When the chips are down

ELECTRONIC manufacturing services (EMS) companies catering to the consumer sector – where they essentially assemble such products – have been on a downtrend for some time now.

The business was at its zenith some 20 years ago, largely thanks to large brands like Dyson which came to this part of the world looking for partners to manufacture their products.

Over the last few years, though, competition from countries like Vietnam has largely ended the consumer sector EMS party in Malaysia.

Top players such as VS Industry Bhd, SKP Resources Bhd and WaveFront Bhd (formerly known as ATA IMS Bhd) that used to report juicy profits, are now trading at a fraction of the valuations they enjoyed during their heydays between 2017 and 2021.

For the financial year 2021 (FY21), VS, SKP and WaveFront recorded annual net profits of RM245.4mil, RM133.2mil and RM150.3mil, respectively, with net profit margins of about 6.1%, 5.9% and 3.6%.

Today, their earnings have weakened sharply. VS swung to a net loss of RM55.3mil in FY26, as lower orders from key customers amid weak global consumer sentiment reduced plant utilisation.

Its results were also hit by customer cost-optimisation measures and start-up losses at its Philippine operations.

SKP’s earnings fell by 71.3% year-on-year to RM33.6mil in FY26.

The company cited weaker end-demand, lower sales orders and customer-driven cost pressures; its fourth quarter of FY26 swung to a RM37.3mil net loss, dragged down by a RM14mil impairment and tariff-related uncertainty affecting customer orders.

WaveFront, meanwhile, has remained in the red since FY22, posting a net loss of RM4.2mil in FY26, following the termination of its Dyson contracts in stages in 2022 and 2023.

Recently, however, VS share prices staged a modest rebound, surging by more than 45% in the past one month.

Earlier this month, AmInvestment Bank Research issued a report noting that VS is enjoying some kind of revival, anchored by a “strategic pivot beyond consumer electronics that was gathering pace”.

The pivot comes as consumer electronics demand “remains subdued”, with the group targeting non-consumer electronics to account for 50% of revenue over time.

The research house said the move could reduce labour dependency while supporting structurally higher profit margins. This raises the question of whether the consumer EMS business in Malaysia is making a comeback of sorts.

The consumer EMS business is inherently fast-moving, with changing product trends and weaker consumer demand making it difficult for manufacturers to sustain growth.

Competition is also intensifying as new EMS players emerge in Philippines and Vietnam.

The country’s EMS industry also faces broader structural issues, particularly labour-related.

“The biggest drag on the prospects of the EMS sector is the government’s flip-flop approach to labour policy,” Trident Analytics chief research officer Peter Lim Tze Cheng says.

The government’s restrictions on foreign worker entry in 2018 caused Malaysia to miss out on opportunities to attract EMS investments, says Lim. Global companies sought alternative manufacturing locations outside China under the China plus one strategy, with many opting for Vietnam instead.

While some may argue that automation is the answer to the sector’s labour conundrum, Lim points out that fully automated production lines may not be cost-effective, given the low-volume, high-mix nature of their operations.

“High-volume EMS production will definitely go to China, where operations are fully automated. High volume here means about one million units a month. Malaysian manufacturers, on the other hand, typically handle orders of about 300,000 to 500,000 units a year, or around 1,000 units a day.

“At such volumes, full automation may not be cost-effective, making labour availability crucial to their operations. Vietnam, Thailand and the Philippines have larger labour pools, making them more attractive to investors,” Lim says.

Another challenge for the consumer EMS space is the erosion of product differentiation, as the expiry of original design patents has opened the door to cheaper alternatives offering similar functionality.

According to an analyst, who spoke on condition of anonymity, the fortunes of consumer EMS companies like VS and SKP are largely driven by demand for products from a handful of key customers, and that dynamic has shifted in two ways.

Both companies earned strong profits because their key customers held proprietary product designs that were highly sought after. However, when the United States began imposing tariffs, import costs from Malaysia to the US rose, and those costs were largely passed on to consumers.

This weighed on demand for these end products, and with it, on order volumes.

“Moroever, cheaper alternatives that offer similar functionality makes it difficult for the key customers of consumer EMS companies to command both pricing and volume,” she says.

However, she notes that the consumer EMS business itself has not become unattractive fundamentally. Rather, the moat around these companies’ clients’ products has narrowed, and profitability now depends on customers launching the next differentiated hit.

Moving up the value chain to remain competitive may be difficult for local EMS companies, as Chinese players have far stronger R&D and design capabilities.

“A more realistic path is for them to diversify towards higher-value products, categories where end-user demand is strong and margins are more defensible,” the analyst says.

There is a common perception that industrial EMS offers better margins, but the distinction is not so clear-cut. Margins for EMS players “can’t run too far”, as Lim puts it, as customers have a clear understanding of the costs of the business, from components to man-hours needed to assemble a device.

“Industrial EMS may have slightly better margins, but it would not be skyrocketing margins,” Lim says.

In some ways, consumer EMS may even offer better margins, as products intended for consumers tend to have higher quality and finishing requirements, for which customers may be willing to pay more.

Ultimately, margins also depend on who the customer is and the end market.

So, is it all bleak for the consumer EMS players?

“Companies will have to constantly find new clients and projects. It does not matter if the customer is consumer or industrial.

“Companies like NationGate Holdings Bhd have been performing very well as they were able to secure new big projects,” Lim says.

Kenanga Research, which maintained its “underperform” call on SKP, says while the company is “proactively” diversifying its customer base to reduce reliance on a single key client, near-term growth is likely to remain constrained.

This is due to intensifying cost optimisation efforts from some of the group’s customers, due to inflationary pressures stemming from tariff developments and the Middle East war.

Meanwhile, Maybank Investment Bank Research says it views VS’ efforts to diversify away from consumer electronics as a “potential rerating catalyst”.

It has a “hold” call on VS and notes new customer onboarding and order loading are encouraging, but visibility at key consumer electronics customers remains limited, and end-demand and cost pressures persist.

Research houses also point to intensifying competition from Chinese brands such as Laifen, Dreame and Xiaomi.

A more durable turnaround for local EMS companies thus will depend on stronger order flows that can be sustained beyond seasonal demand.