EMS & The Economist - Chaos-as-a-Strategy and How Tariffs Are Changing Supply Chains (May 25)

Economic uncertainty looms large over the manufacturing landscape as tariffs, interest rates, and geopolitical tensions reshape global supply chains. The slight contraction in Q1 economic growth masks an underlying reality - demand remains relatively stable, but manufacturers face difficult decisions about where and when to invest in new capacity. I unpack this and so much more with IPC Chief Economist, Shawn Dubravac.

Tariff uncertainty has become a permanent feature rather than a temporary disruption. What began as a negotiation tactic appears to be transforming into a long-term strategic tool, with 10% tariffs likely representing the floor rather than a temporary measure. This new normal is driving dramatic shifts in manufacturing locations, with smartphone imports from India to the US jumping from 12% to 28% in just one year as companies diversify away from China. According to IPC sentiment data, 17% of electronics firms are actively seeking new manufacturing capacity in the US, with others looking toward Mexico, Europe, and Southeast Asia.

Two sectors stand out as bright spots amid the uncertainty. Defense spending in Europe has surged in response to ongoing geopolitical tensions, creating substantial opportunities for manufacturers serving this market. Simultaneously, we're witnessing unprecedented investments in AI infrastructure, particularly in the Gulf region, where massive data center projects are being announced. These twin forces of defense and AI are creating pockets of high growth even as traditional electronics sectors face headwinds.

Companies that can build agility into their global operations while positioning themselves in these growth sectors will find themselves well equipped to navigate the challenging landscape. Rather than waiting for clarity that may never arrive, successful manufacturers are developing strategies to thrive amid ongoing uncertainty. Listen now to gain crucial insights into where the electronics manufacturing industry is headed for the remainder of 2025 and beyond.

EMS@C-Level is hosted by global inspection leaders Koh Young (https://www.kohyoung.com) and Global Electronics Association (https://www.electronics.org)

You can see video versions of all of the EMS@C-Level pods on our YouTube playlist.

Transcript

Economic Growth and Fed Outlook

Philip Stoten 0:06

Hello, I'm Philip Stodham, from my House to Yours. Welcome to EMS and the Economist. I'm here with Sean Dubravec. Sean, pleasure to see you, as always. Thanks for taking the time. Great to be with you, phil. Let's dig in with a couple of the elephants in the room. I wanted to touch on tariffs, but before that, since we last spoke, we did see a negative growth in the first quarter. Very small negative growth, but negative growth nonetheless. Two quarters of negative growth is the fulfillment of the definition of recession. How do you see things looking by the time we get out of the second quarter?

Shawn Dubravac, Chief Economist, IPC 0:49

I think it's first worth pointing out what really drove that decline in the first quarter, and it really isn't an indication of the underlying strength of the economy. It was really driven by lopsided imports as everybody was pulling things forward, trying to get ahead of tariffs. You saw very strong imports GDP the way we measure GDP in the US is it's essentially net exports, and so you end up having this negative figure in q1, primarily driven by the uh, the, the strong imports. If you exclude that, if you exclude trade, then the underlying um momentum in the economy was actually okay, like there was demand was generally strong um for for q1, and so it will be interesting to see how q2 sets up. Obviously you're not going to continue to see the, the lopsidedness and imports, and so um that will, you know, will settle out at the time. The underlying strength in the economy is slowing and has slowed, and so there's a bit more headwind now in not only the US economy but, I think, the global economy broadly.

Philip Stoten 2:14

Yeah, yeah. And what about with respect to interest rates? The Fed seemed somewhat confused by the tariff news and it kind of made made their decision making very difficult. Um, and I think we've seen that elsewhere as well, where, um, people have just taken a hiatus and kept interest for eight rates where they are. Do you see that changing?

Shawn Dubravac, Chief Economist, IPC 2:36

yeah, the the fed has really taken a very much a wait and see approach and and talked about being much more data dependent, feeling like they have the time to kind of wait. I joke that that's just economic talk, for we also don't know what's going on. There's a lot of uncertainty about how the tariffs will impact inflation, how it will impact consumer demand and business demand and also, kind of more broadly, where the tariffs will settle. I mean, it's not clear where those will end up. So I do think that the Fed is much more slow to react and slow to cut rates than probably many people anticipate.

Shawn Dubravac, Chief Economist, IPC 3:28

The market last year was anticipating five rate cuts. This year, even a month ago, the markets were anticipating four rate cuts. It looks like right now the markets have readjusted after the last Fed meeting and Fed press conference to anticipate two rate cuts this year and those rate cuts not happening till later in the year. So I anticipate that interest rates will remain higher for longer than many people anticipate and expect and we've even seen the 10-year treasury moving higher as the markets try to digest the implications for the current you know, one big beautiful tax bill that the Congress is working on right now and they've been going through reconciliation on that bill, and so there's some indication that that will probably add to the federal debt over the long term, and so you started to see the markets adjust those expectations, raise the yield that they're going to demand on that 10-year note, and so you have seen interest rates start to inch up here, and I think that's going to put not only short-term pressure but potentially long-term pressure on firms and on borrowing costs.

Philip Stoten 4:49

Yeah, it has an impact and it certainly has an impact on CapEx and that kind of investment side of the equation.

Tariffs Impact and Manufacturing Uncertainty

Philip Stoten 4:58

Obviously, the other elephant in the room is tariffs.

Philip Stoten 5:01

Last time we spoke, I think we were a bit in tariff turmoil and we were in the room is tariffs last time we spoke, I think we were a bit in tariff turmoil and we were, um, I think there are literally things happening the weekend the weekend that we were, that we were chatting, and from one day to the next, and I think by the time we published, I think I got it out in 24 hours and stuff had changed already again, um, but both on the reciprocal tariffs and now more recently on the tariffs on china, we've got this kind of 90-day hiatus where there is time for negotiation and there seems to be at least some predictability in that period.

Philip Stoten 5:34

What do you think that means in terms of the economy and specifically the electronics economy? I kind of get a sense that some of the Asian CapEx companies were holding off shipping stuff in. Now they're putting stuff on boats, thinking, okay, well, this is maybe a good time to ship stuff in. Are we going to see a lot of that product moving not based on demand, but based on when can we get it into the US under the lowest possible tariff?

Shawn Dubravac, Chief Economist, IPC 6:08

Yep, possibly. I think that we're in a very key time period. If you look more broadly, retailers are often placing their Black Friday and holiday orders around May. May is kind of the deadline to get those orders in and get everything shipped in, and so there was a lot of uncertainty around where tariffs are going to be. That was impacting what those orders should be, what should be brought in, where it should be brought in, and so there was. I think the pause came at an opportune time for retailers, gave them a little bit of clarity so that they could make those decisions, make those purchases and start to think about the consumer shopping season this holiday season. I do think manufacturers will be opportunistic about when they can try to bring it in.

Shawn Dubravac, Chief Economist, IPC 7:08

You know, I think there's still a lot of uncertainty, and we see that in all of the survey work that we do at IPC, that there's still a lot of uncertainty about tariffs. You see it outside of our industry as well, and so it's not clear that we have a lot of of clarity about it. A 90 day pause is good, but it isn't. You know, a pause is not a plan, and so it's not clear that, uh, that people feel like they're working in a clear environment. I'm also not certain that we'll ever get clarity.

Shawn Dubravac, Chief Economist, IPC 7:41

I think that the administration likes having the ability to use tariffs, to threaten tariffs, to use tariffs more broadly than just trade negotiations, and so I think that this administration will use tariffs throughout the entire remainder of the administration and, I think, more pronounced probably in the back half of their administration. Should they lose in the midterm, and should they lose control over Congress, the Senate or the House or both, I do think that the tools that they will have will be diminished and so they'll be reliant on some of these executive orders more, and that's where something like tariffs would play in. So I think we'll continue to have a lot of uncertainty for the next three years about where we are. I do think that you know we're going to see at least some minimum amount. 10% tariffs are probably here to stay.

Shawn Dubravac, Chief Economist, IPC 8:46

Obviously, the negotiations in Geneva we made quick progress over a weekend and we did bring down some of those headline pressures. But I think there's still a lot of uncertainty and I think it's clear that the tariff rates moving forward will be higher, and I think companies now are trying to figure out how much of this can we absorb, how much can we push back up the supply chain? And then how much of the supply chain needs to change so that we can recalibrate around these tariffs? And you've already seen that, if you look at things like you know smartphone imports into the US the imports coming from India were about 12%. Last year In February they were 28%. So you saw a very big shift in a very short period of time.

Philip Stoten 9:40

In trying to reallocate where all of this is coming from, yeah, and I think when you've got production based in different locations around the world and tariffs are very specific to a single location from varying locations, you can actually choose where you ship that in from. You can actually choose where you ship that in from, definitely not afraid of using tariffs for the entire period, I think, and also definitely not afraid of a bit of chaos during that period. I actually think they seem to thrive on chaos and it seems to be a tool that they're using. Interestingly, I've had quite a few conversations with people that are looking to add manufacturing muscle in the US, whether they're European EMS companies or Asian or global EMS companies that don't have or want to scale a footprint in the US. So you have to ask the question of is it working? Working, um, and you know, if you do want to build out a strong manufacturing uh ecosystem in the us, what part of this works and what on?

Philip Stoten 10:48

What other tools should be, you know should be being used? Are the? Are the incentives around restrictions of where devices are shipped and those kind of things, um, going to play well? So I think we're in a curious time of just kind of not just figuring out what's going to happen next. But what works and what outcome does everybody really want? Because I figure we're not going to be building iPhones anytime soon in the US, but maybe certainly products in the defense industry are becoming much more regionalized in their supply chains yeah, if you look.

US Manufacturing Capacity Expansion Trends

Shawn Dubravac, Chief Economist, IPC 11:26

I mean there's been a lot of investment in new manufacturing capacity, some of that because of chip sacks and other things like that and and so you are seeing investment. You have been seeing investment in new manufacturing capacity coming online and I think that will continue and some of it will perhaps reallocate to other sectors of the economy. For example, you had been seeing a lot of investment into the EV ecosystem as growth rates have slowed there. They're still quite strong, but as they have slowed, maybe you see some of that investment moved elsewhere, to other sectors of the economy. And in our most recent sentiment report, which publishes this week, we did ask where are you looking at for new capacity? Have you added new capacity? Are you seeking new capacity? And 17% of firms said that they are looking in the US. Another 6% said they're looking in Mexico. So you did see. You know it's a strong indication that firms are looking in the US. You also saw companies looking in Europe. You saw companies looking in Southeast Asia.

Shawn Dubravac, Chief Economist, IPC 12:37

So there are lots of places that people are looking, and then the majority of firms actually are not looking for Southeast Asia. So there are lots of places that people are looking and then the majority of firms actually are not looking for new capacity At least they haven't in the last 60 days. So I think both things are true. You're seeing some companies look at okay, I need to expand my capacity and my capabilities in places like the US, so let's start that process now. And others are saying well, you know, maybe now not a real time.

Shawn Dubravac, Chief Economist, IPC 13:07

Let's wait for a little bit of more clarity before we start making major commitments. I do think for companies that are looking to add capacity, the US, in some ways, you know you're always going to be safe. I mean it is a little bit of a of a challenge going okay, where do I build if I want to serve the us market? Because, uh, places like mexico that used to look like a very, very safe option yeah, safe option from a you know, financial clarity standpoint.

Shawn Dubravac, Chief Economist, IPC 13:38

Uh, became less certain and wasn't sure if you're going to see tariffs imposed on on those goods and so you know you're always going to be able to avoid tariffs if you're producing right inside the us.

Philip Stoten 13:51

Yeah, yeah, yeah, I think, yeah, I do think. I do think that's the way people are thinking and I, like you say, I think we're in for a whole term of chaos. So I think waiting and seeing for 90 days or six months isn't enough. You either got to wait the whole term out, and obviously you don't know what's coming after this term, or you've just got to make your decisions.

Defense Spending Growth in Europe

Philip Stoten 14:19

I have spoken to quite a lot of people that have global footprints and have really focused their efforts on building a layer of agility on top of those global footprints, because if you can't move stuff around, you don't get the value out of that global footprint, and agility as a competitive advantage is definitely something people are thinking about and perhaps using AI as a way of helping them to do that and helping them to have a little bit more control and predictability about demand and such. The other big sector that obviously is having a lot of impact in the US, but also in Europe, is the defence industry. We're seeing massive growth in defence spending in Europe and we're seeing the European Parliament move much faster than we've seen it move for quite a while in terms of regulation and in terms of getting people together. That's positive for Europe. It seems to be bringing them all together and getting them moving in one direction, an encouraging sign.

Shawn Dubravac, Chief Economist, IPC 15:28

Yeah, I think so, and I think that, you know, all indications are that the war in Ukraine is not going to resolve anytime soon, at least the. You know, the negotiations that have occurred thus far haven't made much progress, and so that that front of the world looks like it's still going to be uncertain and, in some ways, unstable. And so, from a European perspective, there is this, in many ways, new desire to produce and to produce the defense electronics that are needed, and and to also expand, uh, the amount that is invested on that. And so you, europe, has the potential to benefit from two of those shifts. One is the, the shift that we're going to spend more on this, and the second is we want to source it within the region. So, yeah, there's obviously good things happening there.

AI Investments and Gulf Region Growth

Shawn Dubravac, Chief Economist, IPC 16:23

And then, in the last week, you've seen incredible announcements around investments in data centers and and ai infrastructure happening in the gulf region.

Shawn Dubravac, Chief Economist, IPC 16:34

So they're coming out as very strong players and making very big investments.

Shawn Dubravac, Chief Economist, IPC 16:40

Um, you know, I mean these are substantial investments in absolute terms, but but very substantial investments as a percent of the amount that some of these regions, some of these countries in that region, are spending, and so you're going to see big growth, uh, in the years to come, and I think think that was also a wake up call for other countries who are saying wait, we want to be part of this AI wave as well, and so, if the Gulf is making big investments, where else should we be making big investments?

Shawn Dubravac, Chief Economist, IPC 17:14

And it's not surprising that these investments are tied to regions where you've seen big investments in in power generation as well, and so, uh, the an investment in ai infrastructure and in data centers is really an investment in power generation and, uh and electric generation. So I think you're going to still see more announcements this year and next year on that, because I think you're going to still see more announcements this year and next year on that, because I think it it was a very big wake-up call for the rest of the world yeah, absolutely, I think it's uh it.

Philip Stoten 17:51

It's been fascinating on this last tour to see the uh, some of the deals that are coming out and you know some of the uh orders that are coming out and some of the orders that are being placed on companies like NVIDIA that are actually huge. But, as you say, once you've got the data centers, there's a whole infrastructure requirement around that and the production of energy is a huge part of it and it's a game changer in that particular sector. But again, it's a sector that's definitely driving opportunity for the electronic manufacturing supply chain throughout. So, yeah, I think that all bodes well. What's coming up in terms of activity from IPC with respect to data?

Industry Data and Future Outlook

Shawn Dubravac, Chief Economist, IPC 18:39

You said the sentiment reports comes out in this week, this week, and also we're releasing book to bill for both North America EMS and North America PCB and both of those remain quite strong. In the EMS sector it looks like it's been aided in some part by weak fulfillment, by weak shipments, and so that's lifted the book to bill there Bookings look pretty flat year to date compared to last year. So I think, to your point, you're seeing some shuffling happen beneath that headline number still strengthened in defense electronics and probably some weakness in some other sectors that have paused while they recalibrate and reconfigure. And then in the PCB sector, continued strong orders. We saw really strong orders in April, keeping book-to-bill elevated in April, um, keeping book to bill elevated and uh, even with strong shipments in April. You know you still saw uh, very strong bookings that outpace shipments and um, and so I think there's still an indication there that uh, people are looking for supply. They're looking at you know where, where they can acquire supply.

Philip Stoten 20:07

And so I think that's going to continue for the next few months as well. Yeah, and I think we'll see that continue throughout the year. I was actually thinking in one of your first answers you used the word that the economy was okay, and I just think everybody's happy with 2025 if it's okay, if we come out of it okay with a little bit of growth this year, I think everybody will be happy and looking forward to a 2026 where they've got maybe a bit more predictability and they can invest and perhaps see some more aggressive growth, particularly those that are in the defense sector.

Shawn Dubravac, Chief Economist, IPC 20:41

Yeah, and I think the spread on expectations has really widened. So you know, while the average or the median expectations have declined in the US, we've gone from. You know, the consensus expectation was for a little over 2% growth for the economy. Now you're a little over 1% growth for the economy, so that's a pretty significant step down, but the spread has also widened. And so you know there's probably, depending upon what models you look at, 30 to 50% probability that the US finds itself in recession this year.

Shawn Dubravac, Chief Economist, IPC 21:18

And I think, despite the consumer being weak and the consumer being a large component of the economy, it really will come down to what businesses do. If businesses decide that they are going to curtail investment and hold off and wait for better clarity, then I think the US will inevitably find itself in recession. And if businesses continue to invest as they have, then you know the economy could surprise to the upside. Certainly, the markets have repriced their expectations. You saw a pretty good sell off in the market. That has all been recouped. For the most part. The market's relatively flat for the year after yeah the scene after a big dip.

Shawn Dubravac, Chief Economist, IPC 22:06

yeah, so uh, market expectations, I think, are you know, and all of this is happening at a time when the expectations for the economy haven't really recovered. There's still expectations that go lower this year. So I think the market expectations there feel a little bit rich to me, but they do point to a much more optimistic view of the US economy at least, and arguably of the global economy, and it suggests that businesses will continue to invest. At least those expectations are baked in will continue to invest.

Philip Stoten 22:43

At least those expectations are baked in. Yeah, and I think, when you look at those two markets we spoke of defense and AI investment can't slow down in either of those. They're both imperatives that are going to drive continuous growth. Nobody can afford to be left behind in the race for domination of AI. And, yeah, the volatility we see around the world continues to drive the defense sector, which continues to be more and more dependent on electronics. So it is what it is and, yeah, there's definitely opportunities for the companies that are working in those sectors. Sean, thanks so much for your insight. Again, always a pleasure to chat to you. Let's catch up again in a month and see what's happening. Thanks so much.