The New Industry: Will the Growth Continue?

Feature Interview by the I-Connect007 Editorial Team

How sustainable are the primary financial models in the United States regarding PCB fabrication shops? In this interview with IPC Chief Economist Shawn DuBravac and M&A expert Tom Kastner, we explore what’s happening with U.S. printed circuit board shops in today’s market, how consolidation affects the industry, and what can be done.

Marcy LaRont: Shawn and Tom, thank you for joining us today. Tom, in another recent interview, you estimated there are 100 to 120 circuit board shops left in the U.S.

Tom Kastner: Yes, and my number tends to be lower than IPC’s, but I have a different definition of a printed circuit board “shop” because there are so many that are not making boards anymore. It’s difficult to track anyone under $5 million.

Statistically, the number of board shops doesn’t really matter because roughly 90% of production is done by something like the top 50 printed circuit board manufacturers. We see that the bigger shops are getting bigger, for example, the ones like APCT and Summit. There is some organic growth, but much of the growth is due to the acquisition of smaller shops. The bigger shops are more likely to have better equipment and technology to compete with Asia. Overall, that’s good for the industry in the United States.

Nolan Johnson: Tom, if some of those estimated 120 U.S. PCB shops aren’t making boards anymore, what are they doing?

Kastner: They are brokering, for example. Any business that has survived for 25 to 30 years under tough conditions can make much more money brokering because they don’t have the headaches of CapEx or environmental regulations. They are brokering domestically as well as importing boards, and many of them have gotten into assemblies as well.

LaRont: You’ve said there’s more activity on the assembly side rather than PCB fabrication, but the profit margins can be very thin, so why is that attractive?

Kastner: Several factors keep the number of EMS companies high. I don’t know the exact number, but I think there are between 700 and 900 companies in North America. One key thing is that customers like their EMS shops to be local. Ninety percent of that business is within 100 or 200 miles of the customer for lower-volume manufacturing. Higher volume, especially more commodity products, are still made overseas and imported. Customers like to be able to see their products, especially if there is an issue in production.

Also, OEMs like the final touches to be done nearby in case there are any changes to the firmware, anything outside the box, whatever it might be. That is more easily done when it’s nearby. There’s also a much lower barrier to opening an EMS shop compared to a PCB fabrication shop. While it’s still highly technical, you don’t have the “black magic” of chemicals and the “dirtiness” factor with all the environmental regulations. That is a major factor. Finally, air freighting a box build final assembly is getting more expensive; it’s almost prohibitive.

LaRont: Why would someone buy or sell at this time? Why is this even an attractive investment opportunity? Are private equity owners looking to provide a return on investment for their investors?

Kastner: The private equity guys see the trend toward reshoring, the government support in dollars, the nice military budgets, and a halfway decent economy for products. The market may not be growing quickly, but it remains robust. There is a lot of private equity money available overall, and they are investing in everything, not just electronics. That is providing a tremendous amount of liquidity for people in our industry.

Shawn DuBravac: The cost of cash is a lot higher than it was last year and is likely to stay higher. Investing in something like a lawn care business or consolidating dentists’ offices into a group, for example—when your cost of cash is zero, and you think there are synergies in combining a number of them—doesn’t translate as well today. The math doesn’t work out. There will be a much higher threshold for investors to find higher returns on that cash. Previously, they could immediately make 5%, risk-free, or market yields of 7–8% if they were willing to take some risk. Now, with the cost of cash, to make the investment worthwhile you will need to have deals returning in the 15% range.

So, the consolidation we’ve seen from private equity from many industries will go away. There are modernizations that can take place with larger companies, but not enough to drive the level of return that private equity is looking for. In certain instances, electronics starts to look more attractive when you don’t have cash going to law firms and lawn care businesses. Still, I believe we will see this situation affect electronics.

Kastner: It could be, but generally, the deals in electronics have not been very highly leveraged. Everyone recognizes that it is all project-based with no recurring revenue. It’s not a software-as-a-service (SaaS) revenue model, so most have been reasonably leveraged. The valuations could be down a bit, and more investment will be moved into alternative financing, like a seller note or rollover equity.

There are just not that many PCB shops to buy. Big companies must keep buying smaller shops or do something a little bit differently. On the EMS provider side, there are a lot of shops, and the demographics will likely support those deals, so I expect to see a similar number of deals this year. I’m not sure about the total value of those deals because the bigger deals certainly will be affected by higher interest rates.

Johnson: With this change in the financial marketplace, does it change one’s growth strategy? Does available funding encourage more internal investment rather than looking for a CapEx partner to sell the assets to?

Kastner: Obviously, lower interest rates help with CapEx. To grow, the bigger companies must invest more. For example, I don’t think there’s anyone over $20–$25 million who doesn’t have direct imaging. If they want to stay in the game, they must invest in CapEx. The smaller guys will either sell or have an exit strategy. But they’ve existed for 30 years, so there is a lot of ingenuity and intelligence there.

Johnson: In this environment, can you build a PCB fabrication business without DoD?

Kastner: I don’t think so. Most new builds are captive, like GreenSource. Alpha Circuit in Schaumburg, Illinois, is building a new facility and bringing all their shops into one. If you don’t have that business already, it would be incredibly tough. Without the DoD, I do not believe we would have a PCB fabrication industry in the United States.

LaRont: Shawn, let’s talk about broader market projections and the regional sustainability of this business. Some say the current U.S. situation is not sustainable. Where will we be in 10 years?

DuBravac: This is the classic chicken-and-egg problem. If I build my business, will I continue to have enough business? Is it a sustainable investment? This is a big debate everywhere right now. You have government buyers and ITAR that have settled the market in a certain place. Can the market grow outside of where it has naturally settled? On the margin, I think it can.

The next question is, does that new growth get captured by already participating companies as they expand capacity, or does it expand from the existing base? The demographic change in the industry is interesting. You’ve got people who are ready to retire; the next generation doesn’t want to take over the business. So, they’re looking for a liquidity event, and they will take it any way they can. Some of the fuzziness in Tom’s numbers is because some companies will just wind down. The owner will just decide one day, “We’re done,” then turn off the lights and walk away. That could be a long, slow process. It could even be a process that’s ultimately invoked by the next generation when they decide it’s time. So, yes, there is growth in North America happening on the margin, but it’s still a big unknown about how big that grows and where.

Investment into EV infrastructure is a good example of this. There is production going into that. LG just announced a battery factory, and we will see more of those. There’s a big EV investment in the Southeast U.S.—2022 was a record number for Georgia, North Carolina, South Carolina, and Tennessee for in-state investments. Those numbers may have even been eclipsed in 2023. They saw record investments related to EV commitments, and even with the EV market slowing, it is still a growth area. On the margin, that helps.

To Tom’s point, how much needs to be done locally vs. how much can be brought in? Clearly, Mexico is benefiting, and that will continue, if it remains stable and there are workers. There are several forces, though not all of them are moving as fast as they once were. Wages are definitely increasing in Mexico. Those things get added to the balance equation. If they were moving really fast, then you’d see people say the trajectory warrants the gamble of putting in a PCB shop. I don’t know that we’re growing fast enough to make that gamble.

Johnson: Do you see any changes in the makeup of those employed in manufacturing as it grows? Is the need for workers being offset by meaningful investment in automation?

DuBravac: There is definitely investment going into automation and robotics to augment the existing workforce and, in some cases, to fill a need where workers aren’t available. Manufacturers still have a hard time finding people who are willing to work. It’s hard to comprehend that people show up for a job, work for a couple of days, and then just leave without formally quitting. They leave by lunch and never come back. They don’t even show up for their paycheck.

Manufacturers used to compete against other manufacturers for employees. Now, they compete against Starbucks. Manufacturing work has changed; the tastes and preferences of workers have changed. So, they are investing in automation and robotics, which is moving in a very measured way. My guess is that the LG battery factory being built in Texas will be more automated than a battery factory built five years ago. The nature of manufacturing will be more conducive to automation.

LaRont: EV is a huge technology driver for markets in Asia and possibly Europe. What about HDI and UHDI? Has growth slowed?

DuBravac: It’s all relative. We went from a 99% growth rate in EV to around 50% in the U.S. We didn’t double our growth again last year, and everybody is concerned, but we sold over a million units for the first time. There are still a lot of tailwinds in that category. The whole EV infrastructure must grow. Growth will be roughly 30% this year, which is still phenomenal.

As you get to a bigger base, your growth will slow; it’s just arithmetic. The U.S. is still well below the rest of the world when it comes to EV, which suggests there’s some room for growth. We are at about 9% of total EV sales. Europe is at about 18%. There are Nordic countries that have just massive EV penetration compared to what we see in the U.S., so we have a very long way to go. We were gripped by headlines from Ford saying it would delay its investment in battery technology and battery factories. We have had some delays, but not really cancellations. We don’t always comprehend the meaning of a slower growth rate. The law of large numbers means the growth rate will slow, but we will see new entrants into the business. LG wasn’t in EV chargers until they went into South Korea last year, and now in the U.S. this year.

How much is being produced in the U.S. vs. elsewhere? There is a movement toward nearshoring, but it’s slow. What’s the upper boundary? We know it’s not 100%, so where is it? Is it another percentage point, or another 15? How long would it take to get to another 10 percentage points? As I noted in the December 2023 issue, if you just look at the data, Mexico has become a much bigger player. Imports are captured in two different ways in the U.S., which could mean that Mexico is an even larger player than we see with the current data.

Johnson: What other investments are happening in PCB fabrication around the globe?

DuBravac: That is a difficult question. Perhaps it is time to take another, deeper look at regional investment given all the geopolitical shifting. As far as the U.S., the DoD has always been very cognizant of what is being manufactured and the domestic capacity. During the pandemic and subsequent geopolitical tensions, it has become even more sensitive to what is available for domestic PCB production. Outside of DoD, the Commerce Department is now waking up to the greater concern for the U.S. economy and supply chain stability. That does result in movement, but it remains to be seen how much. There is definitely the sense in the U.S. and Europe that they are willing to invest in PCBs. Companies are asking, “Am I willing to put my dollar next to a government dollar and build a facility, and can I make it sustainable in the long term?”

Johnson: What about the margins of new technology? Is now the time to consider growth by pivoting to something like substrates?

Kastner: There is a lot of interest in advanced packaging and microelectronics, and those are sectors that either didn’t exist 20 years ago or were completely blown out and moved to Asia in the late ’90s and early 2000s. Now we are scrambling to recover some of those capabilities, but it doesn’t really mean you should build a new plant. But there will be more investment in clean rooms, wire bonders, advanced 3D inspection equipment, and so on.

DuBravac: The history of manufacturing is the history of innovation. You must constantly reinvent yourself. That means moving into adjacent categories to where the market is. Pre-pandemic, a lot of the market in the U.S. was in rapid prototyping, short runs, and small batches. It shifted a bit during the pandemic. The people who have survived these past 30 years have always paid attention and listened to their customers. Like all good consultants or manufacturers, they respond, “Sure, we can do that. We’ll figure out how to do that.”

A couple of things are happening. Companies are always looking at how to move the value stack and increase the margin stack. It is the classic innovator’s dilemma: finding new things to do that are of value to the customer and have higher margins.

LaRont: This is the constant struggle for business: reinvention, relevancy, and translating value into profitability.

Johnson: We’ve recently spoken to wellknown industry leaders working to shift PCB fab startup costs down dramatically to just barely eight figures. Is this a game changer in terms of potential investment into new PCB shops in the United States?

Kastner: I think there’s been a fair amount of talk, but you really haven’t seen existing fabs do that. Instead, they have chosen to invest in their facilities. It sounds good, but I do not know whether that would translate to new facilities being built in the United States.

DuBravac: It goes back to the conversation we had in the beginning: the constraint is not about cost as much as it is demand. Not having clear demand is the bigger concern. As Tom mentioned, it seems that the companies that are investing typically are tied to a DoD contract or some other type of commitment.

Johnson: It does seem like the growth for brand-new facilities in North America has been captive.

Kastner: That’s right, and believe me, I would love to see new plants go up here. That would be fantastic. In my view, the economics are just not there.

LaRont: Shawn, do you foresee significant changes or shifts globally?

DuBravac: Well, China has its own headwinds, and it’s massive. It’s not going away. China pre-announced its economic growth recently, and it was the lowest reported in decades. It’s not really growing. Outside of China, there’s growth in Malaysia and Vietnam, for example. There is opportunity here in the U.S., but it’s not clear what that is. If the opportunities were clear, people would come. That’s the beauty of America. If somebody sees an opportunity, they will 100% go after it. Tom and I agree that several things must line up for it all to make sense. But we will certainly keep an eye on it and look forward to reporting on what we see.

Johnson: As always, it’s interesting and educational talking with you both. Any parting thoughts?

DuBravac: The main thing to walk away with is that everything hinges on demand. If demand is there, everything else gets in line. If demand is there, everybody comes out of the woodwork and says, “Yeah, I’ll put money behind that.” If demand is there, everything else will take care of itself.

Kastner: Investors are committed to growing, but for how long? These are smart investors. I don’t foresee anybody going IPO on either side—boards or assemblies—but there is measured investor support out there. It’s not crazy, over-the-top support, but it’s there.

LaRont: Tom and Shawn, thank you both for your time and insights.

PCB007

Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.