MMI January 2000
Vol. 10, No.1: January 2000
Table of Contents
2000: The Year of the Supply Chain
MMI’s Annual Outlook for the Year Ahead
Pop culture often treats the year 2000 as if it’s the beginning of some new era. But for the EMS industry that new era actually began in the late 1990s when OEMs realized that they had exchanged their vertical integration model for a somewhat more complex supply chain that included their contract manufacturing partners and suppliers. The benefits of outsourcing were undeniable, and the process was largely irreversible. But as product life cycles shortened and the burden of inventory grew, OEMs needed more speed and flexibility in their supply chains.
Last year, MMI identified supply chain optimization as a megatrend that will drive the industry for years to come (Jan. ’99, p. 1). This year, supply-chain management becomes the megatrend. The supply chain will pervade many, if not most, industry trends in the year 2000.
·# A continuing boom in low-cost geographies. There is a simple reason why Mexico — specifically, Guadalajara — is booming as a contract manufacturing center and Central Europe is about to. Mexico allows U.S-based OEMs to put their board assemblies and increasingly, finished products in a low-cost manufacturing location while keeping the length of their supply pipeline relatively short.
OEMs now want a streamlined supply chain. That means product manufacturing should occur in or near the region where products are consumed. And the supply of board assemblies and other subassemblies should be as close as possible to product manufacturing. More and more outsourcing decisions are taking this geography lesson into account.
A few years ago contract manufacturers stampeded into Mexico. Now the same thing is happening in Central Europe, with Jabil Circuit perhaps the latest provider to announce a site in the region (see News, p.11).
Implication: The EMS business in Mexico and Central/Eastern Europe should continue to grow faster than the industry at large. Low-cost locations in Asia, especially China, are also poised for healthy growth.
As North American work has migrated to Mexico, so too will more European programs be sent to Central/Eastern Europe. Local CMs in Western Europe will be at a disadvantage when competing for high-volume, cost-sensitive business, much to their chagrin.
Among top-tier providers, a new definition of global is emerging. You not only need a presence in the three major world markets, but you must also offer manufacturing in low-cost regions serving each of those markets.
·# More M&A and alliance activity will follow the supply chain. In years past, if a CM went after a different type of company, it would usually be some sort of design or quick-turn prototyping house that would extend the CM’s front-end capabilities. These days, CMs are acquiring or affiliating themselves with all sorts of companies (Oct. p. 1). Though different, these target companies tend to have one thing in common. They give the acquiring company or alliance partner control over an additional part of the supply chain.
For the most part, supply-chain acquisitions currently favor three types of companies: enclosure manufacturers, repair companies and subassembly suppliers. There’s every reason to believe that acquisitions of these types will continue. In one way or another, these deals bring value to the acquiring company by integrating a part of the supply chain that the company deems strategic.
A fourth type of supply-chain acquisition — raw board suppliers — also bears watching. Although most CMs buy their raw boards, companies such as C-MAC, Flextronics and Sanmina have sought to build internal capability in PCB fab. Indeed, board fabrication played an important role in Flextronics’ proposed acquisition of The Dii Group (Nov.’99, p. 1; Dec. p. 4).
Supply-chain strategy will also keep design on the front burner. The party that controls product design also has the ability to design in components of choice. Large providers are anxious to have their preferred components designed into customer products because CMs gain pricing, allocation and delivery advantages with preferred components. ODM (original design manufacturer) alliances or acquisitions are one way to accomplish this end.
Implication: Based on supply-chain acquisitions, it will become easier to differentiate some CMs. For example, C-MAC, Sanmina, SCI Systems and SMTC Manufacturing are building strength in enclosure manufacturing. Sanmina’s planned acquisition of an Alcatel enclosure operation is the latest example of this strategy (see News on p. 7-8).
Supply-chain deals, particularly if they are large, make a company less of a pure-play contract manufacturer. As a result, analyzing performance becomes more difficult. For example, a PCB fab operation runs on a different business model than a CM does.
These deals also blur the line between one type of supplier and another. Take one example. What is the difference between a CM that acquires an enclosure manufacturing company and an enclosure manufacturer such as Applied Power, which operates a contract manufacturing business? Here’s another. How do you tell an ODM supplier of computers from a contract manufacturer with ODM capabilities?
·# OEMs will increasingly outsource an entire product supply chain to one provider. This trend should not come as a shock. In fact, it results from the confluence of two other well-known trends. First, as OEMs have become more comfortable with outsourcing, they have enlarged the scope of what they will farm out. Second, OEMs in recent years have pared down their supply bases to forge strategic relationships with a select group of suppliers.
Outsourcing a supply chain this way benefits the OEM in several ways. With one provider in control of the chain, the OEM avoids handoffs that can consume valuable time during development and ramp-up. Because one provider is managing the chain, this provider is in a position to bring all the DFX disciplines into the design process early, instead of later on when design fixes cost time and money. Also, the same entity that manufactured the product is also performing warranty repairs. So there can be no finger pointing if a field repair problem is traced to manufacturing or a parts supplier.
Implication: This kind of outsourcing obviously favors CMs with end-to-end capabilities. Supply-chain acquisitions are a fast way of extending a CM’s capabilities (see previous trend).
CMs will be doing more and more order fulfillment as well as after-sales repair and service work. For the EMS industry, both of these activities should grow faster this year than bread-and-butter board assembly.
By combining activities under one supply-chain management program, revenue potential is much greater.
# Supply-chain management will become a core competency and defining strategy for more and more CMs. Look no further than Solectron. Last year, the company made it clear that it would do everything in its power to serve as the end-to-end provider for a customer’s supply-chain needs. When a market leader like Solectron takes a major stand, others in the industry listen. No one wants to feel that they are falling behind their competitors. Yet no one wants to be copy cat. So look for other providers to put their own spin on supply-chain management.
Implication: Providers will be looking for ways to improve their supply-chain management skills. That means more IT investment in such areas as quoting, procurement, component and supplier management, product data management, order entry, order tracking and collaborative planning.
Supply-chain management requires new industry language. Although the terms contract manufacturer and EMS provider will continue to be used here and elsewhere, they don’t capture the essence of managing a supply chain. So more providers will use supply-chain management or some variation in describing themselves.
#· Supply-chain communications over the Internet will accelerate. If you’re looking for a fast-breaking trend, this is it. The Internet is perhaps the key enabler to a highly responsive supply chain.
CMs already use the Internet for such purposes as obtaining supplier quotes, searching for components and providing order status to customers. EMS transactions over the Internet will multiply in 2000, which will likely mark the watershed year for e-business in the EMS industry. This year for example, more EMS storefronts will appear, allowing OEMs to order online.
But the ultimate goal of e-commerce is to have computers, not people, communicating over the Internet. Standard setting will pave the way for such communication industrywide. The RosettaNet consortium has released ten Partner Interface Processes (PIPs) for system-to-system dialogs among trading partners in the IT supply chain. PIPs define how business processes are conducted in the chain. The ten PIPs released, the first of an eventual 100, support catalog updating and purchasing. RosettaNet plans to have standards deployed globally in production systems on Feb. 2. Among the RosettaNet members committed to this date is Solectron.
Also, advances in supply-chain software will make it possible to use the Internet in new ways. New software for advanced planning and scheduling (APS) will enable CMs to engage in collaborative planning with customers and suppliers over the Internet. (See next article on p. 4.) Indeed, 2000 may well be the year that collaborative planning comes into its own.
Implication: With more EMS transactions taking place over the Internet, the question then becomes how will they be organized. There are at least three potential scenarios. 1) Large OEMs form their own Internet-based supply chains. 2) CMs, especially major players, set up separate trading communities, each with a CM at the hub. 3) Neutral parties establish industry marketplaces that connect OEMs, CMs and suppliers.
Marketplaces, of course, are already in use for activities such as spot buying of components. But selecting, forecasting and ordering EMS services is a different matter. And there are pros and cons — depending on the point of view — of an EMS industry marketplace. With an industry trading community, an OEM is free to look at any CM connected to the hub, even a provider that normally would not show up on the OEM’s radar screen. That’s great for the little guy. But the OEM’s strategic manufacturing partners may not be so keen about exposing a customer to other providers. So Julie Fraser, principal and director of market strategies at Industry Directions (Newburyport, MA), poses this question on behalf of CMs: “How do we create trading communities that foster our relationships without at the same time exposing ourselves too dramatically?”
On the other hand, an industry marketplace creates an efficient communications network for suppliers. “A supplier doesn’t have to log onto 20 different web sites to gather the information,” points out Deborah Wilson, a Hampstead, NH-based consultant in purchasing automation.
Already, at least three parties have each introduced a trading hub or portal in the outsourcing arena. They are Advanced Manufacturing Online (www.ecnet.com), Agile Software (www.myagile.com) and i2 Technologies (www.tradematrix.com). What’s more, Avnet will reportedly launch a marketplace that will link supply-chain partners.
Major OEMs may hold the key to how Internet supply chains will unfold. If a marketplace can entice some large OEMs to participate, they would have leverage to bring their CMs into the hub.
But it’s early yet. Marketplaces are not the only model that will appear in 2000. At least one CM is setting up its own trading community. SMTC Manufacturing (next article) is positioning itself to serve as the supply chain integrator for its customers and suppliers.
Some Familiar Trends
Consolidation. Based on 1999’s record, only the largest providers — maybe the top six — can be considered immune from consolidation. Trouble is, the top-tier is generally occupied with OEM divestitures and the integration that must follow. So don’t look for the top-tier to be buying up lots of smaller competitors. Consolidation, therefore, will occur among companies in the lower ranks. Last year, a number of mid-tier players disappeared in acquisitions. There will probably more such moves in 2000.
But industry consolidation isn’t reserved for the mid tier. Some regional players will start or continue to buy local companies. Take Primetech. The Canadian CM intends to acquire a contract manufacturing business in Nova Scotia (see News p.10).
OEM divestitures. If January is any indication, 2000 will be a big year for divestitures. Consider one of the latest examples — Celestica’s intended acquisition of IBM assets in a deal that will generate $1.5 billion in annual revenue (see News on p. 7). Only a few players in the industry could digest such a program. It clearly shows the advantage that the largest players continue to have when a major OEM outsources a large chunk of business. The old maxim of the rich getting richer continues to apply to the EMS industry.
Note: This outlook for 2000 consists of forecasts that may or may not prove accurate.
Stage Set for Collaborative Planning
APS systems make it happen
With all the buzz about e-business, one might expect that by now component suppliers, contract manufacturers and OEM customers would be all linked through an Internet supply chain. Sure, it’s easy to draw up such schemes on paper, but implementing them is another matter. A number of things must fall in place. And one of the most basic is planning.
Today, an OEM, or even the OEM’s end customer, can order product through a storefront interface. But that’s no guarantee that the right materials will be on hand in the right quantities to maintain the promised delivery date, especially when there’s an upside in demand. Speeding up order entry is only one piece of the supply-chain puzzle. Materials planning must also occur faster and more accurately across the chain. Waiting for a weekly MRP run at the CM followed by one or more weekly MRP runs downstream does not make for a responsive supply chain.
But what if a CM and its suppliers knew about an OEM’s upside at the same time? And what if those suppliers were then able to tell the CM within hours whether or not they could supply the requisite materials to meet finished product ship dates? Sound like a dream come true? This is a collaborative planning scenario that at least two CMs are aiming for this year.
Collaborative planning is not a brand-new concept. But it does require new tools and lots of cooperation along the supply chain. You need to be able to do materials planning on a real-time basis, or nearly so, throughout the chain. In the last few years, advanced planning and scheduling (APS) systems have emerged for just this purpose. APS systems form another class of supply-chain tools in addition those covered in September 1999 (p. 3-7).
Here’s why you’ll hear more about APS systems this year.
·# APS systems are designed for planning under materials and capacity constraints. During component shortages, these systems come in handy because they give CMs the ability to quickly update their customers about what is deliverable. Without APS, customers may not have the latest information about what is feasible.
With APS, “you should at least be able to make appropriate commitments for your customers,” says Julie Fraser, principal and director of market strategies at Industry Directions (Newburyport, MA). That way “you don’t screw up the relationship with your customer, the OEM,” she adds.
“At least you haven’t promised something you can’t deliver,” notes Fraser. “Probably the major benefit [of APS] during component shortages has been that order promising.” Industry Directions offers hands-on industry analysts focused on manufacturing and the supply chain.
·# Major OEMs that already use APS systems will encourage suppliers to do the same.
·# Early adopters in the EMS industry will flaunt such APS capabilities as collaborative planning.
·# APS engines are essential to order promising within an integrated supply chain.
·# With Y2K work completed, IT staffs are free to evaluate supply chain tools such as APS.
Celestica Rolls Out i2
One of the first CMs to announce an APS purchase was Celestica. The company is installing RHYTHM APS software from i2 Technologies (Dallas, TX). In the first phase of an APS rollout, Celestica is turning on capabilities that include the RHYTHM Supply Chain Planner, which creates a single planning environment across the company’s facilities. “Basically, it allows you to take the planning environment out of the various individual sites, aggregate it, do one top-level plan, and then bring it back into the ERP environment for direct execution,” says Andrew Gort, Celestica’s senior VP of supply chain management.
Another part of this APS solution is the RHYTHM Demand Planner, which will connect with Celestica’s customers. This module allows a CM to consolidate forecasts into one consistent view and to feed the data into Supply Planner, which does the supply-demand match. The resulting forecast can be displayed by customer, geography or product. Demand Planner will be in place with customers at some sites during phase-one deployment, which means by the end of Q1 2000.
In phase two, Celestica will start hooking up its suppliers, resulting in a collaborative system that is web-based. The company will be able to transmit demand signals from a customer down to the appropriate suppliers in the chain without waiting for sequential ERP runs. For this purpose, i2 provides RHYTHM Collaboration Planner
This investment in APS is not small — but neither are the benefits. “It’s probably one of our largest software investments we’ve ever made,” says Gort. “The return on investment is very attractive because you speed up the planning process; you reduce your inventory; you delay your purchases. If prices come down on components, that’s attractive. You increase your productivity. There’s a whole range of benefits that come from this.”
Note that Celestica is not the only CM to choose i2 software. Other industry players that have selected i2 include Avex Electronics now part of Benchmark Electronics, Australia’s Bluegum Group, EFTC and Solectron.
Another i2 product used by contract manufacturers is the RHYTHM Factory Planner, which allows CMs to do constraint-based materials planning within a facility.
SMTC Opts for webPLAN
About a year ago, SMTC Manufacturing (Toronto, Canada) saw that most of its customers were not in a position to adopt new tools for integrating their supply chain. So SMTC decided it would be the one to integrate the information flow among customers, SMTC and suppliers. SMTC intends to serve as the supply-chain integrator for its customers, a key part of the CM’s overall strategy. The new service, however, would not be possible without a new planning tool, and SMTC chose webPLAN (Ottawa, Canada).
This focus on supply-chain management goes hand in hand with increasing flexibility and reducing cycle times, the planned lead times quoted to customers. In the fall of 1998, lead times were typically four weeks. Through internal efforts, the CM cut cycle times such that today no program exceeds 10 days, and many are under five days. The webPLAN tool allows SMTC to continue improving. Phil Woodard, SMTC’s senior VP of Enterprise Development and Integration, says “webPLAN gives us a tool to run real-time MRP and allows us to work in a daily update mode.”
Shortening cycle times, of course, reduces the need for inventory so inventory turns go up. Not only does the CM take inventory out of its system, but inventory levels throughout the chain are reduced through collaboration and rapid flow of information, Woodard submits. The company drives home this point with a slogan: SMTC is replacing managing inventory with managing information.
SMTC also obtains a tool that allows it to market supply-chain management as a new value-added service.
Together, these benefits should provide a payback in the range of six to 12 months, says Woodard. SMTC’s purchase of the webPLAN eSupply-Chain suite amounted to $2 million.
With the webPLAN suite, SMTC’s customers will be able to tap into its manufacturing systems in real time via browser to initiate or change demand, track the status of orders, and conduct what-if scenarios. The tool, for example, will show a customer which configuration would result in the best delivery time. When an upside occurs in customer’s order, the system will automatically alert suppliers and give them a web page showing their portion of the customer’s material requirements on a copy of the latest MRP run. After analyzing the changes on the MRP, suppliers can then respond online with their best-case scenarios for delivering materials.
“To be able to put on the customer’s desktop a reflection of their demand first of all, our production schedules and all the supplier schedules and allow that customer…to go through us to the supply base, I think, will be unique. I do not know of anyone else out there doing that,” says Woodard.
SMTC expects to have preferred suppliers, some 30 to 50 companies, signed up for webPLAN collaboration by the end of Q1. At that point, the CM says it will be ready to provide 24-hour turnaround to customer queries. So if a customer poses a question in the morning, SMTC plans to have answers back from the supply base by the end of the day in order to commit to the plan the next day.
The CM is using Dell and IVI Checkmate, a debit card company, as customer beta sites for implementing webPLAN .
To add visibility of execution on the shop floor, webPLAN recently formed an alliance with Datasweep (San Jose, CA). The company’s Advantage product provides unit-level tracking, among other functions, for a build-to-order operation.
Note that there are likely other APS vendors that have or want customers in the EMS industry. The scope of this article does not permit a comprehensive survey of every vendor with an applicable APS solution. In addition, a number of ERP suppliers have added APS functionality to their offerings.
Still, MMI has learned of at least one additional APS vendor with customers in the EMS industry. Manugistics (Rockville, MD) counts ACT Manufacturing, Celestica and Solectron among its customers. EMS companies have become customers either by selecting Manugistics or through acquisitions they have made.
Another vendor in the APS space, Paragon Management Systems (Los Angeles, CA), lists a number of high-profile OEMs as customers. Paragon’s customer base also includes Mitac of Taiwan and Synnex, a U.S. subsidiary of Mitac in distribution and box build. What’s more, SynQuest (Atlanta, GA), yet another ASP supplier, has at least two OEMs on its customer list.
Manugistics’ NetWORKS Supply offering allows a CM to use business goals — maximum profits, increased revenue, increased customer service — in planning for a materials-constrained environment. The product also allows a CM to distinguish between common and unique parts when making the transition from an old product to a new one. This analysis avoids excess obsolete inventory. For collaborative planning, Manugistics is selling NetWORKS Procurement, which connects a manufacturer with its supply base through EDI or the Internet. This tool enables a user to manage by exception, i.e., focus on what a supplier cannot comply with.
Though collaborative planning sounds like a winner, it’s not a slam dunk. For one thing, it requires a CM to create new business processes with suppliers and customers. Woodard likens this planning to a formula-one race car. “We all have to learn how to drive this to keep it on the road and run at a very high pace,” he comments. It’s all about asset velocity. “So our challenge is meeting with each customer and developing how we’re going to work together with this new tool in this new environment,” says Woodard.
Supplier response is another issue. How fast and how accurately can a supplier respond to an upside if the supplier doesn’t use an APS tool? It would seem that everyone in the system should be equipped with an APS engine. But the cost of APS tools may be too much for some companies, especially small outfits. This scenario, however, could change if APS vendors start offering transaction-based pricing.
Nordic Market Studied
Last year, EMS production in the Nordic market reached a value of about $3.3 billion, according to a new study by the Stockholm, Sweden unit of Arthur D. Little, a well-known management consulting firm. The Swedish unit has given MMI exclusive access to a summary of that study, which covers the four Nordic countries.
Sweden. Arthur D. Little concludes that the Swedish EMS industry will change rapidly in the coming years. Increased competition is expected to result in a decreased market share for small- and medium-sized EMS companies there. Already, three of the largest global players have taken a total of 67% of the Swedish market, by far the largest of the Nordic markets for EMS. AD Little says change in the Swedish EMS industry reflects global trends. Still, the firm found that Swedish CMs have been able to keep their profitability on a relatively high level compared with the large global players.
AD Little estimates that 1999 EMS production in Sweden amounted to 16.161 billion SEK (about $1.92 billion), which represented 58% of the Nordic market. The firm based its estimates on year-to-date values through November 1999 and included mergers and acquisitions announced during the period. Last year, Flextronics International, SCI Systems and Solectron accounted for 41.8%, 12.9% and 12.6% of the Swedish market respectively, according to the study. Together, these companies show that the market is quite consolidated. The largest Sweden-based CM is Partnertech with a 6.1% share in 1999. The eleven largest EMS providers in Sweden control 89% of the EMS market there, according to the study (see table).
Dominating the electronic industry in Sweden, Ericsson and Nokia are the two largest EMS customers in that market. As a result, EMS industry growth in Sweden strongly depends on the two companies.
Norway. Unlike Sweden, the Norwegian market has not seen an influx of tier-one contract manufacturers. Still, the market is consolidated, except that the major players in 1999 were European companies: Sonec (including Kongsberg Electronics) with a 31% share, Kitron with 29% and the EMG group with 13%. Another CM, Hadelandsprodukter, held 7% of the market.
EMS production in Norway last year totaled 2.618 billion NOK (about $330 million), or 10% of the Nordic EMS market, according to the study.
Ericsson and Nokia are also the two largest EMS customers in Norway, says AD Little, although they are not as dominant as in Sweden and Finland (below). What’s more, Norwegian OEMs have retained considerable inhouse capacity, despite the growth of outsourcing in Norway.
Finland. AD Little estimates that total EMS production in Finland reached 4.620 billion FIM (about $790 million) for 1999. That figure gives Finland 24% of the Nordic EMS market.
The Finnish market exhibits consolidation as well. Three of the largest CMs in Finland accounted for 82% of EMS production value in 1999. They are Elcoteq Network Oy with a 51% share (excluding its facility in Estonia), Flextronics (formerly Kyrel EMS Oy) with 19% and Essex/Enviset Oy with 12%. Two other CMs, Incap Electronics Oy and TH-Elektroniikka Oy, each took 4% of the market.
According to AD Little, outsourcing here has progressed almost as far as in Sweden. Growth of the Finnish EMS market, as in Sweden, is dependent on Ericsson and Nokia. But unlike Sweden, only two of the large global players — Flextronics and SCI — are present in Finland.
Denmark. At 8% of the Nordic market, Denmark’s EMS industry is the smallest in region. For 1999, AD Little puts Denmark’s EMS production at 1.864 billion DKK (about $259 million).
Characterized by many small companies, the Danish market is fragmented. The study only identified two Danish CMs with significant market share for 1999; BB Electronics A/S and GPV Elbau Electronics A/S each garnered 16% of the market. Accounting for an additional 10% were SJ Elektronik (4%), GI Teamtech A/S (3%) and C.B. Svend-sen A/S (2%). The remaining 59% of the market consisted of small CMs.
Potential customers consist of smaller Danish firms as well as some international companies such as Danfoss, Grundfors, Lego and Bang & Olufsen. But so far Danish OEMs have kept manufacturing inhouse to a larger extent than have OEMs in the other Nordic countries, says AD Little.
IBM Deal To Yield $1.5B for Celestica
In a deal valued at about $500 million, IBM (Armonk, NY) has agreed to sell operations in three locations to Celestica (Toronto). The two parties have also entered into supply agreements worth about $1.5 billion in annualized revenue to Celestica. The transaction is expected to close in June.
As a result, Celestica will expand its relationship with IBM, specifically the Enterprise Systems Group and Microelectronics Division. Celestica expects that IBM will end up the largest or second largest customer of Celestica.
As measured by both purchase price and revenue, this could be the biggest OEM divestiture yet.
Celestica will buy IBM operations in Rochester, MN, and Vimercate and Santa Palomba, Italy. The 120,000-ft2 Rochester operation provides PCB assembly and test services, while the combined Italian operations perform PCB and system assembly services and occupy about 1.0 million ft2. Celestica will gain 26 SMT lines from these operations. Plus a total of about 1800 employees from the Enterprise Systems Group and Microelectronics Division will join Celestica. The deal also includes the license of intellectual property rights associated with these operations.
Under the supply agreements, Celestica will provide IBM with a full range of services including supply chain management, early prototyping, new product introduction, PCB assembly and test, system assembly and test, fulfillment and end-of-life support.
IBM’s AS400, RS6000, NUMA-Q and System 390 servers will account for 90% of production.
“This further enhances Celestica’s long-standing relationship with IBM, allowing Celestica to provide a truly comprehensive and cost competitive global EMS solution to IBM’s Enterprise Systems Group and Microelectronics Division,” states Eugene Polistuk, Celestica’s president and CEO. “This transaction also reinforces Celestica’s commitment to maintaining its technology leadership through the enhancement of its intellectual capital base with the addition of a skilled work force and talented management team capable of contributing to the future growth of Celestica.”
“Celestica is a recognized leader in the electronics manufacturing services sector, and we have many years of experience dealing with them. As such, our decision to proceed with this relationship was made easier given Celestica’s demonstrated ability to manufacture complex products at a competitive level of cost, quality and delivery,” states Michael Cadigan, VP of manufacturing and procurement at IBM Enterprise Systems Group.
The relationship between the two companies goes back to the days when Celestica was an IBM subsidiary.
By adding the IBM operations in Italy, the deal will boost Celestica’s ranking as a European player. “Arguably, it would make us the largest contract manufacturer in the European marketplace, but [if not] certainly a significant player,” says Marv Magee, executive VP of worldwide operations at Celestica.
Also, the high-end operations being acquired fit into a strategy where Celestica “can go from the high end for high volume capability in all geographies,” Magee remarks. “This maps nicely into that.”
Alcatel To Divest 3 N. American Sites
Solectron and Sanmina benefit
Alcatel, the French telecom equipment company, intends to divest two of its North American facilities to Solectron (Milpitas, CA) and a third to Sanmina (San Jose, CA). Solectron will take over Alcatel facilities in Longview, TX, and Aguadilla, Puerto Rico, while Sanmina will take control of an enclosure plant in Clinton, NC. This move is part of a strategic initiative to better focus Alcatel’s U.S. resources on new product development and introduction.
As a result, Solectron will assume manufacturing responsibility for Alcatel’s build-to-order (BTO) RF communication systems and certain networking PCB products. Solectron expects this outsourcing will produce revenue of about $200 million on a annual basis, given the current demand situation. Subject to completion of a definitive agreement, the transaction is expected to close by the end of Q1.
Solectron will purchase assets including manufacturing and test equipment and inventory and will assume the leases on 78,000 ft2 in Texas and 164,000 ft2 in Puerto Rico. The provider will also offer jobs to more than 600 Alcatel employees. Financial details were not disclosed.
Under a three-year supply agreement, Solectron will provide Alcatel with a full range of services including prototyping and new product introduction management of RF systems, BTO systems build and high-volume PCB assembly.
“We are pleased to be further strengthening our partnership with Alcatel, which is both a global strategic customer of Solectron’s and a leader in their industry,” states Ko Nishimura, Ph.D, Solectron’s chairman, president and CEO. “This action is part of Solectron’s strategy to continue expanding our global BTO complex systems manufacturing expertise.”
Solectron describes its current business with Alcatel as being “on a very small scale.” The provider does some manufacturing for Alcatel in China, France and Malaysia.
This deal will give Solectron its second facility in Puerto Rico and an expanded presence in Texas. The provider entered Puerto Rico with its December 1999 acquisition of SMART Modular Technologies.
Meanwhile, Sanmina intends to acquire Alcatel’s enclosure operation in Clinton, NC, near Raleigh. The 84,000-ft2 facility, which performs metal fabrication and mechanical assembly, primarily manufactures electronic system enclosures for Alcatel’s ADSL (asymmetric digital subscriber line) products. Sanmina plans to hire more than 300 Alcatel employees.
This deal is expected to close in Q1 after a definitive agreement is signed and other conditions are met. Like Solectron, Sanmina will obtain a three-year supply agreement.
“This transaction is a perfect strategic fit for Sanmina. The current operation expands our electromechanical systems capabilities, further strengthening Sanmina’s position as the most vertically integrated electronics contract manufacturer,” states Jure Sola, Sanmina’s chairman and CEO. “It also further enhances our marketing efforts in the telecommunications market. Alcatel has been a valued customer of Sanmina for over 15 years, and we value their ongoing commitment to us as a strategic partner.”
Michael Clarke, senior VP and GM of Sanmina’s Enclosure Systems Division, comments, “Upon completion of this transaction, Sanmina will have enclosure operations in key regions in North America to support our expanding assembly and system build operations as well as the robust enclosure market.”
“This strategic initiative will allow us to better direct and leverage our internal resources, while continuing to provide Alcatel’s existing businesses with world-class manufacturing and test services,” states Krish Prabhu, COO and CEO of Alcatel USA. “We expect these actions to result in cost savings and operational efficiencies that will improve our cash flow and strengthen our balance sheet.”
Alcatel USA will continue to maintain manufacturing sites in Nogales, Mexico; Raleigh, NC; and Plano and Richardson, TX. The company has no plans for further divestitures in North America at this time. Low complexity and high volume were the criteria for selecting which sites to divest. The remaining sites are involved in new product introduction and highly complex products.
Harris To Outsource PCBA To Sanmina
Harris Corp. (Melbourne, FL), an international communications company, has agreed to outsource its commercial PCB assembly to Sanmina under a three-year manufacturing agreement. In addition, Sanmina will buy Harris’ PCBA manufacturing assets and inventory and will lease a portion of Harris’ facility in San Antonio, TX. This is Sanmina’s second asset purchase announced this month (see previous article).
Employees involved with the PCBA operation will be offered jobs by Sanmina. The transaction, which is subject to regulatory approval and other customary conditions, is expected to close in early February.
According to Harris, outsourcing PCBA manufacturing will not only lead to lower operational costs for the company, but more significantly, will reduce the level of future investment needed to meet the demands of growth and expansion. Outsourcing will also allow management to focus resources more effectively on higher value-added areas.
Sanmina says this acquisition gives it the foundation for building an enhanced EMS operation in the telecom corridor in the south central region of the U.S. With the San Antonio facility, the company says it will be able to support current customers and attract new customers by providing box build, system integration, and system testing, especially for large volumes.
Cabletron To Sell Operations To Flextronics
Cabletron Systems, a networking equipment firm based in Rochester, NH, has agreed to divest manufacturing and repair operations in Rochester and Limerick, Ireland, to Flextronics International (San Jose, CA). Flextronics will acquire manufacturing-related assets and inventories for about $100 million and will hire Cabletron’s manufacturing work force of about 1000 worldwide. The EMS provider expects these assets will produce revenue of about $300 million during its fiscal 2001.
“By partnering with Flextronics, Cabletron continues along its path of focusing on core competencies and completes its plan for 100% outsourcing of manufacturing — an important milestone and further evidence that we intend to execute on our strategy,” states Piyush Patel, Cabletron’s chairman and CEO.
This outsourcing deal is expected to enable Cabletron to continue to improve time-to-market, quality, pricing flexibility and ultimately its cost of goods. Economies of scale in component sourcing and manufacturing were also cited as benefits.
Yet this is not Cabletron’s first attempt at divestiture. Last year, the company signed a letter of intent to outsource substantially all of its manufacturing to Celestica (April ’99, p. 2-3). That deal was never consummated.
“Complementary to our recently announced acquisition of the Dii Group, the Cabletron partnership allows us to execute with speed and flexibility on our plan to develop a strong presence on both the East Coast and in Ireland,” states Michael Marks, Flextronics’ chairman and CEO.
Dii To Purchase Ascom Facility
Based on a memorandum of understanding, The Dii Group (Niwot, CO), through its Dovatron International subsidiary, plans to buy a manufacturing facility and related assets in Solothurn, Switzerland, from Ascom, a Swiss telecom and service automation group. Employing about 550 people, the 400,000-ft2 Solothurn plant handles production of PBX equipment and phone terminals including DECT, ISDN and GSM. This activity is expected to generate revenue of more than $180 million a year for Dii.
Under a long-term supply agreement, reported by Reuters as three years in duration, Dovatron will supply PCB assembly, box build and engineering support services.
Dii has been a long-time supplier to Ascom through Dovatron’s Malaysian facility. The expanded relationship between Dii and Ascom will also provide Dii’s Multek China unit an opportunity to supply raw boards for this work.
According to Ascom, the Solothurn team will enhance Dovatron’s telecom capabilities with expanded RF expertise, dedicated design and engineering, and extensive market knowledge in Europe.
This arrangement, says Ascom, will allow it to focus on its strengths and core activities.
Note Flextronics plans to acquire Dii through a stock-for-stock merger, targeted to close in early April (Nov. ’99, p .1).
SCI Acquires ECI Plant
SCI Tel-Aviv Ltd., the Israeli subsidiary of SCI Systems (Huntsville, AL), has purchased ECI Telecom’s Shemer Manufacturing Plant in Peta Tikva, Israel, near Tel Aviv. In addition, ECI, an Israeli company in digital telecom, will outsource part of its manufacturing activities to SCI under a multiyear supply agreement.
Formerly a part of Tadiran Telecommunications, the Shemer facility produces PCB assemblies and other products for ECI. It employs over 350 workers.
“For some time we’ve been looking at Israel as an interesting opportunity, particularly with regard to the amount of new technology emerging in that region and the amount of telecommunications work going on in that region,” said A. Eugene Sapp, SCI’s CEO and president, in a conference call with analysts.
According to Sapp, SCI views this move “as an initial step in developing a market in that region.” He described SCI’s market opportunity in Israel as “several hundred million dollars.”
The deal also provides further diversification for SCI. “We’ve been focusing on broadening our product diversification with a reasonably high degree of focus on telecommunications. This is a further step in that direction,” Sapp told analysts.
SCI is starting in Israel with two sites and a PCB assembly operation primarily involved with ECI’s switching and access products. “We view this as a first step toward doing a much larger share of their manufacturing, if not all of it, as they continue to grow,” said Sapp.
He noted that it would not be unreasonable to expect SCI to open a plant in northern Israel, where costs are lower, for handling higher volumes and less complex work as well as future growth.
SCI believes it is the first significant EMS player with a presence in Israel. That may be true for manufacturing, although Solectron set up a program office there in 1998.
Fabrinet Starts With Plant From Seagate
Founded by disk-drive pioneer
This month, Fabrinet Co., Ltd., a new EMS company in Bangkok, Thailand, took possession of one of Seagate’s Thailand assembly plants. So Fabrinet starts out with a 200,000-ft2 facility supplying Seagate with over three million SMT printed circuit cable and arm assemblies per month and generating annualized revenue of about $160 million. Fabrinet has received a three-year volume supply agreement from Seagate for non-core subassemblies.
The Chokchai facility is about 50% occupied so the new company is seeking customers to use up capacity. The plant offers 63,000 ft2 of better than class 100 clean rooms outfitted for assembly. This space was producing head stack assemblies until last month. Subassembly and test areas account for another 80,000 ft2. Also included is a fully equipped materials and process lab. The facility holds ISO 9002 and 14001 certifications and uses six-sigma statistical analysis. Plant workers number 1600, and 80% have been there for over three years.
Fabrinet was founded last year by Tom Mitchell, who also serves as its president and CEO. One of the pioneers of the disk drive industry, Mitchell was president and co-founder of Seagate. He later served as president and COO at Conner Peripherals, which was acquired by Seagate.
“In January of 1999 after looking at a number of opportunities, I decided to pursue contract manufacturing mainly because of its rapid growth combined with low technical and industry risk. The fact that Wall Street had recognized the value and growth prospects of contract electronic manufacturers and had richly rewarded their shareholders with exceptional returns was also a major factor in my decision,” says Mitchell.
After writing an EMS business plan in June, Mitchell spent most of July in Thailand, where he visited 15 CMs of all sizes. “I had made the decision to start Fabrinet in Thailand based on almost 30 years of Asian manufacturing experience with emphasis on cost, quality and capacity,” Mitchell explains.
He cites Thailand’s advantages: a stable political climate, good availability of high-tech labor, and a rapidly improving and modern infrastructure. Hard hit by the Asian crisis, Thailand has restructured its economy, re-engineered its debt and enacted fiscal reforms, says Mitchell, as shown by its ability to attract new foreign investment.
Mitchell knows Thailand from his Seagate days. “I established the disk drive industry base in Thailand while I was president of Seagate, and disk drives now account for over 10% of Thai exports. The tier-one disk drive companies — Seagate, Fujitsu and IBM –all have major operations in Thailand,” he points out.
In late July, Mitchell proposed the asset purchase and volume supply agreement to Seagate. After registering Fabrinet in Thailand in September, he spent the next three months organizing and negotiating the deal, which closed Dec. 31.
Fabrinet’s management team includes other veterans of the disk drive industry. Teera Achariayapaopan, Ph.D, formerly senior director of HSA/HGA Operations for Read-Rite Thailand, has joined Fabrinet as senior VP of Thailand Operations. He also served for ten years as Seagate’s executive director of engineering for Thailand. Mike Alarid has come aboard as VP of materials, Fabrinet Thailand. He has over 23 years of management experience in procurement, materials and manufacturing, including 13 years at Seagate.
Also, Fabrinet has taken on an investor, Chase H & Q, to provide financing for the EMS business.
Primetech To Add CM in Nova Scotia
Simmonds Capital Ltd. (Pickering, Ontario, Canada), a holding company, has agreed to sell its contract manufacturing division, SCL Technologies in Amherst, Nova Scotia, to Primetech, a Canadian CM with two facilities in Montreal, Quebec.
SCL operates a 55,000-ft2 facility with roughly 90 employees. Most of SCL’s business is directly or indirectly related to Nortel.
In this cash deal, Primetech will acquire all of SCL’s operating assets including property, plant, equipment and inventory related to continuing customers. Primetech will also assume certain liabilities including accounts payable, equipment leases and a portion of the mortgage on the property. Simmonds will retain accounts receivable and certain inventory not required for active contracts.
Closing is subject to certain conditions including completion of due diligence by Primetech and approval from Simmonds’ shareholders. Primetech has agreed to manage the SCL business from Jan. 1 until closing, which is expected to follow the Feb. 15 meeting of Simmonds’ shareholders.
Historically, most of SCL’s work has been through-hole related. Primetech will use the Nova Scotia operation to satisfy a fairly large through-hole requirement from a new Primetech customer. “It makes more sense than building internally,” notes David Brown, Primetech’s VP of finance.
The sale of SCL is part of Simmonds’ strategy to divest its remaining operating businesses.
Opting out of contract manufacturing…World Wireless Communications (Salt Lake City, UT), a developer of wireless and Internet systems and products, has shut down its contract manufacturing operation to fully focus on other businesses. All manufacturing is now outsourced, and the company is in the process of selling its manufacturing assets. World Wireless has also entered into a contract with its suppliers to provide a royalty stream on its existing contract manufacturing business…. Going into contract manufacturing…Airport Systems (Overland Park, KS) has said it will diversify into the manufacture and sale of non-aviation components and systems on both a proprietary and contract assembly basis. The company also agreed to acquire DCI, Inc. (Lenexa, KS) with sales of about $8.3 million last year. DCI designs and manufactures LCDs, digital panel instruments and PCBs and performs contract manufacturing. Airport Systems says this acquisition is an excellent opportunity to aggressively expand into the contract manufacturing market.
Elcoteq, Flextronics and Jabil making moves
As more and more CMs seek the lower manufacturing costs of Central Europe, much of this activity centers on Hungary. The number of CMs in Hungary continues to grow, while more investment flows in from established providers. Here are three new examples of what’s happening in Hungary:
·# Under a new agreement, Elcoteq Network Corp. (Lohja, Finland) will acquire Nokia’s monitor manufacturing unit in Pecs, Hungary. At the same time, Nokia has decided to discontinue display manufacturing and will focus on a new Mobile Display Appliances venture. Expected to close this month, the deal will be effective retroactively as of Jan. 1. According to a joint statement, Elcoteq will continue to manufacture monitors for Nokia in Pecs. Nokia says it will continue to sell displays to corporate customers.
In addition, Nokia has signed a letter of intent to sell its Nokia Display Products’ branded business to ViewSonic (Walnut, CA). Elcoteq will provide ViewSonic with contract manufacturing services for the Nokia branded display products.
The 30,000-sq m (322,900-ft2) monitor plant with 1400 employees becomes Elcoteq’s second facility in Pecs. In 1998, the provider built an 11,000-sq m (118,400-ft2) plant there, which currently employs nearly 1000 people. The company recently said it will shortly start mobile phone box build projects in the existing plant.
Elcoteq says the Nokia plant will substantially increase its ability to serve continental European markets and highlights Pecs’ status as a key manufacturing location for the provider.
·# Flextronics intends to open its third industrial park in Hungary to meet increasing demand. The company has acquired a site in Nyiregyhaza in eastern Hungary and plans to invest between $25 million and $75 million in several phases, ultimately creating 3000 jobs.
“We are making this investment in response to the growing demand from major customers in Europe that will far exceed the available capacity at our two existing industrial parks at Sarvar and Zalaegerszeg and our manufacturing facility in Tab,” states Humphrey Porter, Flextronics’ president of Central Eastern European Operations.
In a recent 12-month period, Flextronics invested over $70 million in Hungary, increasing the work force there to 7000 at the end of 1999. Flextronics is the largest employer in each of its Hungarian locations.
The company selected Nyiregyhaza based on several factors including favorable policies of the regional and local governments and its location, which is situated on a planned highway route from the Ukraine to Western Europe.
·# In December, Jabil Circuit (St. Petersburg, FL) announced a new greenfield site in Hungary. The company said it was in the final stages of site acquisition and plans to bring this new operation on line in the early fall of 2000.
Citing a state news agency, Bloomberg News reported this month that Jabil will locate a plant in Tiszaujvaros, a town in eastern Hungary. But the reported timing of the plant did not match Jabil’s announcement. Jabil has yet to provide details.
New programs…NatSteel Electronics Ltd. (Singapore) has landed a PCB assembly contract from Digital Media Equipment & Services Co., a unit of Japan’s Toshiba Corp. The award signals NEL’s entry into the Japanese market, which NEL says will be a major growth sector for EMS in the years ahead. NEL’s Malaysia plant will supply Toshiba, and other plants are being evaluated by the company. The provider will start by producing high-grade notebook components….Zhone Technologies (Oakland, CA), a new networking company with $500 million in funding, has signed a letter of intent to make Solectron its virtual supply-chain partner. To begin the partnership, Zhone is selling the former Premisys manufacturing division, now a Zhone subsidiary, to Solectron. The division includes certain manufacturing equipment, inventory and about 40 employees. Subject to completion of a definitive agreement, the transaction is expected to close by the end of Q1….Nam Tai Electronics (Hong Kong), which offers EMS in China, will produce cordless phones for Asahi Corp., a subsidiary of Japan’s Casio Computer Co., Ltd…Express Manufacturing Inc. (Santa Ana, CA) will manufacture the Electronic Film System line of digital image capture products for Silicon Film Technologies (Irvine, CA). EMI presents itself as the largest CM in Southern California with more than 1000 employees and five facilities in Orange County….Computerized Thermal Imaging (Layton, UT) has selected Peak Industries (Frederick, CO) to produce components of CTI’s breast cancer detection system. Peak is known for manufacturing complex electronic and mechanical components.
New facilities…Lexmark Electronics (Lexington, KY), an independent business of Lexmark International, is establishing a contract manufacturing plant in Reynosa, Mexico, for PCB assembly. The new 150,000-ft2 facility will be operational in Q2. “Since our inception two years ago, we have been focused on establishing a global presence and opening facilities that bring us even closer to our customers around the world,” states Ben Streepey, VP and GM of Lexmark Electronics. “Just six months ago we began operations in Brno, the Czech Republic, and now we’re getting under in Mexico. This accelerated growth is in response to the explosion of the CEM industry and reflects our commitment to supporting our customers worldwide.” Lexmark International continues to be Lexmark Electronics’ largest customer, although the CM expects its external business will grow at a more rapid pace. Lexmark Electronics plans to add customers selectively. Following “copy exact” processes, the new plant is expected to achieve the same two-hour average cycle times as other Lexmark Electronics sites….This month, Jabil Circuit will move into a new 170,000-ft2 facility in Boise, ID. It replaces a smaller leased facility on Hewlett-Packard’s Boise campus….MCMS (Nampa, ID) is in the process of setting up an engineering and prototype operation in Silicon Valley….New equipment…In Norman, OK, Hitachi Computer Products (America) is investing $3 million in new equipment to be used to assemble and test PCBs for customers of Hitachi’s growing contract manufacturing business. The equipment will allow the Norman operation to add one line and upgrade another. As a result, the operation will be able to run a job on any of three lines.
Some financial news…The latest EMS companies to declare a 2-for-1 stock split are Solectron and Sanmina….Pemstar (Rochester, MN) says it is on track to achieve its goal of $400 million in sales for its fiscal year ending in March….For the fiscal year ended Sept. 30, 1999, IEC Electronics (Newark, NY) reported a net loss of $20.6 million after restructuring charges, compared with a year-earlier net loss of $6.2 million also after restructuring charges. Sales for fiscal 1999 totaled $157.5 million, down from $248.2 million in fiscal 1998….Sparton Corp. (Jackson, MI) will record a pretax charge of $10 million in Q2 of fiscal 2000 as a result of an agreement with the U.S. Environmental Protection Agency for remediation at a facility in Albuquerque, NM.
People on the move…Robert Bradshaw has joined SCI Systems as COO reporting to A. Eugene Sapp, the company’s CEO. Before accepting this position, Bradshaw was a corporate VP at Solectron and president of its Eastern Region. He came to Solectron from IBM, where he worked for 20 years in many capacities. Since Sapp took over as CEO in July, SCI has made four appointments to its executive management team.
Copyright 2000 JBT Communications