MMI June 2006
Vol. 16, No. 6: June 2006
Jabil’s Streak Ends
After racking up 22 consecutive quarters of meeting or exceeding guidance, Jabil Circuit saw that streak end with its May quarter (fiscal Q3). The EMS provider missed its original guidance for core EPS in the quarter by 7 cents; core EPS came in at $0.36 per diluted share versus original guidance of $0.43. When disclosed in an announcement ahead of earnings release, this miss surprised analysts who had come to depend on the company delivering consistent results. Jabil blamed the miss on three separate operational issues. They caused analysts and others in the industry to wonder how Jabil, a company known for its ability to execute, could end up with three such problems in a quarter.
One problem arose in an electromechanical operation being established in Austria for the production of tools used in injection molding of plastics. The 100-plus-person operation experienced delays in the ramp-up of production due to what Jabil described as “resolvable technical issues in management process software.” This delay caused higher than anticipated losses. Jabil expected some customer reimbursement during the May quarter, but it did not materialize. The company anticipates that the operation will continue to incur costs of $6 to $7 million through the November quarter (Q1 fiscal 2007) and reach break-even by the end of the following quarter.
A second drag on earnings stemmed from operational execution issues in certain US sites experiencing strong demand and ramping programs. This problem resulted in about $6 million of lost operating income during the May quarter. Management changes have been made, and Jabil expects these issues to be resolved within the next two fiscal quarters. However, core earnings dilution resulting from these issues will persist in the August quarter.
Jabil’s repair and warranty business in the Americas was the source of a third problem in the May quarter. Within this business, Jabil encountered about $6 to $7 million of higher material and labor costs associated with the ramp of a new program for an existing customer. The company foresees that this program will continue to have operational challenges throughout the August quarter, and appropriate levels of return are targeted toward the end of the February 2007 quarter (Q2 fiscal 2007). Within the repair organization, local management changes have been made.
Altogether, Jabil said it made three to five management changes at a plant level.
According to Jabil, these issues are not systemic. “Fundamentally, the business is in good shape because the operational issues are not chronic. They’re not widespread. They’re resolvable, and we have customer satisfaction in reasonably good shape,” said Timothy Main, Jabil’s president and CEO, during a June 21 conference call.
Still, he admitted that the company was surprised by the issues. “So we are taking this as a bit of a wake-up call to get back to basics,” said Main. He referred to getting back to a “dashboard type of discipline” in monitoring operations. But Main denied that the company has significant weaknesses in its controls.
Restructuring also unexpected
Jabil watchers were also caught off guard when the company announced a restructuring plan during the June 21 call. The company intends to realign its manufacturing capacity in certain higher cost geographies in order to size its manufacturing sites according to current market conditions. Not yet approved by Jabil’s board, the plan could result in charges estimated at about $200 to $250 million, which would involve plant closings and headcount reductions. Charges would extend over the next two fiscal years, with an estimated 50% to 60% falling in the August quarter.
Main said the company will need fewer high-cost locations to achieve its objectives. He explained that Jabil could no longer afford to keep high-cost locations largely dedicated to providing NPI and global coordination for customers with low-cost production. “Today, we increasingly see new product introduction, design and global coordination being done within our low-cost footprint, obviating the need for supplemental high-cost locations support,” said Main. Jabil sees its high-cost locations moving to a high customer count, high-complexity model proved by its Varian acquisition.
According to Main, the restructuring announcement was not a reaction to the disappointing result of the May quarter. However, he did say that in making the announcement “to some extent we’re taking an opportunity here, given the environment we’re in, to be a little bit proactive.”
More Vertical Integration in Mexico
An influx of higher mix, higher complexity work has helped to give Mexico new life as a center for EMS. Part and parcel of this higher mix migration is a demand for system integration. But to build complete systems in Mexico, providers typically want to source bulky enclosures locally in Mexico. Hence, there is increasing demand for enclosure building in Mexico, and EMS providers that take a vertically integrated approach to system build are investing in their enclosure capabilities there. In the last six months or so, Flextronics and Solectron announced investments in vertical integration on the Mexican border and in Guadalajara respectively (see also Dec. 2005, p. 1-4). Now it’s Sanmina-SCI’s turn.
Sanmina-SCI has opened a new 347,000-ft2 enclosures facility in Guadalajara. As far as the company knows, this is the largest enclosure plant of its kind in Mexico.
Seeing a trend toward more product transfers to Mexico, Sanmina-SCI needed to increase its capacity for enclosures in Guadalajara. The old enclosure site, a three-building complex of roughly 200,000 ft2, was landlocked and could not be expanded. So a new larger facility was in order.
The new facility not only expands enclosure production space by about 74% but also is located close to Sanmina-SCI’s three EMS plants in Guadalajara, two of which share the same land area as the new building. Such proximity facilitates vertical integration of enclosures from the new plant with the subassemblies from the EMS plants, where integration takes place. Besides feeding the EMS plants, the new enclosure facility will also supply a system integration-only plant about 10 minutes away. In addition, Sanmina-SCI will allocate some portion of the new facility’s production to sales of enclosures to non-EMS customers and competitors.
Capabilities of the new facility include fabrication of both soft- and hard-tooled enclosures. The plant can also produce injection molded plastics.
“Due to cost reasons, Mexico is the prime destination for higher mix, higher complexity type products,” said Marco Gonzalez, senior VP, Mexico operations for Sanmina-SCI. “When you incorporate some of these big cabinets that we’re doing today in Mexico from the enclosures side plus the PCBAs and try to manage this from the Far East, it becomes a logistics nightmare and a lead-time nightmare.” That’s why Sanmina-SCI continues to see Mexico taking a more central role in system build and vertical integration.
At Sanmina-SCI’s Guadalajara operations, vertical integration typically applies to high-mix products such as switches and routers and a variety of telecom gear from mini-fridge size to rack mountable. But the Mexico operations also build high-volume set-top boxes on a vertically integrated basis, where both PCBAs and chassis are supplied internally in Guadalajara. Upsides for such high-volume products can be accommodated more easily in Mexico than in Asia. If an upside occurs for a high-volume multimedia product built in Asia, airfreight costs will offset and potentially wipe out the savings normally obtained when the product is shipped by sea. “I can tell you it’s a significant split that you want to have in Mexico versus Asia so you can buffer your demand fluctuation,” said Gonzalez.
With 2 million ft2 of space, Sanmina-SCI’s Guadalajara operations are the largest exporter in the state of Jalisco. The company employs 14,000 people in Mexico (including two plants in Monterrey), up from a pre-downturn peak of 10,000. Plans are to hire another 600 people by the end of the year.
Revenue from Mexico operations has also exceeded its 2000 peak. “We’ve been growing consistently for the past four years in Mexico,” said Gonzalez. High-volume multimedia products and telecom work, traditionally a higher-mix activity, have both fueled that growth. As an illustration, the telecom space, which accounted for 3% of the company’s Mexico revenue in the late 1990s, now represents over 30%, he reported.
Hon Hai To Make Camera Deal
Hon Hai Precision Industry (Tu-Cheng, Taiwan), the world’s largest EMS provider also known by its Foxconn trade name, plans to acquire Premier Image Technology (Taipei, Taiwan), described as the largest digital camera maker in Taiwan. Adding Premier, which produces cameras for its outsourcing clients, will put Hon Hai squarely in the digital-camera outsourcing space. This move parallels a camera deal made by archrival Flextronics, which acquired a digital camera developer earlier in the year (Feb., p. 6).
To acquire Premier, Hon Hai will exchange one share of its stock for 3.9 shares of Premier. Based on Premier’s 579 million shares outstanding and a Hon Hai stock price of NT$190 on June 20, the deal is worth NT$28.2 billion, or about $862 million. Subject to adjustment, this ratio does not account for dividends and bonuses approved in Premier’s 2006 shareholder meeting. The deal is structured as a merger with Hon Hai as the surviving entity. Closing is tentatively scheduled for December.
Besides digital still cameras, other products made by Premier include video cameras, projectors, camera modules for cell phones, and optical components. Premier operates a vertically integrated “Camera Town” at Foshan in China’s Guangdong Province. According to Premier’s website, the expanded Foshan factory measures some 126,000 m2, while suppliers of plastics, lenses and such occupy about 115,000 m2. DigiTimes.com reported that Premier employs about 10,000 people in Foshan and 780 in Taiwan.
In a statement, Hon Hai said the acquisition will broaden its product and service offering, further strengthening integration of its eCMMS (e-component, module, move, service) model. The deal will also expand the sharing of resources. As reported in DigiTimes.com, a Hon Hai spokesman said the company was attracted to Premier’s optoelectronic and MEMS (micro-electromechanical system) capabilities. Premier‘s digital cameras, projectors and optical components will give Hon Hai new product lines, according to this report.
For Q1, Premier increased revenue by 61% year over year to NT $9.84 billion ($301 million at current exchange rates). Net income was NT$523 million ($16 million).
Acquisitions have become part of Hon Hai’s growth strategy. Company chairman Terry Gou expects Hon Hai to achieve annual growth of 30% over the next five years, with acquisitions helping to fuel this growth, DigiTimes reported earlier this month.
Another facet of Hon Hai’s strategy is own-brand manufacturing (OBM). The company recently introduced a line of graphics cards under the company’s Foxconn brand. Hon Hai’s OBM activity extends to motherboards and PC components such as chassis and connectors. By limiting its OBM strategy to the component and subassembly levels, Hon Hai avoids conflicts with its OEM customers.
China factory in glare of media coverage
Hon Hai has not been a company seeking to draw attention to its operations. But lately media attention has come to Hon Hai, specifically its complex in Longhua, China. A June article in the Mail on Sunday, a British newspaper, looked into the supply chain behind Apple’s iPod. Part of the article dwelled on Hon Hai’s Longhua operation, which manufactures the iPod nano. The article described a Longhua employee who, it said, earned about $50 a month working 15-hour days.
In a statement posted on the Taiwan Stock Exchange, Hon Hai vehemently refuted domestic and foreign media and websites that used information from the Mail article to report on labor conditions in the company’s contract manufacturing operations in China. Hon Hai pointed out several instances where wide discrepancies exist between information cited in the article and actual facts. For example, the company said the wage level and employee counts reported in the article were incorrect. The article stated that dormitories on site do not permit visitors, but Hon Hai countered that this is done to safeguard employees and their belongings.
According to the article, 100 workers share a dormitory room. Although Hon Hai did not refute this information, the company stated that it continues to improve the environment for employees by adding amenities such as a security system, complimentary laundry services, landscaping, playing fields, a swimming pool, a library, banks and stores. Furthermore, Hon Hai said all of its operations abide by local regulations, and its Longhua site has been recognized by the Shenzhen government as a role model among Taiwan-based companies. The company also pointed out that it is a committee member for the Electronics Industry Code of Conduct, a standard for socially responsible business practices across global supply chains.
As the largest exporter from China, Hon Hai said it must not only meet China’s regulations, but also operate far ahead of the industry norm. According to the company, it is one of only two Taiwanese companies to make the best employer ranking in China. “There is no incident of taking advantage of labor,” stated Hon Hai. In addition, the company said its health benefits and continuing education are well ahead of the industry.
James Lee, senior VP of Hon Hai’s Foxconn Technology, told China Daily that Hon Hai workers in Shenzhen “can earn at least 580 yuan ($72.50) a month,” the minimum wage level set by the local government. Basic pay will increase to 700 yuan ($87.50) in July consistent with new government standards, said Lee in the China Daily report posted online. He added that Hon Hai does not force employees to work overtime and limits overtime to 20 hours per week. This policy contradicts the Mail article in which the Longhua worker was quoted as saying that employees must work overtime if they are asked to. But the policy does raise questions about how much overtime workers are putting in per month. According to various Internet sources, China’s labor laws specify a limit of 36 hours of overtime per month.
Reacting to the Mail article, Apple released a statement in which the company said it was “investigating the allegations regarding working conditions in the iPod manufacturing plant in China.” In a subsequent statement, Apple took matters a step further: “Apple has begun a thorough audit of the manufacturing plant operated by Foxconn in Longhua, China, including employee working and living conditions, interviews of employees and managers, compliance with overtime and wage regulations, and other areas as necessary to insure adherence to Apple’s supplier code of conduct. Apple’s suppler code of conduct sets the bar higher than accepted industry standards, and we take allegations of non-compliance very seriously.”
But the Mail is not the only publication to generate its own coverage of the Longhua complex. BusinessWeek ran a June 19 article profiling Bonnie Nixon-Gardiner, HP’s program manager for Supply Chain Social & Environmental Responsibility. The article cited her experience at the Longhua site to show how HP has pushed suppliers to improve working conditions. BusinessWeek portrayed Hon Hai as willing to cooperate with Nixon-Gardiner after initially resisting her approach. The article detailed production floor changes Hon Hai has made in response to demands from Nixon-Gardiner.
Creation Technologies Enlarges US Footprint
Expanding regional service to California and the US Southwest, Canada’s Creation Technologies (Burnaby, British Columbia), an employee-owned EMS provider, has acquired Asemtec, a privately owned EMS company in San Jose, CA. The acquisition, Creation’s third in the US, brings the Canadian provider closer to its long-term goal of coverage in all key regions of North America.
The Asemtec operation, which will be renamed Creation Technologies – San Jose, gives Creation a total of seven manufacturing facilities providing medium-volume, complex electronics manufacturing solutions to North American companies. Other Creation plants are located in British Columbia and Ontario, Canada, as well as in Wisconsin and Texas in the US.
Founded in 1984, Asemtec operates in a 22,000-ft2 facility with 70 employees. The company expects 2006 revenue of about $7 million. Its customers participate in the medical, military, communications and industrial control markets. As part of Creation, the San Jose operation can provide Western US customers with a scope of services including product design, electronic and mechanical assembly, test services, logistics, environmental compliance, and warranty and repair services.
Creation had been interested in the Bay Area for a number of years. “The Bay Area and Silicon Valley in general had been on our radar screen,” said Arthur Tymos, Creation’s president. “It’s a very key and large market in our space and one that we wanted to have a direct presence in.”
What’s more, Creation recently landed a number of new customers from the Bay Area. “Prior to the operation here in San Jose joining Creation, we did already have a number of customers in this area. And we’re continuing to see customers finding our value proposition attractive. So we wanted to have a presence here,” Tymos told MMI.
For a deal to take place, each company had to see the other as a good fit. Over the years, a number of companies had approached Bill Frandsen, founder and owner of Asemtec. What prevented a deal wasn’t so much timing or anything of the sort. “It was just that the companies didn’t fit what I was looking for,” said Frandsen. One thing he wanted was a deal that “would take Asemtec to another level and also bring the employees along with that same step forward. Creation offered that step where most of the other companies did not,” he explained.
Frandsen will be taking that step too as he will become GM of the San Jose operation.
On the other side of deal, Creation liked what it saw in Asemtec the people, the culture and the customers. According to Tymos, Creation has been successful in other acquisitions in part because the company looks for the right fit. “And we see this as an excellent fit,” he said.
Creation continues to eye other areas in the US where it does not have a presence. “Our goal is to continue to grow our footprint in the US, and we are doing that as opportunities arise,” said Tymos. “Over time, should the right opportunity come our way, we would expect to continue to add to our footprint,” he added.
For 2005, Creation, recorded sales of $173 million and a growth rate of 34%, well above the industry average. Customers “like our business model, and we have been able to pick up business where others haven’t,” said Tymos. He reported that the company’s growth spurt continues, and 2006 sales are expected to be well over $200 million.
The Canadian provider established its first US manufacturing site in 2003 by acquiring Eder Industries, an EMS provider in Milwaukee, WI. The following year, Creation purchased its second US provider, Second Source System, in Richardson, TX.
NOTE To Gain Presence in Norway
Top 50 EMS provider NOTE AB (Norrtälje, Sweden) intends to establish a presence in Norway through its proposed acquisition of Nordic-Printdesign AS, a PCB design firm that employs eight people at offices in Oslo, Norway, and Stockholm, Sweden. NOTE has signed a letter of intent to purchase the PCB design firm, which will be renamed NOTE Oslo AS.
In addition, NOTE plans to equip the firm for fast prototyping in Oslo and will set up a new production facility for this purpose. The provider’s strategy is to offer services such as PCB layout and fast prototyping close to customers, with production directed to NOTE’s more cost-efficient units in the Baltic region and Poland.
“For a fairly modest investment and low risk, we now have very good prospects of achieving high organic growth,” stated Arne Forslund, NOTE’s CEO.
The acquisition also includes a component database to be linked to NOTE’s component management system.
Meanwhile, NOTE is relocating its headquarters to Danderyd outside Stockholm. The move will be completed by the end of June. According to the company, the move will bring NOTE closer to customers and distributors. “Several of our customers are located in the northern parts of Stockholm, and therefore it is a natural step to relocate our head office to this region,” said Forslund.
IMI Notches Two More Alliances
Integrated Microelectronics Inc. (Laguna, Philippines), an MMI Top 50 EMS provider, recently formed strategic partnerships with Pulax, a Japanese EMS company, and PSi Technologies, a NASDAQ-listed Filipino company in semiconductor assembly.
Under the PSi alliance, IMI will promote PSi’s power semiconductor assembly and test services to IMI’s foreign clients, while PSi will market IMI’s EMS offering to PSi customers. PSi could also tap Speedy-Tech Electronics, which merged with IMI last year, for EMS and ODM projects in power electronics.
“This is the first time that two Filipino global electronics companies have come together to promote Philippine electronics industry,” stated Arthur Tan, IMI president and CEO.
In the other alliance, Tokyo-based Pulax will provide prototyping, pilot runs, engineering services, and other start-up operations for new IMI programs with Japanese OEMs. Pulax will have the ability to utilize IMI’s facilities for cost-effective and large-scale manufacturing.
Japanese OEMs contribute more than 60% of revenues generated by the IMI group of companies.
These two partnerships are patterned after IMI alliances with EMS companies in other parts of the world. Recently IMI teamed with BuS Elektronik in Germany (May, p. 7); other alliance partners are Hansatech in the UK and Pensar Electronic Solutions in the US.
Another alliance… Adeptron Technologies (Markham, Ontario, Canada), an EMS provider traded in Canada, and CIVIC Software Engineering, a Chinese company, have entered into a collaborative business agreement to jointly provide a full range of electronics manufacturing and supply chain management services to customers in North America. CIVIC SE (Jinan, China) has provided software and electronics outsourcing services for customers in Europe and North America and has cooperated with several North American companies to develop and manufacture various digital products. At about 1000 employees, the Chinese company has relationships with IBM, Intel and Microsoft to jointly develop business opportunities. In addition to providing manufacturing services in China and Canada, the new alliance will offer software and hardware design and development by China-based engineers. Adeptron and CIVIC SE will also collaborate to grow the number of Adeptron supply chain partners in Asia.
Deal done…Sparton (Jackson, MI), a publicly held EMS provider, has completed its acquisition of Astro Instrumentation (Strongsville, OH), a privately owned manufacturer of specialized medical products, generally involving medical laboratory test equipment (see March, p. 7). The purchase price is about $26.15 million, and additional sums may be paid over four years based on a percentage of earnings before interest and taxes. Astro’s sales for 2005 amounted to about $33 million.
SEC Contacts 2nd EMS Company
Sanmina-SCI (San Jose, CA) has become the second EMS company asked by US Securities and Exchange Commission to provide information regarding option grants. Earlier, the SEC informed Jabil Circuit (St. Petersburg, FL) that it would request certain documents as part of an informal inquiry of option granting (May, p. 8).
Options granting practices have been called into question at companies whose numbers have grown to scandalous proportions. According to the Associated Press, more than 30 companies are being investigated by the SEC or federal prosecutors. The issue is whether or not companies engaged in backdating of stock options.
Last month, Jabil reported results of an internal investigation, which found that the company did not backdate options for any of its officers or directors (May, p. 8). Jabil was among the initial group of six companies whose option granting practices were questioned in a Wall Street Journal article.
In response to recent analyst and media attention, Sanmina-SCI is also conducting an internal inquiry of its stock option practices, as reported here last month (May, p. 8). This review is looking at option grants to its executive officers as named in annual proxy statements. The company said its practice is to grant options to its executive officers at the time of the Compensation Committee’s annual review. Each year, outside directors receive annual grants effective the first business day of October.
Sanmina-SCI’s board has taken the additional step of forming a special committee to conduct an investigation of the company’s stock option grant activity. This committee will retain independent outside legal counsel to conduct a thorough review of the company’s stock option programs.
Jabil’s board also appointed a special committee to review the company’s stock option grant practices. This committee was formed in response to a lawsuit concerning option grants and is investigating this complaint. Later on, Jabil received a subpoena from the US Attorney’s office for the Southern District of New York requesting certain stock option-related material.
In light of this subpoena, an analyst asked during a June 21 conference call whether Jabil was standing by its position stated at the company’s analyst meeting in May. At that meeting, Jabil president and CEO Timothy Main said, “There was no backdating.” Responding to the analyst question, Beth Walters, Jabil VP of communications and investor relations, said, “You can assume that everything we said historically still stands.”
Flextronics in Plastics Deal with LEGO Group
Family-owned LEGO Group (Billund, Denmark), billed as the world’s largest manufacturer of construction toys, will outsource the greater part of its production to Flextronics (Singapore). This outsourcing, basically plastics, represents a departure from typical EMS deals, where the revenue is in electronics, and plastics, if at all present, are ancillary parts with low aggregate value.
Outsourcing will take place at three LEGO sites. Starting Aug. 1, 2006, Flextronics will take over operations at the LEGO Group’s factory in Kladno, the Czech Republic. This factory will continue to play a key role in the production of LEGO System products. Production at the LEGO Group’s operation in Enfield, CT, will be phased out during Q1 2007 and transferred to Flextronics’ facilities in Mexico. The relocation affects up to 300 employees including US distribution, which will also be moved.
At Billund, Denmark, production of LEGO System products will shift to Flextronics’ facilities in Eastern Europe in stages between 2007 and 2010. As a result, up to 900 jobs out of 1,200 at the Billund production facilities will be affected over a three-year period. Production of technically more demanding products, LEGO Technic and BIONICLE, will remain in Billund.
This deal expands the relationship between the two companies. Earlier this year, the LEGO Group moved production of its DUPLO preschool products to Flextronics’ site in Sárvár, Hungary.
Flextronics said the deal affords the company further market diversification and enhanced plastic molding capabilities in low-cost regions.
Enics To Take Over ABB Activity
As of Sept. 1, Enics (Baden, Switzerland), an MMI Top 50 EMS provider in the industrial and medical segments, will take over the assembly and test unit of ABB Switzerland’s Protection and Station-Automation products. The 18 ABB employees affected by this transaction will transfer to Enics’ operation in Turgi, Switzerland.
According to Enics, the deal strengthens its core services areas of system integration and after-sales. Indeed, the provider will add ABB business in both areas. As to the latter, Enics will take over repair services for product generations that are no longer active. In addition, Enics said the transaction deepens its long-term relationship with ABB.
For many years, Enics Switzerland has manufactured subassemblies for a number of product families in the protection and station automation group.
Meanwhile, this month Enics officially opened its newly enlarged plant in Elva, Estonia, following completion of the plant’s third addition. The company expects to double plant capacity within the next couple of months and exceed 500 employees there by year end. At present, the plant employs 450 people.
Enics said its increased capacity is a response to the growing demand in the European market. The main role of the Elva plant is to provide a cost-competitive alternative for customers inside Europe with medium- and higher-volume products that do not require customer proximity.
More EMS business…Cyberkinet-ics Neurotechnology Systems (Foxborough, MA) has contracted Minnetronix (St. Paul, MN) to provide engineering and manufacturing services for a device designed to treat acute spinal cord injuries. Minnetronix specializes in developing software and electronics-based medical devices and in turnkey contract manufacturing of finished electronics-based medical devices….Winland Electronics (Mankato, MN) has received a $3.3-million order from an existing customer, XATA (Burnsville, MN), for whom Winland manufactures products utilized in XATA’s onboard GPS tracking and wireless communications system sold to the fleet trucking industry….LaBarge (St. Louis, MO) has received a $1.7-million contract from Northrop Grumman’s Defense Systems Division to produce PCB assemblies for a radar jammer system designed for the F-15K fighter aircraft. The provider expects to receive follow-on orders.
New facilities…Hon Hai Precision Industry will establish an R&D center in Japan to pursue business in robotics and automation systems, according to a DigiTimes report citing a Chinese publication, Economic Daily News….Universal Scientific Industrial (Nan-Tou, Taiwan), a top-ten EMS provider, recently started mass production at its second plant in Shanghai, China. Located in the Zhangjiang Semiconductor Industry Park, the new plant has shop floor capacity of 65,000 m2. With the contribution of the second plant, USI expects its output from Shanghai to reach $400 million this year, up from $150 million in 2005. The new plant is currently focusing on communications products and LCD panel control boards and within three months will begin mass production of consumer electronics…. Asustek Computer (Taipei, Taiwan), which operates ODM, OBM and EMS businesses, has also opened a new site in Shanghai at a cost of $125 million, DigiTimes reported. The site is said to be ramping production of notebooks and handhelds….Also in Shanghai, ODM Inventec (Taipei, Taiwan) will start work on a fourth plant with the capacity to produce 5 million notebooks a year, according to DigiTimes.
Hiring…According to BBJ, a business weekly covering Hungary, Elcoteq (Espoo, Finland) plans to hire more than 650 people for its operations in Pécs, Hungary. Reportedly, 500 of these will be contract workers.
Using a shelter company to provide a facility and workforce has been a longstanding option for companies that want to manufacture in Mexico. Recently, a new company, IMS (N.A.) Inc. of Northbrook, IL, took the shelter concept to China, but with a twist.
Unlike Mexico where customers use the identity of the shelter company, IMS’s service allows a customer to operate in China under its own name. With IMS, the customer will have its “own business setup in China,” said Leo Chan, CEO of IMS.
IMS is marketing its shelter service to small and mid-sized companies that want their own operations in China, but without the need to build infrastructure. According to IMS, its service offers both access to low-cost manufacturing in China and the ability to sell into the country’s large domestic market.
Resources provided by IMS include production and dormitory space, utilities support with backup power, HR and personnel administration, security, and liaison with local authorities. The IMS campus is located at Dongguan in the South China province of Guangdong.
IMS offers customers several options. With on-site support of IMS, a customer can set up its own manufacturing facility on the IMS campus and hire its own workers. Or IMS can provide the client’s workforce as well as the facility. In addition, IMS can supply a dedicated engineering team.
Although the company is presenting its shelter service as an alternative to using contract manufacturers, IMS believes that its buildings could also be utilized for contract manufacturing.
IMS was founded in 2005 by individuals from Hong Kong, China and the US with over 100 years of business experience in China. As of May, the company had two customers, both in the plastics and molding industry.
People on the move…Marc Onetto has resigned from his position as executive VP of worldwide operations at Solectron (Milpitas, CA). One of Solectron’s most visible executives, Onetto led Solectron’s high-profile effort to implement lean manufacturing. Solectron said he is leaving the company to pursue other interests. Mike Cannon, Solectron’s president and CEO, will assume Onetto’s role while the company searches for a replacement….Michael Walkey has left Flextronics, where he served as VP and GM, reverse logistics and repair, to join Hitachi Data Systems as senior VP of global volume channels. …Chou Kung-Hsiung has replaced Chiang Hsiao-Chin as managing director of Cal-Comp Electronics (Bangkok, Thailand), which ranked 11th in the MMI Top 50 for 2005. Chiang Hsiao-Chin resigned from his Cal-Comp position to become managing director of Taiwan’s Kinpo Electronics; the Kinpo group is a major shareholder in Cal-Comp. He will also serve as vice chairman of Cal-Comp….Jan Jørgensen, CEO of Top 50 provider Kitron (Lysaker, Norway), has left the company. Also, Morten Jurs has resigned as Kitron’s CFO.
ODMs Still on a Roll
In preparing ODM results for the May edition, this writer was hopeful that the numbers would show ODM growth rates heading downward toward EMS levels. The results published in the May issue are discouraging if you’re on the EMS side.
One May article looked at Q1 2006 sales for ten of the largest ODMs. Total Q1 sales for the ODM group went up an eye-popping 47.0% year over year in US dollars. Apparently, this quarterly result is not an aberration. It follows on the heels of an aggregate 2005 growth rate of 40.4% (in US dollars) for the ten ODMs. A second article, the cover story, includes a larger group of 12 ODMs with a 2005 growth rate of 34.3%, still high by EMS standards.
These numbers, which are well above ODM growth estimates typically seen, spell bad news for the EMS industry. Far above what the industry has done in recent years, these results show that the ODM outsourcing model continues to deliver significantly higher growth overall than the EMS model does. And there’s no sign, through Q1 at least, that the growth gulf between the two models is shrinking back to 2004 levels.
To make matters worse for the EMS industry, ODMs are still putting up decent margins. For Q1, the ten ODMs posted combined gross and operating margins of 7.2% and 3.6% respectively, well above the collective margins of the nine largest US-traded EMS providers in the quarter.
On the face of it, one might argue that there should not be so much of a disparity between the two models. After all, the large EMS providers can offer design solutions to their customers just as the ODMs are wont to do. But ODMs specialize in a few product areas where they have developed domain expertise, whereas EMS providers are jacks of all trades, providing design and manufacturing services across myriad products.
MMI believes ODMs have been so successful for a couple of reasons. First, ODMs were early players in the OEM trend to outsource design and manufacturing. The ODM model worked especially well for commodity products because ODMs could leverage a basic design platform across multiple customers where product differentiation was minimal. In return for allowing ODMs to keep the intellectual property of their designs, OEMs got new products at little or no development cost. Second, ODMs became experts in designing certain commodity products, particularly notebooks. So good were ODMs at this that they continually gained market share, while demand for these products also rose. ODMs became adept at quickly developing new products in an environment of continually shrinking product life cycles. If an ODM could design a product faster than its customer could, that customer was probably hooked.
Unfortunately, MMI doesn’t see that the EMS industry can do much more about the rise of ODM-style outsourcing. Those providers that wanted to start ODM businesses already have. Given ample opportunity, the rest have taken a pass on the ODM model.
Obviously, there’s room for both models in the world of outsourcing. ODMs have been the high flyers lately. But they depend on a few product sectors. EMS providers are more diversified, which could work in their favor over the long haul. Time will tell.