TORONTO -- EMS executives are reporting lower margins due to higher costs of material costs, particularly certain types of components.

Their companies are taking measures to renegotiate contracts but months into allocation, signs of stability are not yet clear.

End-market demand for electronics, especially for vehicles, is exacerbating the parts situation. Benchmark president and CEO Paul Tufano explained that shortages been caused by passive component manufacturers have reallocated capacity to higher margin markets like automotive, and are not adding capacity. "Depending on your relationship with various distributors or directly with those manufacturers, you get an allocation and that allocation maybe altered if there's a better opportunity somewhere else," he told analysts on a conference call.

Sanmina chief executive Bob Eulau said the company sees "component manufacturers adding capacity, but not at a rate in line with industry demand and suppliers are still generally reluctant to increase capacity for older component technologies."

Mandeep Chawla, chief financial officer, Celestica, said "the material constrained environment has not necessarily gotten better. We are encouraged that we’ve seen some stability this quarter. In terms of revenue, that was gated. It was slightly better. I wouldn’t say it was a fundamental shift, though." Celestica said the amount of revenue "gated" -- products that would otherwise have shipped had sufficient components been available: dropped to $14 million in the June period from $30 million in the March quarter. "[W]e’re getting better at managing it. You could say at the beginning of the quarter that there may be slightly less constrained environment that we’re – or material that we’re dealing with versus 90 days ago but again, not a really fundamental shift in the industry."

Celestica's inventory turns improved 0.2 turns in the June quarter to 6.6 turns on an annualized basis.

Flex chairman Michael McNamara said, "a number of passive components are currently on allocation around the world, and this shortage is constraining the revenue of many customers. We believe this constrained environment will continue into 2019, and we expect these impacts to increase over the next couple of quarters.... We still anticipate some impact on revenue, operating profit, and, more visibly, on increased inventory levels until this problem dissipates." Flex, he noted, increased its purchase of the highly constrained MLCCs to 50 billion this year, up seven billion from last year. Flex did not comment on its inventory turns.

Sanmina's Eulau called the supply chain environment "very difficult," adding that profitability was "negatively impacted by inefficiencies associated with this difficult supply-constrained environment and ongoing new program ramps. I expect very tough profitability improvement in the (current) quarter.... Lead times are still very long. Roughly one-third of our parts have lead times over 81 days. The big challenge is when the lead times are changing on us or when suppliers aren’t meeting their commitments and then we end up getting surprised by it when we actually receive the material."

Sanmina's inventory turns rose 0.2 turns to 5.9 turns.

Most EMS firms are reporting the component shortage is taking a toll on margins. Delta Electronics experienced a 2% drop in gross margin in the second quarter, mostly related to the price increase of raw materials, passives and some power ICs. Sanmina's gross margin at its EMS unit fell 60 basis points to 5.7%. Benchmark's June quarter gross margin plunged 140 basis points sequentially to 8.2%.  Celestica reported a 20 basis point drop to 6.4%. Flex saw adjusted gross margin drop 30 basis points to 6.4%. On the positive side, Kimball Electronics said gross margin rose 10 basis points to 8.2%.

All the EMS firms indicated plans to pass along higher parts costs to customers.

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