Nordic contract manufacturers have experienced years of growth

Translation: Original comment published in Finnish on 9/6/2023 at 8:23 am EEST

We examined the revenue growth and acquisitions of six Nordic contract manufacturers over the past 4.5 years. Since 2018, the companies’ revenue growth has been at a fierce level (combined revenue grew by some 19% p.a.). Part of the growth is explained by the numerous acquisitions made by the companies, but organic revenue growth has also been strong (total organic revenue has increased by over 10% p.a.). We estimate that organic growth has also been volume driven, although inflation has supported growth. Examined this way, the Nordic contract manufacturers we review have also grown organically much faster than the European contract manufacturing market, where the average growth rate has been around 5%¹.

¹Revenue for the last 12 months 6/2023

Nordic contract manufacturers have organically grown faster than the market

The growth of the contract manufacturing market as a whole is driven by the growth of electronics production and the increase in its outsourcing rate due to digitalization. In other words, the revenue of contract manufacturers increases with increased demand for the end product, and as the services of contract manufacturers expand from PCBA to box-build. However, this trend driving the entire industry does not explain the stronger growth of the companies we are reviewing compared to the market as a whole. On the other hand, stronger growth among our Nordic companies than for the market has been supported by:

• The companies’ customer portfolios focusing on industrial electronics, whose demand has been positively influenced by the electrification of industry required by the green transition
• Customers’ desire to move supply chains closer to their end markets driven by geopolitical risks

In contract manufacturing customer relationships are long (even decades long) and also important to the customer (OEM). Thus, new customer acquisition is relatively troublesome for contract manufacturers, but on the flip side, the threshold to change contract manufacturers is high for the customer. New customer acquisition creates potential for organic revenue growth in the long term and in the short term the main drivers of growth are:

• Increase in end product sales to current customers
• Customer-specific expansion of the contract manufacturer’s service portfolio (increase in outsourcing rate per customer)

The former can only be influenced indirectly by the contract manufacturer, while the increase in the outsourcing rate per customer is a sign of a satisfied customer and the contract manufacturer being successful. Customers often use several contract manufacturers to manage the risk associated with individual suppliers, so an increase in the outsourcing rate per customer is also a sign of the contract manufacturer’s competitiveness. It is often difficult to understand the drivers of revenue growth as they are not reported that precisely. However, the customer structure, changes in the customer structure and management comments reported in the companies’ annual reports may give an indication of the sources of growth.

*The practices for reporting customer structure vary

Fierce growth is often supported by the success of the customer’s end product in the end market

During our review period, Incap’s organic growth rate of about 30% has been clearly strongest. Incap’s rocket-like growth has been driven especially by the excellent success in the end markets of the company’s largest customer. The flip side to the success is that the customer's growth led to a situation where Incap’s largest customer accounted for over 60% of the company’s annual revenue. The second half of 2023 becomes challenging for Incap as the largest customer has announced the need to reduce its inventories, so the company’s clearly higher customer risk has also partially materialized. Norwegian Kitron and Swedish Note have also achieved very strong organic growth rates.  Note’s close to 20% organic growth has been boosted by fast-growing customers like Charge Amps (EV charging stations) and Plejd (smart lighting), in addition to which the company has been successful in new customer acquisition. Kitron that achieved similar organic growth of nearly 20% has managed to grow quite extensively in all of its segments, but growth has been driven by the Industry segment that generates 30% of the company’s revenue, where the company produces equipment for, e.g., safety, storage and automation solutions. During the review period, the organic growth of Scanfil, the largest company in the group measured by revenue, has been at an acceptable level of around 10% annually, and we believe the growth has been extensive in terms of customers, although the largest customer’s share of revenue has increased to a moderate 19% (2022) during the review period, but it decreased again in 2023. Compared to the peers, Scanfil has been the most selective when it comes to acquisitions.

Acquisitions are an inherent part of the strategy due to the fragmented market

The European contract manufacturer market is highly fragmented and there are over 2,000 individual contract manufacturers². Therefore, it is natural for companies to have a lot of acquisition opportunities. All the companies in our review have utilized the acquisition card in the last four years and the combined revenue of the companies acquired after 2018 exceeds EUR 500 million (see Table).

In recent years, Hanza’s and Inission’s growth has been based more strongly on acquisitions than for the other companies in the group. We estimate that Inission’s organic growth has been at a decent level of close to 10%, but acquisitions have generated even more growth. Inission’s acquisition strategy has deviated from the competitors, as the company has also acquired  companies with lower performance and has sought to turn their business around. The company has been moderately successful in doing so, but in its current strategy, the company focuses more on organic growth following a busy M&A period. Hanza has been the most active of the group on the acquisition front, and a majority of the company’s growth consists of growth from acquisitions. The company’s organic growth has remained roughly at the level of the European contract manufacturer market (some 5%).

Sources: ²Incap capital markets day: in4ma marketreasearch