2024 proved to be a challenging year for European manufacturers. The lingering effects of ECB interest rate hikes and persistent manufacturing sector contractions across major economies led to a decline in production, widespread factory closures, and subsequent job loss.
This continuing industrial recession has created an environment where OEMs are under mounting pressure to maintain competitiveness and operational resilience. And with little evidence that a rebound is imminent, traditional manufacturing models need reevaluation.
Between July 2023 and July 2024, industrial production fell by 2.2% in the eurozone and 1.7% in the EU. The steepest falls were recorded in Hungary (-6.4%), Germany (-5.5%), Italy (-3.3%), and France (-2.3%). By September, industrial production had decreased by 2.8% in the euro area and 2.4% in the EU.
These figures, however, do not reflect the global state of things. U.S. manufacturing remained stable throughout 2024, with a somewhat positive outlook amidst Trump 2.0 and "America First” politics, while China’s industrial production expanded by 5.4%.
Isolated and struggling, European manufacturers find themselves at a crossroads. With industrial sentiment in major economies remaining in contractionary territory for almost two years now, OEMs must adapt their operational strategies to navigate these challenging conditions.
Factory divestment and strategic outsourcing are powerful solutions for OEMs looking to enhance their resilience. By divesting their factories and entrusting production to a reliable manufacturing partner, OEMs can unlock several key advantages:
Embracing an asset-light business model by divesting factory operations allows OEMs to convert fixed costs into variable costs, providing greater flexibility in managing expenses during economic fluctuations. By shedding capital-intensive operations, OEMs can achieve agility and scalability, qualities that are particularly valuable in times of both economic uncertainty and fast-paced industry changes.
A key benefit of factory divestiture is gaining access to specialised expertise. EMS outsourcing partners bring cutting-edge technology, advanced capabilities, and optimised processes that many OEMs may find challenging or costly to replicate in-house. Partnering with these specialised manufacturers improves product quality and shortens time-to-market, giving OEMs a competitive edge without bearing the entire investment burden.
One of the primary reasons behind factory divestment is OEMs’ desire to focus on their core competencies. OEMs often excel in areas like product design and innovation, but managing manufacturing operations may not align with their strengths. By divesting factories, these companies can reallocate their resources to the areas where they have the most expertise and can drive the most value.
Another factor driving factory divestment is the geographic flexibility offered by outsourcing partners. Many EMS partners operate global networks that allow OEMs to efficiently serve diverse markets without the need to establish and maintain their own facilities. This flexibility reduces the burden of navigating complex regional regulations and adapting to market-specific requirements.
Factory divestment also creates opportunities for capital reallocation. The capital raised from selling factories can enhance liquidity, reduce debt, or fund new initiatives that drive growth. Assets can be reinvested in high-growth areas, such as research and development, digital transformation, or market expansion. Some OEMs use this capital to fund acquisitions or develop next-generation products. This financial flexibility creates a considerable competitive advantage that can put OEMs ahead of the competition when the demand tides turn.
Companies that have seen great success from divesting include IBM, which sold its PC division and manufacturing operations to Lenovo, and Philips, which spun off its semiconductor business into NXP. Both companies retained the strategic focus on their core competencies while leveraging external partnerships for manufacturing, allowing them to optimise efficiency and cost and remain industry heavyweights despite market fluctuations.
Strengthening partnerships with manufacturing partners is another advantage of factory divestiture. These collaborations create a more dynamic and collaborative ecosystem, giving OEMs firsthand access to emerging technologies and faster implementation of innovations. This, in turn, fosters global competitiveness, which is essential for long-term economic growth.
Key considerations when selecting an EMS partner should include:
Despite the market landscape, the manufacturing industry is ever-evolving as consumer demands shift and technology advances. However, the desperate need to merely maintain operations leaves many manufacturers in a position where keeping up with and embracing industry trends becomes less of a priority. This inevitably hinders long-term growth further.
Outsourcing partnerships offer OEMs the opportunity to keep abreast of industry trends and use the resources and capacity they already have available–like their factory spaces–to get ahead of the changing landscape.
Strategic EMS partners' advanced capabilities can complement OEMs' existing processes and systems, such as more intelligent supply chain management and sophisticated New Product Introduction. At the same time, outsourcing manufacturing also increases organisational agility. With production handled by partners, OEMs can scale operations up or down based on market demand, reducing the risk of overcapacity or idle facilities.
These strategic outsourcing benefits can streamline the entire production lifecycle, mitigate risks, and improve time-to-market for OEMs at the forefront of industry trends. This kind of futureproofing is particularly valuable in today's uncertain economic environment that demands flexible and agile manufacturing.
As European manufacturers navigate challenging economic conditions, strategic factory divestment and outsourcing can help build resilience and maintain competitiveness. By carefully selecting EMS partners and implementing robust management frameworks, OEMs can transform their current challenges into opportunities for long-term growth and operational excellence.
The key to success lies in viewing manufacturing outsourcing not merely as a cost-reduction strategy but as a strategic partnership that enhances capabilities, reduces risks, and creates sustainable competitive advantages. For OEMs looking to thrive in today's complex manufacturing landscape, the time to consider strategic outsourcing is now.
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