MMI August 2000
Vol. 10, No. 8: August 2000
Table of Contents
Line Blurs Between Electromechanical and EMS
Flextronics-Chatham merger puts exclamation point on trend
As OEMs, particularly in the communications space, ask more and more of their outsourcing partners, EMS providers and electromechanical houses have been more than willing to oblige. EMS providers are increasingly delivering fully enclosed products, while electromechanical players are shipping more fitted-out enclosures ready to be loaded with electronics. When an communications OEM outsources a bulky rack-mounted product, these two sides come face to face. Does the EMS provider furnish electronics to the enclosure house or does the enclosure house supply the EMS provider? If design is required for the enclosure and its subsystems, who performs that work?
The EMS provider may have the upper hand when it comes to system integration and test, but the enclosure house will often have experience with design of the enclosure and its subsystems.
When this type of outsourcing takes place, EMS and electromechanical capabilities must be merged in some fashion. And an increasing number of EMS providers have taken steps to ensure they can control the supply chain by offering a full system solution that includes all enclosure-related work.
Starting last year, at least seven EMS providers have added electromechanical capabilities through acquisition. Five of them are top-20 providers. So there is no longer a clear separation between the EMS space and the enclosure market. Outsourcing has taken care of that.
The most recent and perhaps most visible example of a melding of electromechanical and EMS capabilities lies in the agreed-to merger of EMS provider Flextronics International and Chatham Technologies, which supplies the communications infrastructure industry with large-form-factor packaging system solutions. In this stock-for-stock merger, Chicago-based Chatham will become part of the newly formed Flextronics Enclosures business unit.
As result, Flextronics will obtain the ability to compete on a more vertically integrated scale in the communications infrastructure market. “In the infrastructure space, we definitely give them more vertical integration on the electromechanical side as well as a fair amount of what we call system solution capabilities,” says Gerry DeBiasi, senior VP of business development at Chatham. Those capabilities encompass design of the packaging system and various subsystems, system integration, system test, supply-chain management, program management and installation services.
But even before this deal, the capabilities of both companies had been headed toward convergence. Flextronics had earlier acquired an enclosure design and manufacturing house, Palo Alto Products (Feb., p. 9) and entered into a strategic alliance with Chatham. Chatham, for its part, had evolved well beyond the scope of a traditional enclosure supplier.
Like some enclosure suppliers, Chatham can build an enclosure and integrate subsystems such as power, thermal management, backplane and cabling. But Chatham had gone further, not only loading boards, but taking the process all the way through final integration, final system test, shipment to the site and installation on site.
This integration work often takes place in facilities close to, but separate from Chatham’s metal fabrication plants. Sometimes, though, Chatham will subcontract the enclosure to a local supplier. “There are a couple of facilities where we tried to put integration facilities in with metal manufacturing facilities and realized that is not going to be a successful model in the long term if you want to do full board-level integration and full functional testing,” Unlike a typical metal fabrication plant, Chatham’s integration facilities are set up with spotless ESD flooring, T1 lines, test equipment, test engineers and so on. And these facilities are quiet in contrast with the thumping sounds of a metal plant.
There is a good reason for the enclosure supplier to handle full systems integration for bulky communications products. You bring the boards to the enclosure and eliminate the extra expense of shipping large enclosures full of air. Take wireless bay stations. “I guarantee it will cost a lot less to ship the boards for that bay station versus shipping the bay station enclosure to the boards,” declares DeBiasi.
“I think some of the OEMs have been uncomfortable having the enclosure vendors do final integration, board-level integration and test because frankly I think a lot of enclosure vendors do not have that skill,” he notes.
Even Chatham, as advanced as it is in final integration, admits there’s room for improvement. “Are we fully developed in that capability? No. But we have a few of those facilities and that is the direction we’re heading,” says DeBiasi.
After final integration and test, Chatham can do the field installation, as mentioned earlier. Here is another area into which Chatham has expanded as has Flextronics. Through several acquisitions including Ericsson activities, Flextronics offers telecom installation services through its Flextronics Networking unit based in Sweden. Chatham will add resources, skills and customers in North America to Flextronics’ Europe-based business in installation services.
When a communications OEM outsources an entire infrastructure product, there is the question of who will control the supply chain (June ’99, p. 5). With this merger, the two companies are saying that the company in control will a need combination of capabilities from both the EMS side and the electromechanical side. As evidence of this, DeBiasi knows of one large communications OEM that is not splitting up its electronics and electromechanical assets as Nortel did last year (Aug. ’99, p. 1).
What’s more, Chatham believes that the Flextronics campus model is the way to go when taking on an outsourced product in the infrastructure space. Facilities for manufacturing the various subsystems could be colocated with an integration facility. Indeed, the two companies are planning such a campus for the Dallas, TX area. The Dallas campus will likely contain an enclosure manufacturing operation, a backplane assembly operation, a cable assembly operation, an integration and testing facility, and a design and product introduction center. A 100-acre parcel has been purchased for the campus.
The prospect of more outsourcing and divestitures by communications OEMs had a lot to do with Chatham’s decision to merge. “We believe we needed to have significant access to capital, a broader set of vertically integrated capabilities, and the strength of a top-tier EMS provider to be able to compete in that evolving marketplace,” says DeBiasi. Flextronics brings access to the public equity markets as well as board and backplane capabilities that Chatham had previously bought on the outside.
But Chatham and Flextronics are not finished with vertical integration. “We don’t intend to stop there. We intend to continue to develop the vertical integration capabilities to be able to provide a true system solution for our communications infrastructure customers,” says DeBiasi. While he won’t be specific, he will say that the merged company will pursue both internal growth and acquisitions in order to provide that solution on a global basis.
Chatham’s current run rate is over $600 million, and the company has grown more than 50% organically since its last fiscal year ended September 1999. It operates in Brazil, China, France, Mexico, Spain, Sweden and the U.S. with nearly 4000 employees and over 2 million ft2. Ericsson, Lucent, Motorola, Nortel and AT&T each represent about 10% or more of Chatham’s business. Ericsson is the largest customer.
The merger calls for Flextronics to issue up to about 8.33 million ordinary shares in exchange for Chatham’s stock, warrants and options. Closing is expected to occur by the end of this month.
However, not every EMS provider sees an immediate need to vertically integrate electromechanical capabilities. Marv MaGee, Celestica’s executive VP of worldwide operations, believes “over the longer haul you will start to see more customers looking for that capability. I don’t see it as a big differentiator. I don’t hear a lot from our customers today that it’s a top priority for them.” But if competitors see an opportunity where this capability makes sense, “I’m not trying to say that it’s is a wrong strategy,” he notes. MaGee thinks this strategy will evolve over time.
Still, Celestica does some enclosure work, but it’s not a big part of the company’s business.
Then there’s Jabil Circuit. Jabil may be one of the severest critics of vertical integration. The company does not believe an EMS provider can be world class in every process along the supply chain (June, p. 6).
So the vertical integration of EMS and electromechanical capabilities is an emerging trend, but by no means a universal one. Whether it continues to gain traction will largely depend on communications OEMs and how far they go into system-level outsourcing. It will also depend on whether EMS providers working closely with nearby enclosure houses can do the job just as well.
Breaking the Mold
Popular wisdom says that when an OEM removes itself from manufacturing, it’s the large providers who benefit. But two small players have recently shown that you don’t need to be big to take over an OEM’s manufacturing operation.
First, consider the case of Asemtec of San Jose, CA, a CM operating in about 22,000 ft2 with some 65 employees and three SMT lines. FOCUS Enhancements (Wilmington, MA), which develops video conversion technology, is closing its Morgan Hill, CA, facility and is outsourcing its manufacturing to Asemtec. The CM is taking over all procurement, manufacturing and testing for FOCUS’ professional video products. The contract includes box build and shipment to FOCUS’ customers. While Asemtec is not acquiring any equipment in this agreement, the company is in the process of buying inventory that it can use in production.
According to FOCUS, this agreement will reduce raw and WIP inventory levels by $400,000 during the next few months.
How does a small CM swing a deal such as this? For one thing, Asemtec had done work for the Morgan Hill operation when it was a local company prior to being bought out by FOCUS. But that was only part of the story. “We were at the right place at the right time to be able to take it over,” says Bill Frandsen, founder and president of Asemtec. But he adds, “We had the infrastructure to be able to handle their present and future requirements.”
For Asemtec, this is a significant piece of business that has the potential to be a “couple of million dollars a year,” reports Frandsen.
“It’s a good fit for both of us,” he notes. “They’re going to get our attention, and we’re looking for a long-term relationship. They would not get that at a large company.”
Lately, Asemtec has picked up another customer of this type, which will provide EMS sales of $1 million to $4 million a year, a range that Asemtec targets. “They’re looking for somebody to provide the infrastructure of a large organization, but yet provide the flexibility of a small company,” says Frandsen.
Testing is a key part of that infrastructure, and Asemtec has its own test engineering staff through the senior level. Manufacturing software is another piece, says Frandsen, and Asemtec runs Manix. Of course, the manufacturing capability must be there as well as people who are trained for turnkey programs. But the company doesn’t try to do everything itself. To complete the infrastructure, the CM maintains a small group of subcontractors for such services as board layout and design.
Shortages have been a problem for Asemtec as they have been for most industry. But being small doesn’t mean you can’t cope. Asemtec has been able to work around the problem and has not missed deliveries. Still, Frandsen says the solution requires open communication between CM and OEM and an open pricing structure.
Asemtec was founded in 1983, and Frandsen reports it has been profitable ever since. The private company does not disclose its revenues. Frandsen will say business is going very well this year after bouncing back from 1998.
The CM specializes in large, com-plex products built in low volumes.
Next comes the example of Assured Industries, a small CM based in Plano, TX. Debunking the rule that says divestitures belong to large providers, Assured is acquiring all the equipment and tooling associated with Intrusion.com’s security hardware manufacturing along with about 33 employees. Under this nonexclusive agreement, Assured will take over system integration, final assembly, and configuration work for Intrusion.com (Richardson, TX), a company that has relaunched itself as a supplier of network and Internet security solutions. Assured will also provide prototyping and pilot run manufacturing.
How did Assured pull this off? “We were able to demonstrate that we could do what needed to be done, when it needed to be done, and at quality levels they needed to have. That’s it in a nutshell,” says Rob Caldwell, GM of Assured. “There wasn’t any magic to it.”
No magic maybe, but a lot of hard work. Before landing this deal, Assured had to respond to a pretty steep ramp-up from the end of last year to about February.
According to Caldwell, Intrusion considered some CMs quite a bit larger than Assured. He believes Intrusion’s monthly volumes probably weren’t high enough to hold the interest of some larger CMs. Assured also has the advantage of proximity: It’s located only a few minutes away from Intrusion.
“It’s a significant deal. On the other hand, we look at it just as what we’ve been working toward the last six, seven years,” says Caldwell.
Assured has endeavored to position itself as a one-stop shop for OEMs that cannot command the attention of first- or even second-tier CMs. These OEMs “are actually looking for the same service levels and offerings in small contract manufacturers,” says Caldwell. So Assured continues to add capability – operating system loading, for example – for system integration, while relying on subcontractors for services such as board layout, mechanical design and in-circuit test.
The CM was founded in 1993 by Will Pasler, David Daniels and Dale Runnels. They bought an existing assembler and revamped the business. Assured’s sales last year totaled $8.0 million, and sales to date are already at $10 million for the current year. The company occupies 21,000 ft2 in Plano and 11,000 ft2 in Richardson, TX. With the ability to handle turnkey programs, Assured offers low-to- medium volume, high-mix PCBA as well as full system integration, configuration and test.
So the lesson here is: If you’re a little, it pays to act like you’re much bigger.
More on ODMs
EMS providers aren’t the only ones enjoying hefty growth in the outsourcing space. Six of the Taiwanese ODMs (original design manufacturers) surveyed for last month’s ODM cover story expect ODM sales growth ranging from 30% to 55% this year. (See table.) So ODMs, like EMS providers, continue to increase their penetration of the electronic equipment TAM (total available market).
Where is the ODM growth in Taiwan coming from? Part of the answer lies with OEMs such as Hewlett-Packard and Compaq. In 1999, HP purchased some $3 billion worth of IT products from Taiwan. The company says this year’s total procurement could exceed $4.5 billion in goods and services. That could amount to 50%+ growth. Last year, Compaq bought about $7 billion worth of goods and services. A forecast from Taiwan’s Ministry of Economic Affairs projects Compaq’s IT purchases will grow to $8.5 billion. According to the forecast, the world’s top 20 IT firms are expected to buy more than $26 billion worth of goods and services from Taiwanese companies.
Clearly, not all of this estimate will come from ODM work. Presumably, other types of purchases are factored in such as chips made by foundries and bare boards. And it is unclear where standard motherboards fit into all this. But the combination of ODM work and box build done by ODMs is significant.
ODMs are also seeking growth by diversifying into new technologies, particularly wireless. The Aug. 7 issue of Business Week showed that a number of Taiwanese ODMs are producing cell phones or plan to be.
How large is the ODM piece of the outsourcing market? MMI believes that the 11 Taiwanese ODMs listed in last month’s ODM feature (p. 2) could have accounted for up to $18 billion in 1999 outsourcing, or more than originally estimated last month. This revised estimate in part reflects additional data that came in after last month’s publication deadline. Some ODM sales figures were revised based on that data (table).
If you count the box build work that some ODMs do, the ODM slice was easily greater than $18 billion for 1999. How much greater is hard to say. There are other Taiwanese companies involved as well as other regions of the world. But whatever the real number is, it’s a fast moving target.
SE Asia on Fast Track
According to a new report from Frost & Sullivan (www.frost.com), the contract manufacturing industry in Southeast Asia grew by 39.3% in 1999 to $15.92 billion. The firm says the communications segment is fuelling demand for contract manufacturing in the region. Moreover, the region’s appetite for electronics has swelled as Southeast Asian economies have restructured following the Asian financial crisis of the late 1990s.
The new study, entitled Southeast Asian Contract Electronics Manufacturing Markets, predicts the EMS industry in the region will achieve a compound annual growth rate of 32.4% from 1999 to 2006. For 2006, Frost & Sullivan projects $113.5 billion in EMS business from the region.
Based on the study’s forecasts, this year’s growth will take up where 1999 left off. Frost & Sullivan expects the contract manufacturing market in the region to grow by 40.2% this year to $22.3 billion.
Within Southeast Asia, the report looks at five countries – Malaysia, Singapore, Thailand, Indonesia and the Philippines, listed in order of 1999 market size. Malaysia continues as the region’s largest EMS market with an estimated 48.2% share in 1999. That share is forecasted to increase to 55.1% in 2006. Next comes Singapore with 22.6% in 1999, followed by Thailand’s 15.5% and Indonesia’s 12.4%. Frost & Sullivan predicts the Thai market will overtake Singapore in 2003. In this analysis, the Philippines remains a small contributor, with a share in the neighborhood of 1% over the forecast period.
The study also divides the Southeast Asian market into three tiers of contract manufacturers. According to Frost & Sullivan, NatSteel Electronics, SCI Systems and Solectron occupy the first tier, defined by the study as having production revenues above $850 million in the region last year. Second-tier CMs range from $150 to $850 million in 1999 revenue from the region, and the study found nine of them. It further estimates that some 1200 CMs fall into the region’s third tier, where 1999 sales are below $150 million.
Box build accounted for 32.7% of EMS revenue in Southeast Asia last year, according to the report. This percentage is expected to rise to 42.2% in 2006.
Despite the impact of the Asian financial crisis on the region’s economies, the EMS market grew steadily during that period, says the study. It attributes that growth to demand from the U.S. and Europe, increased outsourcing, and high growth in end-user markets.
Not mentioned by Frost & Sullivan is another factor – currency. Depressed currencies the region acted to lower costs accrued in those currencies for CMs that do business in U.S. dollars.
Flextronics to Make Stock Deal for JIT
Flextronics International (Singapore) continues its acquisitive ways. The provider has inked a definitive agreement to obtain JIT Holdings, a Singapore-listed EMS provider, in a stock-for-stock merger.
Ranked 17th in the MMI Top 50 for 1999, JIT manufactures in Singapore, Malaysia, China, Hungary and Indonesia. Capacity stands at more than one million ft2, and employment at about 4500. For the fiscal year ended Mar. 31, JIT recorded sales of about $562 million (S$973 million) and a profit after tax but before extraordinary items of about $16 million (S$27 million). Flextronics will issue ordinary shares worth about $640 million in exchange for all of the outstanding ordinary shares and options of JIT.
This deal will give Flextronics operations in Northern China through JIT’s new sites in Tianjin and Shanghai as well as adding much needed capacity in Malaysia. Flextronics says JIT’s presence, infrastructure and about 1300 employees in Northern China will enable Flextronics to meet growing demand in this region.
Also, JIT’s management team is expected to make a significant contri-bution toward growing Flextronics’ business throughout Asia. Flextronics has relied heavily on past acquisitions to fill key management roles.
“Top-tier global EMS providers must have the flexibility and speed to expand geographic locations to meet accelerating customer demand. Our merger with JIT enhances our ability to provide an extensive network of manufacturing facilities in Northern China, Malaysia and Singapore,” states Michael Marks, Flextronics’ chairman an CEO. “JIT’s strong management team and business philosophy complements our core business strategies and solves our capacity requirements in Asia. In addition, many of JIT’s largest customers are also significant customers of Flextronics, and the combined company will be better positioned to serve JIT’s growing customer base.”
Clearly, one of those common customers is Motorola, now JIT’s largest customer representing 46% of JIT’s sales for its fiscal year ended Mar. 31. Both companies manufacture cell phones for Motorola. And as the EMS world knows, Motorola and Flextronics recently announced a five-year outsourcing pact with an estimated value of more than $30 billion (June, p. 1). Hewlett-Packard, which accounted for 40% of JIT’s fiscal 2000 sales, and Philips serve as two more cases of shared customers. Then there’s Fujitsu. The company has been listed as a JIT customer, while Flextronics took over a server operation in Germany for a Fujitsu-Siemens joint venture (Dec. ’99, p. 3-4).
Earlier this year, JIT reported having more than 25 customers (Mar., p. 2). Other customers included in that number were Adaptec, Canopus, Kulicke & Soffa, and Mitsubishi.
Tommie Goh, cofounder and executive chairman of JIT, says, “Merging with Flextronics will propel JIT to be a top-tier player in the global EMS industry. Increasingly, large contracts are going to top-tier players that have the worldwide presence, size and advanced technological capabilities to offer global partnership opportunities for OEMs.”
Also, JIT says its shareholders will benefit from the generally higher market valuations enjoyed by global EMS companies with larger market capitalization. Other benefits for JIT include being part of a company with a broader and more diverse customer base and economies of scale.
The two companies expect that the deal will close at the end of November. It will be treated as a pooling of interests and is subject to certain closing conditions, including approval by JIT shareholders. Tommie Goh and William Goh have pledged their shares, representing 47.2% of the issued and paid-up capital of JIT. The number of Flextronics shares to be issued is subject to a collar of not more than about 9.85 million shares and not less than about 7.27 million shares. Based on the $77.375 closing price of Flextronics stock on Aug. 9, Flextronics would issue about 8.27 million shares.
Started in 1988, JIT has enjoyed a compounded annual growth rate of 78% over the last four years.
For fiscal 2000, complete product build represented 91.5% of JIT’s sales, compared with 32.5% the year before.
SCI in Telecom Deals in U.S. and Israel
SCI Systems (Huntsville, AL) has acquired EOG Inc., a Mid-Atlantic (U.S.) EMS company with an emphasis on telecom and a growing base of optical networking activities. In addition, SCI and Israel’s Telrad Networks Ltd. have entered into an agreement for the sale of Talrad’s Ma’alot facility to SCI. Both deals are expected to contribute to SCI’s growth in telecom.
The EOG acquisition, says SCI, furthers its growth in optical networking, one of the hottest sectors in the EMS market. Financial details were not released.
“This acquisition is significant not only in establishing an SCI presence in the mid-Atlantic emerging growth market, but it also fits very well with SCI’s strategic growth, and product and customer diversification objectives,” states Gene Sapp, SCI’s chairman and CEO.
Besides expanding SCI’s telecom and optical networking activities, EOG also adds new customer relationships in the medical and industrial markets. According to Bear, Stearns & Co. (New York, NY), among EOG’s customers are General Instrument and Marconi Medical.
Certified to ISO 9001, EOG operates a 72,000-ft2 facility in Hunt Valley, MD, 20 miles north of Baltimore. The company specializes in assembly of highly engineered electronics. Bear Stearns reports that EOG’s annual revenues are expected to be in the range of $50 million.
Like SCI, EOG was founded in 1961. Also like SCI, EOG was a pioneer in contract manufacturing; the company began contract work in the 1960s. EOG started out as Electronic Modules Corp., which was acquired by Rexnord in the 1980s. EOG took its present identity after being sold in 1988.
In Israel, SCI is making its second acquisition (Jan., p. 9). The company’s subsidiary there will purchase the Telrad facility, which produces PCB assemblies and other products for Telrad and Nortel. SCI has obtained a multiyear agreement for the supply of more than $500 million of Telrad’s products. The provider will employ more than 200 workers of the plant. Closing is expected in late September.
C-MAC Makes Automotive Move
C-MAC Industries (Montreal, Canada), ranked as the 13th largest EMS provider in the 1999 MMI Top 50, has reached an agreement to acquire Invotronics Manufacturing (Farmington Hills, MI), which designs and manufactures electronic body controllers, electromechanical systems and intelligent switches for the automotive industry. Subject to regulatory approval, the transaction is expected to close late this month.
“This acquisition represents a key milestone in C-MAC’s automotive strategy and is timed to take advantage of the expansion of electronic products in the automotive sector, not dissimilar to what we have experienced in the communications market in the past few years,” states Dennis Wood, C-MAC’s chairman and CEO.
Invotronics is a unit of Magna International (Aurora, Ont., Canada), also an automotive supplier, which provides interior and exterior body and chassis systems to every major automaker in North America and Europe. Magna is publicly traded in Canada and the U.S.
Donald Walker, Magna’s president and CEO, comments, “This divestiture of Invotronics to C-MAC is important to Magna as we expand our market based on our core competencies, with reliance on our strategic partners to support our other needs in providing integrated solutions. C-MAC will provide Magna with advanced electronics design and manufacturing expertise that Magna will utilize in developing and marketing total integrated solutions to our OEM customers.”
Meanwhile, C-MAC has picked up two companies on the components side of its business. It has acquired G.H.Z. Technologies, a producer of microwave filters and other components, and T.Q.F. Technologie, a related business that provides specialized plating for various microwave and wireless components. C-MAC says having access to an in-house source of specialized components including quartz crystals, crystal oscillators and filters is an important aspect of its selective vertical integration strategy.
For the Q2 ended July 1, C-MAC reported sales of Cdn$581.9 million, up 126% over the year-earlier quarter. Net earnings grew by 171% to Cdn$24.2 million.
Sanmina Gaining Design Operations from Nortel
Similar to Solectron deal
Last month, Sanmina (San Jose, CA) said it had signed a definitive agreement to acquire from Nortel certain operations in ECAD (electronics computer-aided design), electronics systems packaging design and product integrity. These activities make up Nortel Networks Wireless and Enterprise Design Services Operations.
With respect to ECAD, this deal resembles one that Nortel recently announced with Solectron (July, p. 7). Solectron has now completed its acquisition of Nortel ECAD capabilities in five locations.
As in the case of Solectron, Sanmina’s acquisition will expand its relationship with Nortel. Sanmina has a multiyear design services and supply contract with Nortel, which sold some electromechanical operations to Sanmina last year (Aug. ’99, p. 3).
In this latest agreement, Sanmina is acquiring product integrity and regulatory test facilities and equipment in the U.S., Canada and Europe. The provider will provide jobs to about 110 Nortel people. The transfer of employees involves several physical design teams.
The transaction was expected to close by the end of last month. It is subject to employee consultation in Europe.
Partly as a result of this deal, Sanmina has set up a Global Technology Solutions Group to support customers with a full range of design services. This group includes over 200 technical personnel.
Celestica Acquires Bull’s EMS Unit in U.S.
Celestica (Toronto, Canada) has purchased Bull Electronics Inc., a CM in Lowell, MA, and formerly the North American EMS operation of France’s Groupe Bull. The price was not disclosed. Celestica bought the operation from Bull HN Information Systems.
This deal follows the news that Bull intends to sell its French EMS unit, Bull Electronics Angers, to ACT Manufacturing (July, p. 6). So Bull, like a number of other OEMs in the past, is withdrawing from the contract manufacturing business.
The 130,000-ft2 Lowell operation employs over 200 people and focuses on complex PCBA, final systems assembly and test, and supply chain management.
Celestica intends to move its Andover, MA operation, originally acquired from HP, to the Lowell site. The two operations will be merged. Based on Celestica’s agreement with HP, the provider had always planned to move out of the Andover campus that is now part of HP spin-off Agilent Technologies. Out of fairness to employees, Celestica needed to find a site within a certain radius of the Andover location.
The company had looked at other sites. “When this acquisition opportunity came along, it just made a lot more sense to put the skills of the two organizations together,” says Marv MaGee, Celestica’s executive VP of worldwide operations. Andover has OEM attributes in its technical skills and low-volume, high-complexity manufacturing, notes MaGee, while the former Bull operation is a proven CM with the ability to deal with multiple customers and aggressively pursue new business. “So you put the two together, and it makes a great combination,” he declares.
This deal also gives Celestica much more capacity to take advantage of opportunities in the New England market. One of those opportunities, and an important one, is Cisco, which is expanding its presence in the region. Cisco is a customer of both Celestica and the former Bull operation.
Elsewhere in New England, Celestica has opened a 206,000-ft2 facility on the site of what was Pease Air Force Base in New Hampshire. The provider has moved an operation from Exeter, NH, where it had been in a leased facility, to the newly built plant. That operation, also acquired from HP, focuses more on system build and fulfillment.
CTI To Buy Mexican CM
CTI Technology (Springfield, MA), a new name in the EMS business, has signed a letter of intent with American Development Company (ADCO) to purchase the manufacturing assets of Maquila Americana, S.A. de C.V. of Rosarito, Mexico, a high-volume EMS operation that is licensed to function as a maquiladora.
The Mexican operation occupies a 30,000-ft2 facility that was completed in late 1999. Its Rosarito location is about 15 miles south of Tijuana. Facility equipment includes four SMT lines, and the work force numbers 120. In conjunction with this letter of intent, CTI plans to manufacture a medical product at this site under a contract that is slated for completion within 45 days.
“With the addition of this important operation, we have greatly expanded our capability as a national and international provider of manufacturing services to a growing list of customers in our targeted markets of electronics, computer, medical and telecommunications industries. This relationship will dramatically broaden our manufacturing base and add significant depth to our management team,” states George Davies, CTI’s chairman and CEO.
ADCO executives Gary Warford, Larry McFall and Weldon Boyd will join CTI as senior management. They will retain responsibility for operating the Mexico facility and developing other offshore capabilities including material sourcing and procurement.
This acquisition will give ADCO’s customers access to a broader range of services. ADCO of Baja California offers EMS through its Mexican operation.
CTI resulted from a recent reverse merger (June, p. 11). CTI’s predecessor company started in New England through the 1998 acquisition of Northeast Technical Services, a long-time CM in Springfield. Two more EMS companies, Clairemont Electronics (Yanceyville, NC) and Contract Technologies (Pompano Beach, FL) were recently added to the CTI stable.
China Invites More EMS Investment
Flash Electronics, Sanmina and Viasystems spending in China
The importance of China as a low-cost region for EMS continues to grow. Case in point: Three EMS providers have recently announced either a new facility or acquisition in China. Both Flash Electronics and Sanmina have chosen China for their first EMS operations in Asia. Viasystems, which is transforming itself from PCB fabricator to EMS provider, is expanding its presence in China with a new EMS facility.
# In Shanghai, Flash Electronics (Fremont, CA) has completed a 55,800-ft2 facility, its first plant outside of Silicon Valley. The facility will provide high-volume EMS, including turnkey SMT, box build, fulfillment, and global distribution. Start-up production is scheduled for Oct. 1., with volume production underway by Dec. 1. Complete box build with global fulfillment is expected to be available by July 2001.
“By expanding into Asia with a first-class, high-volume site in Shanghai, Flash will be better able to serve its present customers, while also attracting new OEMs from both sides of the Pacific Rim. This is consistent with our goal of growing at least 80% annually, to become a top-tier player in the global EMS industry,” states Chin Fan, Flash’s president.
Fan says Flash is committed to increasing its manufacturing capability in Asia. The company plans to add a larger facility of about 150,000 ft2 in the Shanghai area by January 2002. At that point, Flash would employ 300 to 400 workers in China and utilize 30-plus SMT lines there.
The CM recently broke ground on its third facility in Silicon Valley, and that plant is slated to come on line in December. By year end, Flash will have doubled its space to over 200,000 ft2 from 96,000 ft2 at present, doubled its employment to 800, and tripled its revenue run rate to about $300 million.
Privately owned Flash has a customer base that includes Nokia, Digidesign, Pinnacle Systems, PE Biosystems, CacheFlow, Lexar Media, Adept Technologies, Redback Networks and SonicWall.
# Sanmina has acquired a 270,000-ft2 PCBA and box build facility in Shenzhen, Guangdong province, China. This purchase also includes administrative and dormitory buildings as well as administrative offices in Hong Kong and a procurement office in Taiwan. The acquired business, Ocean Contract Manufacturing Ltd., had been a subsidiary of Ocean Information Holdings Ltd., a Hong Kong-listed company. Ocean’s contract manufacturing business made the MMI Top 50 for 1999.
The acquired business, now a subsidiary of Sanmina, focuses on PCBA and targets telecom, networking, computer and medical electronics markets. Customers include Alcatel, HP, IBM, Ascom and Fujitsu.
Bernard Leung, COO of the Ocean unit, will continue to manage it.
Sanmina says it looks forward to further expansion in Asia, especially China’s telecom and networking sectors.
# Viasystems Group (St. Louis, MO) has begun construction of a 150,000-ft2 EMS facility in Shanghai. There the company will be adding about 85 managerial and engineering positions plus 250 operators. Viasystems Shanghai will become an integration center, serving customers in the Shanghai and Suzhou area. The facility will offer capabilities such as backplane assembly, enclosure manu-facturing, integration of subsystems, systems test and logistics. Production is scheduled to begin in Q4.
To further support local customers, Viasystems’ facility in Guangzhou is expanding its EMS capabilities to include cable harness assembly and PCBA. These new services will also complement and support the Shanghai integration center.
With the new center, Viasystems’ work force in China will increase to more than 9500 employees at seven facilities.
Viasystems reported that it increased the EMS percentage of its sales to 45% in Q2 from 34% in Q1. The company expects the EMS percentage to increase again during the second half of 2000.
# One could even cite a fourth case. China figured in Flextronics’ intended acquisition of JIT Holdings, which gives Flextronics operations in Northern China (see p. 5).
More facility projects…In Chihuahua, Mexico, Jabil Circuit (St. Petersburg, FL) has broken ground on two plants, each planned at 275,000 ft2. One will serve the automotive industry, while the other will focus on the consumer sector. The facilities are projected for completion during Q1 2001. Jabil currently leases 43,000 ft2 there….Plexus (Neenah, WI) has signed an offer to purchase an existing 67,000-ft2 facility in Appleton, WI, to house Plexus’ Wisconsin operations for new product introduction and build to configure. A 60,000-ft2 addition to the company’s engineering headquarters in Wisconsin is scheduled for completion by Oct. 1. Also, Plexus plans to more than double its Kentucky operation and to add a greenfield field facility of about 100,000 ft2 in Illinois. The company says it will be adding close to 300,000 ft2….Anticipating growth of system integration requirements, Benchmark Electronics (Angleton, TX) is doubling the size of its main building in Dublin, Ireland, and increasing its Huntsville, AL facility by about 50%. The Dublin building will expand from about 50,000 ft2 to 100,000 ft2, while the Huntsville facility will gain about 130,000 ft2. Also, the provider is adding 50,000 ft2 of leased space in Hudson, NH, and 25,000 ft2 of leased space in Beaverton, OR….Teradyne’s Connection Systems Division (Nashua, NH), or TCS, is set to open a 144,000-ft2 plant in Hudson, NH, for backplane production. “Our backplanes and interconnects are powering the growth of the Internet. Our customers have an appetite for high-performance interconnect solutions and that’s fueling our expansion in Hudson and elsewhere,” says Rick Schneider, GM of the division and a Teradyne VP. Among TCS’ customers are Cisco, Alcatel, EMC and Lucent. The new facility, Teradyne’s sixth Nashua-area location, will increase the company’s manufacturing space in the area to nearly 700,000 ft2. In addition, TCS has put a new 46,000-ft2 facility on-line in Fremont, CA, for backplane assembly and systems integration.
Another deal done…Solectron has completed the purchase of Bluegum Group, reportedly the largest CM in Australia (June, p. 10). Financial details were not disclosed.
Alliances and such…Circle International (San Francisco, CA), a global logistics company; Omni Industries (Singapore), a publicly traded CM in Singapore; and Mentor Media (Singapore), a supplier of services such as media distribution, printing and packaging, have formed an alliance to provide integrated supply-chain services. Called COM, this alliance is billed as an all-in-one solution for outsourcing manufacturing, assembly and logistics….Wong’s Technology USA Corp., a subsidiary of Wong’s International (Holdings) Ltd. (Hong Kong), has entered into a collaboration agreement with Infinite Technology Corp. (Richardson, TX) to establish a system-on-chip (SoC) product business. Wong’s will manufacture the resulting SoC products on an ODM basis. They will be based on ITC’s DSP technology and developed by independent design teams….Earlier, another Wong’s subsidiary, Wong’s Electronics (Hong Kong), and C-MAC Industries announced a joint venture operation in Mexicali, Mexico. The 50,000-ft2 facility began production in April. This is the second joint venture between the two companies. In 1995, they set up a manufacturing operation in China….Alpha Metals, a supplier of solder materials; ChipPAC, an IC packaging house; Hewlett-Packard and Sanmina have formed an alliance to evaluate the reliability of lead-free PCB assemblies.
Flextronics Lands Cell Phone Program
Under a new outsourcing agreement, Flextronics will manufacture about 33 million mobile phones for Siemens Information and Communication Mobile Group by the end of 2003.
To estimate the size of this contract, at least two analysts are using a revenue average of $100 per phone. Based on that figure, the contract could be worth more than $3 billion.
According to analyst Alexander Blanton of Ingalls & Snyder (New York, NY), “this is by far the largest cell phone program ever awarded.”
Siemens will also increase capacity at four locations including Shanghai, China, where production will double to 10 million units.
“By outsourcing a portion of our cell phone production, we can react more quickly to market conditions and get our products to market with greater speed. In addition, we can decrease the amount of capital we spend for production and thereby lower our overall invested capital,” states Rudi Lamprecht, president of the Siemens group. “We are continually sold out of mobile phones, and this agreement with Flextronics allows us to satisfy the enormous demand.”
Siemens says outsourcing of cell phone production will increase over the long term.
This agreement expands the two companies’ relationship, which includes Flextronics taking over a Bosch mobile phone site to supply Siemens (April, p. 3).
More new programs…Cayman Systems (Billerica, MA) has signed an exclusive agreement with Celestica as manufacturer for Cayman’s family of gateway products….Jabil Circuit will provide EMS to optical networking company Sycamore Networks (Chelmsford, MA) for its next-generation transport and switching products….INRANGE Technologies (Mount Laurel, NJ) has selected Sanmina to manufacture a new line of Fibre Channel Directors for storage area networks. Manufacturing will primarily take place in Sanmina’s Manchester, NH plant. INRANGE will continue to manufacture its other product lines. This move will allow INRANGE to focus on R&D and discrete manufacturing, while leveraging Sanmina’s volume purchasing and production….Mariposa Technology (Petaluma, CA) recently outsourced all of its in-house production to Solectron to achieve volume manufacturing needed for the growing customer demand for its products. Mariposa is a developer of integrated access devices for the convergence of business-class data, voice and video….Motorola’s Integrated Electronics Systems Sector, GM’s OnStar unit, and CM Saturn Electronics & Engineering (Auburn Hills, MI) have teamed up to develop and produce advanced wireless products for GM vehicles beginning with model year 2001. Saturn is assigned the manufacture of certain components under Motorola’s contract for OnStar, a multiyear, multimillion-unit program. The value of this initiative could approach $1 billion over its lifetime….Bloomberg News reports Ionics EMS, a unit of Ionics Circuits of the Philippines, has landed a contract to produce 10 million rewriteable CD drives a year for Philips….Group Technologies (Tampa, FL), a subsidiary of publicly held Sypris Solutions, has been awarded a $23.2-million manufacturing contract from the Weapons Programs unit of Boeing for the Brimstone missile program. Manufacturing is slated to begin in Q3….Also on the military side, LaBarge (St. Louis, MO) has landed a contract from Lockheed Martin to produce PCB assemblies for a U.S. Marine Corps radar system. The contract is expected to be worth more than $3 million. LaBarge has also been awarded a contract valued at about $1.1 million to provide assemblies for a U.S. Navy communication system.
Loading up on capital…Celestica has sold 20-year liquid yield option notes (LYONs), resulting in gross proceeds of $750.1 million. The provider intends to use the net proceeds for capital expenditures, working capital and general purposes, including future acquisitions. The underwriter will purchase an overallotment representing additional gross proceeds of about $112.5 million….C-MAC Industries has completed an IPO in the U.S. and a public offering in Canada totaling 11.5 million common shares. Net proceeds of about $693.9 million (U.S.) will be used primarily for acquisitions and new facilities, as well as for capital expenditures, working capital and general corporate expenditures. C-MAC shares will be listed on the New York Stock Exchange under the symbol EMS. In June, C-MAC raised Cdn$189 million in total proceeds from a stock offering in Canada….Jabil Circuit has filed a universal shelf registration statement that will enable the company to raise up to a total of $1.5 billion by selling debt securities from time to time. The CM plans to use the net proceeds for general purposes, including capital expenditures, repayment or refinancing of debt, and working capital. Jabil may also use a portion of the proceeds for acquisitions, but currently is not involved in any material acquisitions that would require these funds. In June, the provider sold 13 million shares of common stock amounting to gross proceeds of $542.8 million. …Also in June, Flextronics agreed to sell senior notes through a private offering totaling $645 million in gross proceeds. The company also sold 5.5 million shares of common stock at a public offering price of $71.25. That offering produced gross proceeds of $391.9 million, excluding any overallotments. Between the two offerings, Flextronics has raised over $1 billion in gross proceeds….Benchmark Electronics filed a registration statement in June in connection with a public offering of 2.75 million shares of its common stock.
More financial news…This month, shares of Pemstar (Rochester, MN) started trading on the Nasdaq exchange under the symbol PMTR. In this previously announced IPO, the CM offered 8.4 million shares at $11 per share for a total of $92.4 million raised (May, p. 11). Pemstar intends to use the net proceeds to repay debt, fund recent acquisitions and for general corporate purposes. The company had earlier anticipated a price range of $11 to $13 a share (July, p. 5)….Last month, SMTC Corp. (Toronto, Canada) completed its IPO in the U.S. and Canada (April, p. 7). Total net proceeds of about $156 million were used to repay debt and to finance the cash portion of its Pensar acquisition (June, p. 10-11)….On the other hand, Saturn Electronics & Engineering (Auburn Hills, MI) has decided to postpone its IPO due to current market conditions (April, p. 7-8)….Flextronics and Plexus have declared two-for-one stock splits….For the quarter ended June 30, Varian’s Electronics Manufacturing unit (Tempe, AZ) recorded sales of $46.2 million, up 96% year over year. Operating profits at $3.6 million also climbed 96%….Reptron’s K-Byte Manufacturing unit (Tampa, FL) reported Q2 sales of $56.8 million, an increase of 54% from a year earlier. Gross profit rose 109% to $7.3 million….At Nasdaq-listed provider Nortech Systems (Wayzata, MN), Q2 sales from continuing operations grew by 40% year over year to $13.2 million. Net income from continuing operations went up by 55% to $448,009….For the fiscal year ended April 30, SigmaTron International (Elk Grove Village, IL) posted sales of $88.9 million, compared with $88.2 million a year earlier. Net income declined by 55% to $766,647. …ZEVEX International (Salt Lake City, UT), which both develops its own medical devices and provides medical EMS, reported that contract manufacturing sales for Q2 exceeded $4 million, up 33% from Q2 1999.
People on the move…IEC Electronics (Newark, NY) has appointed Thomas Lovelock as president and CEO, effective Aug. 21. He will replace Russell Stingel, who has served as president and interim CEO following the death of David Fradin in December 1999. Lovelock comes from another CM, Group Technologies, where he served as president and CEO. Earlier, IEC hired William Nabors as VP and GM of its Newark, NY, facility, a 300,000-ft2 operation. Before joining IEC, Nabors worked for EMS provider XeTel as VP and GM. Other people who have recently joined IEC include Kevin Monacelli as corporate director of finance, Joseph Karwowski as director of programs for IEC’s Texas and Mexico facilities, and Terry Conner as plant manager in Reynosa, Mexico. Karwowski’s management experience includes time at GE, while Conner’s resume includes Zenith Electronics. In addition, IEC has promoted Eric Griffen as corporate director of business development. Finally, IEC has named Dermott O’Flanagan to its board of directors. O’Flanagan had served as president of Dovatron International, a CM that was part of Flextronics’ acquisition of The Dii Group….Group Technologies (Tampa, FL) has promoted James Cocke to president and CEO in place of Thomas Lovelock, who has departed as mentioned earlier. Cocke had served as GroupTech’s VP of finance, contracts and program management. GroupTech has also named William Walker as VP of operations. He joins the company from Unova, where he was VP and GM at the Identification Systems Division of Unova’s Intermec Technologies Corp….ACT Manufacturing (Hudson, NH) has appointed Christopher Gorgone as VP of administration and treasurer, responsible for financial and strategic planning, M&A, IT, legal and treasury. His most recent experience was in the “e-health” segment of the health care market. …ACT’s former VP of business development, Robert Egan, has joined provider CTI Technology (Springfield, MA) as VP of business development….Manufacturers’ Services Ltd. (Concord, MA) has named Sam Landol as its first president of Americas operations. He will direct MSL’s sales and manufacturing operations throughout North America and will figure in MSL’s expansion into key markets in Latin America. Landol spent almost 15 years with Digital Equipment’s operations in Puerto Rico and Latin America and most recently served as president of Nypro Puerto Rico. At Nypro, he launched the company’s contract manufacturing business. Also, MSL has added three members to its board: Robert Donahue, president of MSL; William Weyand, president and CEO of Structural Dynamic Research; and George Chamillard, chairman and CEO of Teradyne….Solectron has appointed Kevin Whalen as VP of corporate communications. He joins the company from Shandwick International, a PR firm where he was a VP.
More management changes…SCI has named Bruce Leasure as corporate VP of marketing and sales. Leasure arrives from Solectron, where he was director of account management for the Eastern Region. Previously, he was VP of marketing and business development for WorldPartners, a communications consortium….C-MAC Industries has appointed Claude Michaud as VP and CFO. He had been managing director of investment banking at Scotia Capital. Michaud replaces Robert Coallier, who left C-MAC earlier to pursue new opportunities….EFTC (Denver, CO) has hired Peter Harper as CFO. He comes from Iomega, where he was VP of finance. Harper replaces Stu Fuhlendorf, who had left EFTC earlier. The CM also has brought in Michael Eblin as senior VP of operations. He joins EFTC from Sony, where he was director of operations for businesses with revenues exceeding $1.0 billion. In addition, EFTC has hired Thomas MacLaren as GM of its Northwest Operations, which include facilities in Newburg, OR, and Moses Lake, WA. He left M.A. Hanna Co., where he served as VP of North American Plastics Manufacturing. EFTC says it is adding management as part of an overall plan….Flash Electronics (Fremont, CA) has named Bob Dean as VP of business development, a newly created position. Before joining Flash, Dean spent seven years at Lam Research, where he held management positions that included quality, manufacturing and production engineering. He assumes duties from Ed Hayes, who had been VP of corporate development. Hayes will continue with Flash as a consultant on a part-time basis….At Nextek (Madison, AL), Richard Savas has accepted the position of VP of business development. He most recently served as VP and GM of Sanmina’s Guntersville, AL facility. Privately held Nextek specializes in high-function, small-form-factor assemblies utilizing advanced interconnect technologies….Nam Tai Electronics (Hong Kong) has appointed Joe Fox as COO of North America. Fox, a former VP at Texas Instruments, will support Nam Tai’s North American operations including business development and the establishment of operating and R&D facilities….Kimball Electronics Group (Jasper, IN), the EMS segment of publicly held Kimball International, has hired four new business managers to focus on targeted accounts. The new hires are Joe Hargett, Dave Doctor, Mark Yaquinto, and Dave Malick.