persistently worked the market with a very
small team, trying to persuade potential customers of our expertise. 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. Then we also had to find the
right window of opportunity and have some luck.
In the meantime, electronics continued to make rapid strides in the automotive industry. While
electronics share of value added to automobiles was about 16 percent in the early 1990s, that figure
had jumped to 30 - 40 percent twenty years later. 3 The company was again operating in a growth
market, and that was reflected in steady increases in sales (see Exhibit 1 for revenue growth and
Exhibit 2 for major milestones in the companys history).
Joint Venture in Hungary

During the Philips period, labour-intensive processes were outsourced to Hungarian
subcontractors. After the management buy-out, a joint venture was formed with an existing
Hungarian partner, with cms electronics retaining 51 percent of the companys shares. For the
partner, this meant a high level of dependence on the one hand, but extensive use of existing
infrastructure and minimized sales risk on the other. 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.
For Velmeden, this alliance was beneficial for the following reasons:
On the one hand, labour is significantly cheaper in Hungary than in Austria. We have a high degree of
automation in Klagenfurt and qualified people in Hungary who can handle the more manual labour-
driven processes. As a result, we have a combination of both, which allows us to make better offers
than our competitors. On the other hand, we have built a complementary structure. In Hungary, there
is competency in hand soldering and wave soldering, while Klagenfurt is the competency partner for
automated processes. This means that we can be significantly more efficient in supporting process
technologies such as process setup or maintenance. We thus need just one specialist to control four
1 The term OEM is used in several different ways, depending on the industry. While in some contexts it is used to describe
companies that supply complete components or subsystems for another companys end products, in the electronics industry OEM
refers to a company that offers the branded end product.
2 Mallok (2008)
3 Verband der Automobilindustrie (Automotive Industries Association of Germany) (2011).
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wave soldering machines. As a result, we achieve greater economies of scale for support processes,
which are really expensive.
The two locations in Austria and Hungary were connected as one integrated manufacturing facility,
with the plant in the Hungarian town of Fonyod responsible for specific production steps. For legal
reasons, to keep track of cross-border transactions between the two separate legal entities, cms
electronics continued to conclude internal subcontracting agreements with the Hungarian
subsidiary (see Exhibit 3 for the corporate structure of the cms electronics group).
Production, Quality Control, and Product Development

As in a typical EMS company, cms electronics main business was the contract manufacturing of
electronic components and systems. 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, mounting, and testing of electronic components and devices. Additional
production processes such as soldering (primarily at the Fonyod location), pin insertion, and
conformal coating were also offered. The self-developed automated solutions for components
manufacturing were seen as a major core competency that guaranteed consistent, reproducible
quality requiring only a small number of employees (thus also optimizing costs).
cms electronics was also able to handle materials management for its customers, i.e., all purchasing,
transport, storage, and logistics processes required for the manufacture and just-in-time delivery of
electronic components.
In all processes, cms electronics pursued a zero defects strategy supported by the use of quality
management systems. Both production locations in Austria and Hungary were also certified
according to various quality, security, and environmental management standards.
As part of its one-stop shop philosophy, cms electronics also offered product development
support. In a process called NPI (new product introduction), the design of an electronic product
was optimized with a customer; this included serial production (design for manufacturing), the
use of testing procedures for quality control (design for test), and keeping costs as low as possible
(design for cost). This included finding the most efficient solutions for the layout, for adjusting
conventional machines to specific processes, and for materials used.
In addition to the NPI process, in which an existing product is optimized for manufacturing, some
customers were also interested in new product development, i.e., the complete development of
electronics for specific applications using state-of-the-art technology. Since cms electronics had
only a small development department, it collaborated with external partners experienced in
developing electronics for specific applications (e.g., heating controls or LED lighting systems).
Purchasing and Supply Chain Management

Since material costs could account for up to 80 percent of sales revenues of EMS companies,
purchasing was a key activity for companies in this industry. cms electronics differentiated between
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operative purchasing (order processing and procurement) and strategic purchasing (supplier
management and price negotiation).
Since the largest suppliers of electronic components were located in Asia, cms electronics opened
a trading office in Hong Kong in 2012. This Asian presence enabled the company to achieve price
advantages due in part to the fact that global companies offered certain product groups (e.g.,
semiconductors) at different price levels in Europe, America, and Asia. Certain suppliers were also
unable to export directly to Europe because of territorial protection issues. At the Hong Kong
office, which had been opened within a week, a local employee served as the Asia Pacific
purchasing manager to support the companys purchasing manager, Markus Quendler, who also
spent much of his time in Asia.
Its difficult to evaluate the quality of suppliers from a distance, and a local office is also important
for building trust, Quendler explained. We decided in favour of Hong Kong because the people there
are well educated and understand international business especially compared to [mainland] China.
Furthermore, there is greater company loyalty employees dont change jobs as quickly if they can get
five more euros somewhere else as is the case in China.
After the necessary infrastructure had been built in Hong Kong, Quendler and his Asian colleague
visited potential suppliers in Asia and, after doing quality checks, selected the most suitable ones.
Hong Kong also established itself as a logistics hub. Previously, 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,
import duties, and taxes, while the buyer is simply responsible for unloading them). 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, significantly higher
than the usual 1.5-2 percent in Europe). Under the new arrangement, 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, insurance, unloading, import customs clearance, import taxes, and further transport to
the final point of destination). The materials were bundled at an external logistics warehouse and
sent to Europe by sea or air freight, depending on the urgency.
Purchasing was also optimized with an award-winning electronic supplier management system.
Individual projects were tendered among potential suppliers via an Internet portal, facilitating the
fast and clearly structured selection of best offers. In addition, a product catalogue with annually
negotiated prices was integrated in a supplier database. Individual orders could thus be placed
quickly and immediately confirmed by management through a pre-established approval process.
For larger suppliers, electronic data exchange was gradually set up between the ERP systems of
cms electronics and respective partners.
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Customer Segments and Sales Strategy

cms electronics operated in four different market segments: automotive, industry, energy systems,
and medical technology (see Exhibit 5).
The most important customer group was automotive suppliers that produced components or
systems for the automobile industry. Since cms electronics was not competitive in areas involving
large volumes due to its mid-sized structure, it concentrated on smaller units in the premium
segment of the automotive industry (with usual batch sizes between 500 and 50,000 units). The
companys electronics were found in car makes such as Audi, BMW, Mercedes, Porsche, Ferrari,
and Rolls Royce. 1 In this segment, there was a constantly growing share of electronics, and
fluctuations in the economy had less impact than in the mass market. 2
At the turn of the century, the solar industry was a booming market from which cms electronics
wished to profit. Since no materials were involved (customers required pure manufacturing
services without sourcing or supply chain management services), this sector had different
determining factors than traditional automotive or industry sectors. At the height of the boom, even
without materials, the energy systems (then known as renewable energies) sector accounted for
significantly more than 10 percent of cms electronics sales revenues; if materials were included,
this figure would have been about 25 percent. Due to reductions in subsidies and massive
competition from Asia, the European solar industry tumbled into a severe crisis in 2012, leading to
a massive decrease in this customer segment for cms electronics. 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, which also plays a role, as Velmeden noted (see
Exhibits 6 and 7 for the companys financial situation in 2011 and 2012).
To win tenders, 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, said Velmeden. We must offer system-solution
competency and added value, particularly in the area of new product development. 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, possibly at a lower price. However, this rarely happens because
its not that easy to change suppliers due to complex product-specific production processes and special
tools. The threat is always there, however, because of extreme price competition. Its a constant sword
of Damocles. I dont believe, however, that a customer would do that if it felt it was well served.
Many customers demanded complete transparency in the offer. If they wanted to, they could then
implement the open-book calculation of one provider with a competitor.
Most of cms electronics large customers were located in Europe, primarily Germany. To get closer
to its German customers, cms electronics established a sales office in Kassel. The company saw
this as the first step to offering a broader range of local services to German customers.
1 cms electronics (2014)

2 assembleon.com (2014)
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In 2012, cms electronics also established a sales office in Turkey, where the company saw
opportunities in the automotive sector. In its first two years of operation, however, the branch office
did no business. The business environment had changed considerably since the decision to enter
the Turkish market. Government decisions made in Ankara particularly restrictions on freedom
of speech had been watched closely in EU countries. 1 In addition, the Turkish lira was down 25%
in the spring of 2014 compared to the previous year, making the purchase of products from
Eurozone countries unattractive.
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). Many automotive suppliers and their subcontractors had
relocated to China to supply the large factories of major European car manufacturers. Driven by
increasing demand in China, the automotive industry was forced to produce locally due to
restrictive import and export rules and the legally required minimum shares of local production.
This development, in turn, forced cms electronics to offer its own services there.
Since we dont want to lose our customers, we must go where they go, explained Velmeden. If they
should also go to the U.S. or Mexico, however, we would no longer be able to keep up. That is the fate
of small players: Will it really pay to go to China if we still lose our biggest customers because we
cant 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). In 2013, after jumping some bureaucratic hoops, a
second sales and engineering office was opened in the Chinese city of Shenzhen. A local engineer
was hired to work in that office, which focused primarily on supporting existing European
customers that were doing business in China. Exports from China to Europe were less profitable
due to strict Chinese rules and high transport costs. However, intra-Asian deliveries were facilitated
by the ACFTA free trade agreement between China and the ASEAN countries. 2
The initial results were encouraging. Velmeden explained:

The customers reacted positively to this move. We were able to carry out our first project, although it
was not a major one: We handled all of the engineering, transferred the product, and developed and
produced the measuring equipment while subcontracting the manufacturing services to a local
competitor. This arrangement was still profitable for our partner because he did not have to deal with
the customer. For us, it was a way to enter the market with minimal risk.
However, customers still doubted that a small supplier could successfully move into China.
They require progress reports and want to know exactly what steps we are taking. Of course, there are
also similar providers in China, although they dont meet our customers quality criteria and
1 Kade (2014)
2 ACFTA = ASEAN-China Free Trade Area; ASEAN = Association of Southeast Asian Nations
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requirements. In any case, I always admit openly and honestly that we are small. We must remain
realistic.
Characteristics of the EMS Industry

At the end of the 1970s, original equipment manufacturers (OEMs) in the electronics industry
began to outsource their production of electronic components and systems to contract
manufacturers. So-called electronic manufacturing services (EMS) companies bundled production
capacities and component purchasing volumes for OEMs across various industries. EMS
companies specialized in optimizing purchasing and manufacturing processes. As a result,
economies of scale effects and higher capacity utilization were achieved in the production of
electronic components. OEMs were thus freed of manufacturing and storage responsibilities and
problems connected with fluctuations in capacity utilization. They were now able to replace fixed
costs with variable costs, purchase electronics more cheaply, and simultaneously concentrate on
their core competencies in the end products business. Closer to the end customer, they could also
generate significantly higher margins than in manufacturing (while EMS industry leader Foxconn
generated a return on sales of just 2.4% in 2012, Apple, its largest OEM customer, generated a
return on sales of 26.6%). 1
Due to the clear efficiency and flexibility advantages, but also because it was viewed as an industry
trend that could not be ignored, the EMS concept prevailed worldwide, especially in the 1990s and
2000s. More and more OEMs sold their manufacturing facilities. 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, Dell, Hewlett-Packard, Microsoft and Sony, it generated
sales of over US$132 billion in 2012) 2 and Flextronics (over US$23 billion in sales in fiscal 2012-
13). 3 These big players in the EMS industry, with factories around the world, handled the entire
production of complete product lines for their customers, primarily in the large markets of mobile
phones, personal computers (including tablets), and consumer electronics. Besides the two global
market leaders, there were also a handful of other companies in Asia and North America that
dominated the global market. Most of them also had production facilities in Europe, particularly
Central and Eastern Europe.
In Europe, there were also smaller EMS companies offering services in niche markets as
outsourcing partners in an industry characterized by medium-sized enterprises. While the global
players manufactured fewer products in large production quantities (high volume, low mix:
HVLM), smaller EMS companies such as cms electronics were characterized by greater flexibility
and the ability to manufacture customized small-scale batches (high mix, low volume: HMLV).
In addition to traditional manufacturing services, EMS companies also began to offer an entire
spectrum of additional services to meet market demand. 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 Worstall (2012), Fortune.com (2014)

2 Fortune.com (2014)
3 Flextronics (2013)
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Alongside EMS providers, original design manufacturing (ODM) emerged as an alternative

business model. ODMs also developed and manufactured end products on a contract basis for brand
companies, albeit with a stronger focus on design and engineering competency. Customers could
launch products under their own brand without building their own production facilities. For OEM
companies, the ODM model made it possible to buy finished product designs, leading to a
substantial reduction in time to market. However, this often led to a loss of competitive advantage
in terms of uniqueness and innovation. 1
Current Developments in the EMS Industry

The 2008-09 global economic crisis also had a strong impact on EMS companies. Many contract
manufacturers had to accept double-digit declines in sales. 2 In Austria, short-time work was
introduced in many companies. The industry recovered slowly from the crisis and returned to a
growth trajectory, although with significantly lower rates than in the past. 3 For the regional
European market, slightly negative growth rates were forecast for 2014, although great potential
was still seen in the development of some target markets (e.g., medical electronics and the
aerospace industry). 4 There were also positive prospects in the automotive industry, with forecast
annual growth rates of 4 percent for global car production in 2013-2018 (see also Exhibit 11). 5 In
addition, industry experts assumed that the automotive electronics market would grow faster than
car sales due to the increased use of sensors, safety systems, and new electric and hybrid drive
systems. 6
However, the industry still faced significant challenges such as a raging price war and low profit
margins. 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, or whether the very small margins generated by contract
manufacturers would be viewed as potential additional savings by OEM companies. 7 If this were
the case, there was a danger that the major EMS players in the consumer electronics sector would
also switch to industrial markets, thereby creating greater competition for the mid-sized EMS
companies operating in that segment. 8
As demonstrated by the rapid collapse of the solar industry, the EMS industry had to prepare for
short-term changes in its customer structure. Industry experts recommended that EMS providers
1 CBA (2013)
2 Andreae and Mallok (2010)
3 EETimes.com (2012), CBA (2013)
4 evertiq (2014)
5 ZVEI (2014: 35)
6 ZVEI (2012: 24), ZVEI (2014: 45)
7 EETimes (2012)
8 EETimes (2012)
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reduce their dependency and minimize their risk through a mixture of core, growth, and niche
markets and limit their share of individual customers as a percentage of total sales. 1
Another trend was the on-going shift of the electronics industrys focus to Asia in terms of both
production and demand.
Future developments also depend on end markets, said Velmeden. The question is how many
markets will relocate to Asia. I think that many industries will remain in Europe. But the Chinese have
also made rapid progress in areas such as mechanical engineering. We have to accept that, in Europe,
we will no longer have the same overall growth. The markets here are saturated.
Even in saturated markets, companies must be prepared for change. In Europe, there is a trend
toward greater manufacturing flexibility: higher product diversity with smaller batch sizes, 2 said
Michael Pollinger, production manager at cms electronics. When ordering from EMS companies,
customers expected shorter lead times and the fastest possible delivery, leading to uncertainties
regarding materials supply and requiring greater flexibility in all areas.
The swamping of the European market with Asian products, as occurred, for example, in the
photovoltaic industry, was not feared at the time, since higher transport costs, disadvantages in
terms of flexibility, 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,
whereas in Europe particularly in the HMLV area it was common for HR costs to account for
20 percent or more of sales ).
EMS Industry Trends in China

In 2012, China accounted for more than 50 percent of the worldwide production value of EMS
companies. 3 Within China, the industry was strongly concentrated in the regions surrounding
Shanghai and Shenzhen. 4 In its 2011-2015 Five-Year Plan, the Chinese government aimed to
improve innovation levels in the electronics industry and make a leap toward the higher end of the
value chain. 5
China was traditionally seen as a low labour cost country. In recent years, however, labour costs
had been rising steadily. In the electronics industry, the average hourly wage had increased from
US$0.60 in 2000 to US$2.50 in 2012. 6 Mike McNamara, CEO of Flextronics, noted, however that:
[i]t might be a little more expensive to produce in China for export, but it also means an expanding
consumer base. So if youre selling in China, too, 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.com (2012)
3 Keith (2013)
4 Ibid. (2013)
5 CBIChina (2014)
6 WSJ (2012)
7 WSJ (2012)
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In addition to a growing consumer market in China, a further advantage of manufacturing

electronics in Chinas coastal region was also low logistics costs due to the high concentration of
suppliers in the area. Industry experts also reported improving productivity levels, as local
companies profited from the ever-increasing experience base in the Chinese electronics clusters. 1
Industry observers also noted that the big players in the Chinese EMS industry, which had
traditionally concentrated on high-volume business, had also begun supplying small and medium-
sized enterprises after the global economic crisis in 2008. 2
One of the focal industries in Chinas 2011-2015 Five-Year Plan was that of energy-efficient cars.
Chinas auto parts and accessory market experienced a compound annual growth rate of
29.96 percent between 2007 and 2012. 3 Although a slowdown in car sales was predicted, double-
digit annual growth rates were still forecast until 2015. 4 With intelligent safety, electronic control
(including energy efficiency), information, and comfort systems on the rise, car electronics were
seen as one of the industrys main growth sectors, especially in China, where electronics share of
the total value of cars was still considerably below the global average. 5
Despite the opportunities offered by the Chinese market, international companies still voiced
concerns about doing business in China; these related to intellectual property protection, lack of
transparency, and high levels of protectionism and bureaucracy with regard to getting official
approvals, for example. 6
New Challenges
Due to increased demand, many EMS companies of all sizes tried to offer customers more
comprehensive services, from development and engineering to repair. Many industry players
believed it would be possible to achieve greater added value. Velmeden, however, 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. However, the added value that lies in development is overvalued
in my opinion. The customer demands it, but does not want to pay for it. You receive the payback
through manufacturing. Real added value can only be generated if you offer unique designs that can be
transferred to various solutions. In that case, there are no longer any development expenses, but rather
economies of scale. If singular designs are sold, you have no multiplier effect and are selling a service,
not a product.
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.gov (2014)
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low. 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.g., in the design and development area).
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. The lack of willingness to pay for these services means that we EMS companies lose added
value, while we must simultaneously offer more competency which can only be achieved through
growth. I believe that it is not a linear curve, but rather that there are level effects here. That is one of
the reasons we want to establish ourselves among the top twenty in Europe. If we have sales of around
100 million euros, we should be able to achieve additional economies of scale and, above all, become
more visible in the market and meet all the necessary secondary conditions that are expected by
customers, such as liability insurance.
Many European companies in the industry had already embarked on a growth course, trying to
achieve a critical size through mergers and acquisitions. Velmeden was aware, however, that
company mergers came with many risks. To realize his companys growth strategy, it was
particularly important for him to bind existing customers to cms electronics. Since many European
customers did business in China, he thought that cms electronics should also be able to offer its
full range of services there. Deliveries from Europe were slower and more expensive. Moreover,
customers wanted to have local contacts and services. However, Velmeden did not want to take
too many risks:
As a small company, we cant finance a factory with a two-year lead time, which our larger competitors
can easily do. 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. We cant immediately allocate a large amount of money for that purpose, but
must proceed gradually.
Velmeden had to decide whether and how cms electronics should take another major step in China.
Perhaps the Chinese philosopher Lao Tse could offer some guidance. In his major work, Tao Te
Ching, he wrote, He who shows courage without daring lives on. 2
2015-03-27
1 CBA (2013)
2 Laotse (2005: 86), translated by the author.
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Exhibit 1
2009-2013 revenue growth of cms electronics group (including 2014 forecast)
in million euros
In million EUR
70.0
64.0
59.8
60.0 54.4
50.0
41.0 42.5
40.0
30.0 26.6
20.0
10.0
0.0
2009 2010 2011 2012 2013 2014 FC
Source: cms electronics (2014)
HEC Montral 13
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, Germany
2002 Bankruptcy of the Klagenfurt subsidiary of AIK Electronics
2003 Management buy-out and founding of cms electronics; acquisition of components manufacturing business
segment
2005 Joint venture (cms manufacturing Kft.) 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, SMT)
2009 Investment in a fully automated, 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, 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 orlu, Turkey
Opening of trading office in Hong Kong, China
Expansion of production site in Klagenfurt by 700 m2
cms electronics wins Carinthian Export Prize 2012, BEST EMS Award in the On-time Delivery category,
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, 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.cms-electronics.com/Milestones.461.0.html/, accessed April 29, 2014
HEC Montral 14
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
4,200 m2 manufacturing space in the German market
Development, purchasing, materials handling, logistics,
prototypes, component and devices assembly, testing systems,
end product assembly, automation
51% cms electronics

cms electronics kft
Fonyod/Hungary sales office trkiye
orlu/Turkey (since 2012)
135 employees Business development

3,000 m2 manufacturing space in the Turkish market
Materials handling, prototypes, component and
devices assembly, testing, 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
HEC Montral 15
Exhibit 4
Organizational structure of cms electronics gmbh
M. Velmeden
General Manager
cms
manufacturing
J. Singer H. Rom
Assistant Quality Management T. Toth
Production
Fonyod
M. Velmeden S. Skjellet
PRODUCT CREATION PRODUCT REALISATION
E. Stckinger H. Pasterk M. Velmeden S. Skjellet M. Pollinger

Sales & Marketing NPI / Development Business Services Production Services Production / Technology
U. Hferer H. Rom
E. Stckinger H. Pasterk
Finance &
Marketing Proj. Engineering Quality Assurance
Controlling / HR
A. Stanta M. Quendler O.Skerjanz

T. Bertoncelj
Head of Purchasing
Development Ind. Engineering
Key Account Management
J. Forst S. Skjellet
Business
W. Mller Supply Chain
IT
Development Management
G. Lippautz
Subcontract
Material Handling Company management
Environmental
& Work Safety Extended company management
HEC Montral 16
Exhibit 5
Market segments of cms electronics
Market segment Share of Applications End products (examples)
total
revenues
(2013)
Automotive 72% Actuators/sensors Lighting systems, blinkers, sound systems,
Regulators/controls electrically operated windows, climate
LED regulation, diesel preheating, steering
Assembly control elements, motor sensors,
transmission control, air volume control
Industry 22% Power/power supply units Sensors, laser measuring, heating
Actuators/sensors technology, cooling devices, power supply,
Regulators/controls motor controls for radio transponders,
LED communication units
Assembly
Energy systems 3% Power/power supply units Power supply units, inverters, 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, electronic controls for medical
Assembly equipment
Source: taken from cms electronics (2014) with adaptations and additions
HEC Montral 17
Exhibit 6
Profit and loss statement of cms electronics gmbh (structured as required by
Austrian accounting standards, in million euros)
2012 2011
Revenues 54.4 42.5

- Cost of goods sold / cost of external
services used & changes in inventory -40.9 -30.5
Operating revenue 13.5 12.0
Other operating income 0.3 0.4
- HR expenses -6.0 -5.3
- Depreciation -0.7 -0.6
- Other operating expenses -2.7 -2.4
Net financial income/expenses -0.1 -0.1
Profit from ordinary activities (EBT) 4.3 4.0
Source: Austrian Commercial Register; Revenues: cms electronics (2014)
HEC Montral 18
Exhibit 7
Balance sheet of cms electronics gmbh (structured as required by Austrian
accounting standards, in thousand euros)
31.12.2012 31.12.2011
Long-term tangible and intangible assets 1,799 1,910

Financial assets 514 6
Fixed assets 2,313 1,916
Inventory 3,864 4,080
Accounts receivable 6,702 5,524
Cash/bank 513 364
Current assets 11,079 9,968
Prepaid expenses 132 151
TOTAL ASSETS 13,524 12,035
Share capital 500 500

Untaxed reserves 1,000 500
Accumulated profits 3,251 3,267
Own funds 4,751 4,267
Investment grants 0 30
Provisions/accruals 1,063 1,613
Bank debt 4,817 2,656
Accounts payable 2,281 2,871
Other liabilities 612 598
Total liabilities 7,710 6,125
TOTAL EQUITY AND LIABILITIES 13,524 12,035
Source: Austrian Commercial Register
HEC Montral 19
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); Product group 85 Electrical, electronic equipment
HEC Montral 20
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.org (2014). Product group 85 Electrical, electronic equipment
HEC Montral 21
Exhibit 10
Value-added areas offered by EMS companies
- Development of products and components for electronic
Development devices and systems
- Customized design of circuit boards and electronic devices

Design - Design for Cost, Design for Manufacturing, Design for Test
- Prototypes
- Circuit analysis
Testing concept - Testing processes
- Supply chain management

Materials management - Supplier selection and materials procurement
- Materials logistics
- Manual or automatic assembly,

Manufacturing mounting, and testing electronic devices
- Logistics concept
Logistics & distribution - Labeling & packaging
- Delivery to end customers
- Customer service
After sales service - Repairs
- Spare parts supply
Source: Based on ZVEI (2008)
HEC Montral 22
Exhibit 11
2013-2018 Regional automotive production forecast according to factory
location (in million units per year)
50 47.5
2013
Million units/year
2018
40
34.4
30
24.2 25.0
20.4 20.7
20
9.7 9.0
10
0
America Europe Japan Asia
Source: ZVEI (2014), S. 35
HEC Montral 23
References
ANDREAE, Hubertus and Claudia MALLOK (2010). Wie sich EMS-Firmen krisenfest
aufstellen, Elektronik Praxis, March 16, accessed 17 April 2014.
ASSEMBLEON.COM (2012). Das bestgeeignete Maschinenkonzept, Case study, January,
accessed 17 April 2014.
CBA (2013). Beyond outsourcing post #2: 10 global trends and implications for OEMs, beyond-
outsourcing-post-2-10-global-trends-and-implications-for-oems, May 6, accessed 24 April
2014.
CBICHINA (2014). Part I: Transforming growth pattern, create a new scenario for scientific
development, accessed December 16, 2014.
CMS ELECTRONICS (2014). Firmenprofil 2014, accessed 2 April 2014.
FORTUNE.COM (2014). Fortune Global 500, Fortune.com, accessed April 17, 2014.
DELOITTE (2011). Gaining Momentum: Recent trends in Chinas Automobile Parts Market,
Shanghai/Beijing, Deloitte China.
EETIMES.COM (2012). EMS industry at the crossroads?, July 19, accessed April 17, 2014.
EVERTIQ.DE (2014). Wie sah das EMS-Jahr 2013 aus?, http://evertiq.de, February 3, accessed
April 17, 2014.
EXPORT.GOV (2014). Doing Business in China, www.export.gov, accessed December 16,
2014.
FLEXTRONICS (2013). Form 10-K Annual Report 2013, May 28, 2013, accessed 8 April 2014.
HOLLEY-SPIESS, Evelyn (2002). AIK Electronics ist insolvent, November 2, WirtschaftsBlatt,
accessed April 2, 2014.
KADE, Claudia (2014). Gauck zeigt Erdogan sein Missfallen ohne Worte,
http://www.welt.de/politik/deutschland/article127227516/Gauck-zeigt-Erdogan-sein-
Missfallen-ohne-Worte.html. Published 24 April 2014, accessed 25 April 2014.
KEITH, Ron (2013). Five Emerging Trends Impacting Asian Manufacturing, IndustryWeek,
October 9, accessed 16 December 2014.
LAOTSE (2005), Tao te king: Das Buch vom Sinn und Leben, Mnchen, C.H. Beck.
MALLOK, Claudia (2008). sterreichischer EMS-Anbieter hat Umsatz nach fnf Jahren
verdreifacht, Elektronik Praxis, October 13, accessed March 25, 2014.
TRADEMAP.ORG (2014). International Trade Center Trade Map, accessed 17 April 2014.
VERBAND DER AUTOMOBILINDUSTRIE (2011). Das mitdenkende Auto ist keine
Zukunftsmusik mehr, September 23, accessed April 1, 2014.
WSJ (2012). For Mexico, an Edge on China.
http://www.wsj.com/articles/SB10000872396390444318104577587191288101170.
Published 16 September 2012, accessed 16 December 2014.
WORSTALL, Tim (2012). Apple vs. Foxconn: The importance of profit over turnover and the
low value of manufacturing jobs, Forbes.com, July 12, accessed 8 April 2014.
ZVEI (2008). Services in EMS, Frankfurt am Main, Fachverband Electronic Components and
Systems im ZVEI Zentralverband Elektrotechnik- und Elektronikindustrie e. V.
ZVEI (2012). Progress Report of the Application Group Automotive 2011/2012, Frankfurt am
Main, Fachverband Electronic Components and Systems im ZVEI Zentralverband
Elektrotechnik- und Elektronikindustrie e. V.
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Electronic Components and Systems im ZVEI Zentralverband Elektrotechnik- und
Elektronikindustrie e. V.
HEC Montral 24

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HEC104

Market Expansion at cms electronics

Michael Velmeden, managing director of cms electronics gmbh, 2 headquartered in Klagenfurt,

Beginnings, Crisis, and Management Buy-Out

industry used as outsourcing partners by original equipment manufacturers (OEMs), companies

Joint Venture in Hungary

Production, Quality Control, and Product Development

Purchasing and Supply Chain Management

Customer Segments and Sales Strategy

1 cms electronics (2014)

The initial results were encouraging. Velmeden explained:

Characteristics of the EMS Industry

1 Worstall (2012), Fortune.com (2014)

Alongside EMS providers, original design manufacturing (ODM) emerged as an alternative

Current Developments in the EMS Industry

EMS Industry Trends in China

1 Andreae and Mallok (2010)

In addition to a growing consumer market in China, a further advantage of manufacturing

Source: cms electronics (2014)

Source: based on http://www.cms-electronics.com/Milestones.461.0.html/, accessed April 29, 2014

cms electronics gmbh

MANUFACTURING SALES AND

51% cms electronics

135 employees Business development

Far East trading

Customer service in the Chinese market

Source: cms electronics (2014)

E. Stckinger H. Pasterk M. Velmeden S. Skjellet M. Pollinger

A. Stanta M. Quendler O.Skerjanz

Source: cms electronics (2014)

Revenues 54.4 42.5

Long-term tangible and intangible assets 1,799 1,910

Share capital 500 500

Exporting country 2009 2010 2011 2012 2013

1 China 216 293 320 379 423

Importing country 2009 2010 2011 2012 2013

1 China 175 237 252 297 331

- Customized design of circuit boards and electronic devices

- Supply chain management

- Manual or automatic assembly,

Source: Based on ZVEI (2008)

Source: ZVEI (2014), S. 35

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