MMI June 1999
Vol. 9, No. 6: June 1999
Table of Contents
Electromechanical Players Grab Piece of Outsourcing Pie
MMI Lists 11 of the Largest Providers
When partaking of the fruits of outsourcing, EMS companies are not necessarily the only ones invited to the table. Want proof? Just look at Nortel’s recent disclosure of the operations that it intends to divest initially (May, p. 2). Out of ten activities slated for divestiture, four are electromechanical assembly operations. Chances are one or more large providers of electromechanical services will be considered as possible buyers for these operations. Indeed, a whole group of large suppliers, increasingly global in reach, have emerged on the electromechanical side of the outsourcing space (see table below). Starting with an electronics enclosure as their core offering, these providers have branched out into value-added services that often include mechanical and tooling design, supply chain management, and integration of enclosure subassemblies.
For now at least, electromechanical providers maintain peaceful coexistence with EMS companies in the OEM supply chain. Whether or not that holds true in the future remains to be seen. One thing is clear, though. Electromechanical services have become big business.
How big is the market for electronics enclosures and related services? An estimate of about $20 billion pops up in several places. But in new report entitled Electronics Manufacturing Supply Chain, U.S. Bancorp Piper Jaffray (Minneapolis, MN) comes up with an addressable market of about $45 to $60 billion when value-added services are factored in. It’s difficult to say which numbers are more valid because study of this market, long overlooked, has only just begun.
Beyond Metal Bending
In recent years, companies supplying enclosures for electronic products were often described as “metal benders,” if they were noticed at all. And usually they weren’t because the enclosures business was a highly fragmented industry mainly populated by small companies that built empty frames and boxes for local customers. The system worked because shipping bulky enclosures over long distances made little sense.
Then a funny thing happened on the way to the OEM customer. OEMs began to see the merits of outsourcing more than just an empty enclosure. Why not have the enclosure supplier add such things as cables, a power supply, a backplane, and thermal management? And why have one supplier provide the metal parts, while another molds the injected plastics? Let’s deal with a single supplier and make it responsible for providing additional items within the enclosure, customers started to say. Not only that, the supplier could help with the electromechanical aspects of product design.
At the same time, large OEMs were moving to or already practicing multiregional manufacturing around the globe. The one item, above all else, that needed to be made locally was the enclosure. Again, shipping enclosures full of air was not a good idea. But how do you ensure that enclosures designed in one place are duplicated exactly with consistent quality in every manufacturing location worldwide? And who will handle the sourcing of the additional parts and subassemblies that can be outsourced along with the enclosure?
The need to supply more parts and services in more locations favors larger providers over smaller ones. “Customers are asking us for globalization and scale,” said Mark Stevenson, chairman of electromechanical provider EM Solutions, in a recent EMS conference held by Thomas Weisel Partners.
Moreover, U.S. Bancorp Piper Jaffray believes that scale will be the single largest contributor to the future success of enclosure suppliers. The firm offers other reasons that bigger is better. OEMs with large programs seek providers that are big enough to finance them. Also, OEMs that want to shrink their supply base look for scale in their partners. Finally, large providers have purchasing leverage for cost reductions. U.S. Bancorp Piper Jaffray predicts that the top five to ten providers should grow 15% to 20% per year.
It’s no secret that the quickest way to achieve scale is through mergers and acquisitions. A number of large electromechanical providers owe their size to M&A. According to U.S. Bancorp Piper Jaffray, over the last three years the top providers have acquired more than 30 companies. As a result, consolidation is underway in the electromechanical sector.
The emergence of large electromechanical players with integrated services and multinational facilities is familiar to anyone that has followed the EMS industry. Just as the change from metal bender to electromechanical provider parallels the earlier evolution of board stuffer to EMS provider. The electromechanical business “is where contract manufacturing in electronics was in the ’90-’91 time frame,” says Hardie Harris, VP of business development at electromechanical provider CMS Hartzell. He ought to know. Harris served in senior management at both AVEX Electronics and Group Technologies in the EMS industry.
Who Are These Large Players?
MMI has compiled a list of 11 electromechanical providers with electronics-related sales of more than $200 million (see table). As far as MMI knows, this is the first time such a list has been published. Because electromechanical outsourcing is poorly documented, the list is not presented as complete. MMI may not have covered every electromechanical provider that belongs on the list. Many players are either private or operate as units within larger companies. Any companies belonging on the list should contact MMI.
Some of the largest players may be familiar, and others may not. They are listed roughly in order of 1999 or annualized sales of electronics enclosures and value-added services. The list should not be used for ranking because data is insufficient. In some cases, the order represents MMI’s best guess. Here is a brief rundown on each player.
Applied Power. This public company has made a huge investment in its enclosures business. In the last two years, Applied Power has spent $1.05 billion on 11 acquisitions for that business. The company is now focusing on growing at least 20% a year. By far, Applied Power has more plant locations than any other electromechanical provider (table). A reorganization recently went into effect, splitting the company into two segments: APW Industrial and APW Electronics. The latter will serve as a single point of contact to supply electronics OEMs with enclosures, power supplies, thermal systems, backplanes and cabling either as products or integrated as a system.
Hon Hai Precision. Better known under its Foxconn name, this Taiwan-based company believes it is the largest enclosure provider to the PC industry. Hon Hai plans to ship about 25 million enclosures to that industry this year. Remarkably, the company has been in the PC chassis business for just three years. Hon Hai also sells connectors, which are included in reported sales. It does not break out enclosure-related sales. The company was ranked 33rd on Business Week’s Information Technology 100, out this month.
Rittal. This Germany company claims to be the world’s largest enclosure manufacturer. But privately held Rittal does not disclose its revenue, much less sales of electronic enclosures. It is unclear whether Rittal’s sales in the electronics market would be on par with Applied Power or Hon Hai. U.S. Bancorp Piper Jaffray estimates that electronic enclosures make up less 50% of sales. Unlike the typical large electromechanical house, Rittal does not engage in build-to-print work required for custom enclosures, although value-added assembly is done for certain customers.
Fullarton Computer Industries. Part of the UK-based Laird Group, Fullarton serves as one model for what can happen when electromechanical services converge with contract manufacturing. Fullarton started out in electromechanical assembly and gained an EMS operation through the 1997 acquisition of Mimtec. This unit contract manufactures PCs in Scotland, where its main plant produces over one million PCs a year. Before the acquisition, Fullarton had supplied chassis to Mimtec, which used them to build PCs for IBM. Three electromechanical sites turn out a weekly total of about 90,000 units up to and including power packs and disk drives. In Scotland, Fullarton now runs two plants dedicated to full PC build, with the Mimtec unit employing over 1000 people.
EM Solutions resulted from the 1998 merger of Electronic Manufacturing Systems based in Longmont, CO, and RSP Manufacturing of Fremont, CA (Dec.’98, p. 3). Electromechanical assembly focuses on complex electronic products with big price tags. Typical products supported include complex servers and large data storage systems. EM Solutions won’t supply metal only. Services include enclosure design, prototyping, metal fabrication, cable assembly, supply chain management, and parts integration. As a result of the merger, McCown De Leeuw & Co. became the majority shareholder of EM Solutions, which remains private. The company has its sights set on reaching $1 billion in the next few years.
Chatham Technologies. There is perhaps no better example of a roll-up strategy at work in electromechanical services. In August 1997, Chatham was formed by the simultaneous acquisition of seven companies. As a result, Chatham started out with about $150 million in annualized revenue. The privately held company is the brainchild of Kidd & Company. Chatham has also taken part in OEM divestitures, with the acquisition of electromechanical operations from Ericsson. Like its competitors, Chatham is touting its ability to provide an integrated electronic package.
Pentair. A diversified public company, Pentair operates in three markets: professional tools and equipment, water and fluid technologies, and electrical and electronic enclosures. The Electrical and Electronic Enclosures Group consists of Hoffman Enclosures, Schroff, and Pentair Enclosures. Billed as number one in electronic enclosures for Europe, Germany-based Schroff also supplies North America and Asia, selling direct to industrial electronics manufacturers. Pentair Enclosures provides custom enclosures and integrated solutions to telecom, datacom and server OEMs. Hoffman sells to electrical enclosure markets through distribution. In 1998, sales of the Electrical and Electronic Enclosures Group totaled $564.0 million. Pentair describes itself as the first consolidator in the global enclosures business. Since the fall of 1998, the company has made two enclosure acquisitions.
Trend Technologies. This company got its start as Trend Plastics, an injection molding operation that was purchased by an investor group in March 1997. Three acquisitions followed to add capabilities such as sheet metal fabrication and to put Trend Technologies into Europe through a Dublin site. Trend molds plastic parts; fabricates sheet metal items; assembles plastic and metal pieces; mounts other parts such as fans, cabling and power supplies; and performs electrical testing. Trend promotes its ability to make its own tooling. Design and engineering capabilities include setting up new product introduction teams to perform design for assembly analysis and the like.
Shinei Group, Singapore Shinei Sangyo Pte Ltd. One electromechanical provider called Shinei a formidable competitor. Shinei operates two facilities in Singapore, one in China and one in the U.S. Like Hon Hai Precision, Shinei maintains a small customer base, with the computer industry as a major market for ser-vices. The Singapore-based company also offers PCB assembly through another company, Hokuriku Pte.
CMS Hartzell. This electromechanical house originated from a platform company called Continental Metal Specialty in the metal stamping and assembly business. After acquiring a sheet metal house in the Silicon Valley area last year, CMS merged with Hartzell Manufacturing, an injection molding and die casting operation, at the end of the year. Then in 1999, CMS Hartzell acquired a Texas company to add engineering, quick-turn prototyping and tooling, and short-run injection molding. CMS Hartzell is committed to providing customers with an integrated solution that unites its capabilities in electromechanical outsourcing.
Mack Molding. This turnkey enclosure supplier also owns an MMI Top 50 contract manufacturer — Mack Technologies. Although Mack Molding supplies some of the enclosures that Mack Technologies uses, the two companies maintain separate operations. According to Mack Molding, a full-service enclosure supplier to major computer and business equipment OEMs must offer supplier management, manufacturing engineers, program managers, part design in addition to design reviews, and global logistics.
Uniting Mechanical and EMS
Despite the rise of large players specializing in electromechanical work, electromechanical capabilities also exist among some EMS providers. These providers may form a small group, but they do create a precedent for the integration of electromechanical and EMS capabilities.
For a good example of this integration, take C-MAC Industries. Among EMS providers, C-MAC is one of the most vertically integrated. It can manufacture everything from the bare board and backplane to a finished and tested product. That includes manufacturing sheet metal card cages, racks, and indoor and outdoor cabinets as well as providing thermal management.
C-MAC is noteworthy for another reason. It recently boosted internal capabilities on the electromechanical side with the January acquisition of R & M Metaltek, a sheet metal house with 165,000 ft2 in Montreal, Canada, and 55,000 ft2 in Seymour, CT. C-MAC can build an enclosure in house or farm it out depending on what is best for a given program. C-MAC’s sales, employees and plants related to enclosures stack up against the large electromechanical players (table).
But C-MAC is not the only EMS provider to add capacity recently on the electromechanical side. It may not be common knowledge, but SCI Systems gained some mechanical capacity when it acquired manufacturing assets from Intergraph (Oct., p. 3-4). That capacity, primarily sheet metal cabinets and housings, is being moved to the SCI campus, where a building is being added to house the new capacity.
What’s more, some people may not realize that SCI’s plant no. 4, a six-building complex in Laceys Spring, AL, is dedicated to mechanical work. Some of this work is purely mechanical in nature, and some consists of building chassis, racks and housings for the electronic products that SCI manufactures. Internally built enclosures are not a majority of what SCI uses, but are “a significant amount of it,” says Olin King, chairman and outgoing CEO of SCI. He puts the value of these enclosures at “tens of millions of dollars a year.”
SCI’s electromechanical capability dates back to its very beginning. “We had a sizable machine shop in month two of our history,” King points out. That capability has been retained from SCI’s days as an aerospace-military house and enhanced.
He stresses that today SCI’s elec-tromechanical capability is adequate, and SCI does not need to expand it. Still, the company is keeping its options open. “We have looked and continue to look at how we might appropriately expand that,” says King.
One can find more examples of such internal capability in the EMS business. K*TEC Electronics, another proponent of vertical integration (Sept.’98, p. 1), performs injection molding and metal fabrication within its EMS facility in Texas. And Flextronics International controls the supply of plastics to its industrial parks through equity in its plastics subsidiaries. Even a small EMS operation like I-PAC Manufacturing, a subsidiary of Photomatrix, can participate on the electromechanical side (Feb., p. 5).
Who Controls the Chain?
The answer to this question determines who gets the lion’s share of the value add. Will it be the EMS provider who can build and test the electronics or the electromechanical house who can supply the enclosure and electromechanical accessories? It is likely that instead of a single answer, multiple solutions will appear. Here some potential scenarios:
(1) The EMS provider becomes the tier-one supplier and subcontracts enclosures to the electromechanical house, which acts as the tier-two supplier. An OEM may set the parameters for an enclosure AVL, but the EMS provider will have purchasing authority.
(2) The EMS provider vertically integrates electromechanical capabilities as above and takes over the metal and plastics portion of the supply chain.
(3) The OEM decides its enclosure should not be shipped around. So it stays at the electromechanical house for final assembly and test. The EMS provider supplies board assemblies. As a result, the electromechanical company becomes the tier one supplier and the EMS provider is relegated to tier two.
(4) The electromechanical provider vertically integrates board assembly and test as well as final assembly and test. The supply chain then belongs to the electromechanical house.
(5) The OEM decides that for whatever reason final assembly and test should remain on its premises. So the EMS provider and electromechanical house continue as separate suppliers to the OEM.
Most if not all of these schemes probably have a place in the future. Scenarios (1) and (5) largely represent the status quo with (5) diminishing over time. For the most part, (1) will likely be the scheme that (2), (3) and (4) must beat.
Scheme (2) requires EMS providers to invest in capabilities outside of their traditional core competencies. And this need to invest may continue as new customers bring added requirements for metal or plastics. But (2) has a start. Scenario (3) can work only if electromechanical houses obtain system configuration and test capabilities. Number (4) puts an even greater burden on the electromechanical house, which must either buy SMT lines or acquire an EMS company. Still, outsourcing large, complex products may favor (2), (3) or (4).
Electromechanical providers such as CMS Hartzell will pass on vertical integration and remain content to supply turnkey enclosures to whomever sits atop the supply chain. But those who do have designs on the supply chain must be ready to beat the EMS providers at their own game. So far, enclosure companies are behind the curve, reports one analyst. “I think operating efficiencies and operating models of enclosure companies are not as refined as EMS companies are,” says Roger Norberg of U.S. Bancorp Piper Jaffray. He recently found that four enclosure companies generated sales per ft2 that ranged from $191 to $317, while the top ten EMS companies averaged $888 per ft2. Norberg also concluded that enclosure companies should boost return on assets to make up for declining margins, as EMS companies have done.
VMI Issues Explored
A Second Look at VMI
If there were any doubt about vendor-managed inventory (VMI) as a hot trend in contract manufacturing, consider this. One logistics provider, Virtual Integration Associates (VIA), is shipping product to 11 different contract manufacturers under VMI programs. Of those CMs, eight are in the pilot stage. So not only is VMI emerging as a trend (see April, p. 1), it’s about to blossom.
A recent talk with Gerry Gentile, president of VIA (Markham, Ontario, Canada), reveals a number of issues facing those who would undertake a VMI program:
# How does a logistics company ensure that it will have warehouse space available in every VMI location required by its EMS customers?
# Is VMI limited to the largest EMS companies with the greatest purchasing power?
# Who pays for this VMI service and how much does it cost?
# Are all VMI programs the same?
# Who is driving this trend: component suppliers or their EMS customers?
# What happens when a component supplier must provide VMI delivery to two or more CMs in the same locale?
For an EMS company, VMI combines two irresistible qualities. One is fast delivery of buffer inventory from a local, third-party warehouse — a must for build-to-order programs. The other attraction is that buffer inventory stays off the CM’s books until consumed, improving the financial metrics that depend on inventory. In addition, VMI offers other benefits such as freeing up EMS facility space that had been used for warehousing and eliminating the confusion of numerous truck deliveries with a single truck from the VMI warehouse.
Now that a growing number of CMs, particularly in the upper ranks, are asking for VMI, logistics providers face a potential dilemma. How do they provide warehousing in all the locations that CMs might ask for? One solution is to have or be willing to set up warehouses everywhere they are needed. Hence, VMI can favor global logistics providers that operate ware-houses in many locations (April, p. 1).
But VIA, for one, has taken a different approach to meeting the need for a large number of VMI locations. In major markets, VIA still sees the need to have its own buildings. Rather than paying for brick and mortar in every location, though, VIA looks for partners to provide warehouse space in markets that VIA might otherwise pass up. As a result, VIA has created a network of about 10 logistics companies, sharing a common IT system, program management and ISO process. These partners allocate a certain amount of space to VIA, which puts its own people and warehouse management system on site.
“Whereas before [the network] we would look at a contract manufacturer and say to ourselves if these guys don’t have about $50 million in material throughput, it’s not going to be a viable solution for us. Now we can say even if they have only $5 million in material throughput, because I can just book only the amount of space that I need from a partner locally without having to put up a whole site, I can do it,” says VIA’s Gerry Gentile. For the smaller CM buying components through distribution, VIA treats the distributor as another supplier that can use a VIA hub for product delivery. So VMI need not be limited to the largest CMs.
VIA lists 40 sites in the U.S., 20 in Canada, and two in Mexico. The Mexican locations consist of a warehouse in Guadalajara and a start-up operation in Monterrey. In addition, VIA has entered an agreement with a global logistics company to provide facilities in selected locations in Europe and Asia.
Today, about $4 billion in material flows through VMI programs within VIA. About 60% of VIA’s business typically comes from CMs, and Gentile expects that percentage will continue to grow. “It will probably be closer to 80 to 90 percent by the end of next year,” he predicts.
Although CMs are the customers for materials delivered under VMI, they usually do not pay VIA for this service. Gentile reports that “in at least 90% of the cases” suppliers — part manufacturers or distributors — pay. “So the ECM gets a great deal,” he remarks.
The cost of VIA’s services is activity-based and depends on such things as the amount of space needed, the number of ins and outs, and value-added services to be performed. Still, Gentile says, “Ten years of experience has taught us that most opportunities fall under less than half a percent of the value of goods per month, even though we don’t quote that way.”
Given VIA’s exposure to the VMI programs of 11 CMs, the company has noticed differences among their programs. “Some [CMs] basically are isolating just the critical parts that they use every day,” reports Gentile. “Some are sweeping right across the board….They’re trying to capture 100% of their components and putting them on the program.” He also sees differences in the level of automation ranging from EDI at every step of the process to the use of phone calls, fax or email for a major portion.
What’s more, CMs do not follow a universal strategy for withdrawing material. “Some are pulling entire bills of material under one number. And some are pulling individual part types,” Gentile notes. There are also differences in the services that VIA provides to its EMS customers, some of whom want VIA to prepare their parts for manufacturing. “They get a returnable tote, and in the tote they have the complete kit, detrashed, prepped, programmed, tape and reeled, and ready to go to the line. And some are still doing those types of activities inside their own building,” he observes.
Moreover, not all CMs want to be immersed in VMI details. “In some cases, the contract manufacturer wants nothing to do with the actual nuts and bolts of the VMI [program],” says Gentile. The CM tells its suppliers to provide VMI deliveries, and the suppliers look for a logistics provider. “So we set ourselves up to work with either side of the equation,” he points out. If a supplier won’t furnish VMI without VIA, then the company has achieved its objective.
Working with a single logistics provider, whoever it may be, makes sense from a supplier’s standpoint. Supporting multiple CMs with multiple VMI programs tends to hinder economies of scale (April, p. 2). Also, Gentile points out that a supplier must do EDI mapping for each logistics provider it uses. And this problem can come to a head if a supplier is asked to support two VMI warehouses in the same city.
Take Guadalajara. Rather than splitting up parts among separate VMI programs, some suppliers are serving multiple CMs in Guadalajara out of a single VIA hub. Naturally, one can expect initial resistance from EMS competitors whose inventory is being colocated. But VIA takes precautions to ensure that a firewall exists between one CM’s inventory and another’s.
In essence, VMI creates a potential tug of war between CMs and their parts suppliers. CMs typically want the freedom to fashion their own VMI programs with logistics providers of their choice. Suppliers, on the other hand, are not anxious to tie up inventory in numerous VMI locations operated by a variety of logistics companies. Which side has the strongest pull? Ask the major OEMs. Ultimately, it is they who must be satisfied with the supply chain that feeds their products.
MCMS Rolls Out Superstore
To show that VMI is not limited to top-tier providers, consider MCMS. The company calls its VMI concept the Supplier Superstore.
Over a year ago, MCMS recognized the need to build a more responsive and efficient supply chain management program by using a demand-pull model for material flow. “Our goal was to develop a plan that would take our supply chain initiative to the next level,” says Robert Subia, CEO. To achieve this end, MCMS created the Supplier Superstore, a logistics and material management program that synchronizes inbound material flow with manufacturing demand. MCMS rolled out the first phase of the Superstore to its tier-one distributors in January.
In the Supplier Superstore program, a warehouse managed by a third-party stores supplier-consigned materials about a half mile from MCMS’ flagship facility in Nampa, ID. That third party is Air Van Logistics, a local agent for North American Van Lines. Materials are delivered to the facility on demand. MCMS assumes ownership of the materials upon receipt at the plant. Suppliers manage inventory levels in the Superstore based on forecasts and actual demand data. MCMS and suppliers have access to in-transit data, status of on-hand materials, and historical pull data through an online logistics and inventory management system. MCMS reports that the program allows it to pull materials in exact quantities just in time for manufacturing, while providing suppliers greater visibility to demand and a buffer to accommodate changes.
MCMS has advanced the Superstore program into a second phase to include strategic OEM suppliers, which provide materials directly to MCMS rather than through distribution. Ultimately, the company’s goal is to receive about 80% of its raw materials from the Superstore.
Poll Confirms More Outsourcing Across the Board
According to responses from 87 OEMs, 84% of them intend to increase their use EMS providers over the next 12 months. This initial result comes from the 2nd Annual Electronics Manufacturing and Supply Chain Survey recently conducted by Bear, Stearns & Co. (New York, NY).
The firm polled 120 leading OEMs in five segments: computers and peripherals, consumer and related, data networking, telecom hardware and other electronics. Respondents so far number 87 companies, representing some $329 billion in cost of goods sold, or over half of the estimated $650 billion in global COGS. Of these participants, 60% plan to modestly increase their use of EMS providers over the next 12 months, while 24% foresee a substantial increase over that period.
This total of 84% expecting an increase is up from 74% in last year’s poll, which netted 54 responses out of 80 surveys (July ’98, p. 4).
Bear Stearns believes that telecom hardware presents the largest growth opportunity for EMS providers over the next 12 months. The survey found that, when weighted by COGS, only 20% of manufactured product from telecom respondents is outsourced (see table). Although 96% of them already use contract manufacturers, the same percentage expect to increase their use of EMS over the next 12 months.
Despite views to the contrary, Bear Stearns holds that still more outsourcing will come in computers, especially in the notebook and high-end computer markets. A reported 79% of participants in the computer, storage and peripherals sector said they would increase use of contract manufacturers, with 89% already outsourcing. Bear Stearns believes that since most major computer companies have announced increased use of CMs, there is upside to the sector’s current level of outsourcing. That level is 28% of manufactured product, based on COGS-weighted responses (table).
The survey shows EMS penetration is greatest in the data networking market, where responding companies outsource 57% of manufactured product. What’s more, all of the networking companies surveyed use CMs, and 73% expect to increase that use. Still, Bear Stearns sees increased outsourcing opportunities with emerging networking companies such as NetCore Systems and Avici Systems.
Bear Stearns describes consumer and related products as the other sleeping giant (besides telecom) for outsourcing. An eye-opening 100% of responding OEMs in this consumer category expect to increase their use of EMS. All them report some outsourcing. This category includes set-top box producers, cell-phone makers, and diversified consumer giants. Weighted by COGS, only 28% of product from these companies is outsourced. Bear Stearns cautions that because it received only ten responses in this category, results may not reflect the consumer electronics industry. Still, Bear Stearns remains bullish on outsourcing of consumer electronics based on competitive trends, especially in Japan.
Finally, the Bear Stearns survey covers a category called other electronics, including companies in semi-conductor equipment, office equipment, defense and avionics, medical, automotive and point-of-sale hardware. This category is underpenetrated with 17% of product outsourced, and 71% of respondents in the category intend to use CMs more. Some 79% already do some outsourcing.
Overall, 53% of OEMs in the survey said the primary reason for outsourcing was to reduce costs. Capacity constraints and time to market were cited by 28% and 20% of OEMs, respectively. Telecom companies were most concerned with reducing costs, which accounted for 67% of their responses, compared with 25% for capacity constraints and 8% for time to market. Computer-related OEMs cited lower costs 51% of the time, time to market in 26% of cases, and capacity in 23%. Responses from networking companies were divided equally among the three reasons.
Flextronics To Acquire Kyrel EMS
On June 14, Flextronics International (San Jose, CA) said it entered an agreement to acquire the Finnish contract manufacturer Kyrel EMS Oyj. The deal will expand Flextronics’ business with Kyrel’s two largest customers — Nokia and Alcatel.
Flextronics expects to issue about 1.9 million shares to make this deal, which would be worth about $105 million based on the June 14 price of Flextronics stock. Pending government approval in Finland, the deal is expected to close in Q3. It will be accounted for as a pooling of interests and will result in a one-time charge of $3.0 to $3.5 million expected in Q3.
An EMS provider since 1983, Kyrel EMS operates two plants in Finland and one in Lunéville, France. Headquarters are in Kyröskoski, Finland. For the end of 1998, Kyrel reported about 225,000 ft2 of plant space and about 19 SMT lines. The company just added 6000 m2 (65,000 ft2) to its main plant in Kyröskoski. Kyrel employs about 900, and its run rate is $230 million. Based on Finnish GAAP, the company was profitable in 1998. Kyrel is projecting a revenue increase of about 30% for 1999.
Nokia and Alcatel represent the majority of Kyrel’s sales. Kyrel attracted Flextronics because of Kyrel’s relationship with these two telecom companies and its management strength. Kyrel manufacturers cell phone accessories, cell phone cards and office phones for the two customers. For example, Kyrel’s French operation in Lunéville supports an Alcatel factory near Strasbourg, France. What’s more, Kyrel is expecting to begin a major project for Alcatel in August.
“The addition of Kyrel, with its experience and key customers in the telecom industry, will strengthen Flextronics’ position as a leading EMS provider to telecom customers. This merger, in conjunction with the recent acquisitions of ABB and Ericsson operations in Sweden, will allow Flextronics to offer present and future customers better service due to improved experience and increased economies of scale,” states Ronny Nilsson, president of Flextronics, Western Europe.
Flextronics did not need Kyrel to establish a substantial presence in Scandinavia. Without Kyrel, the company’s six sites in the region total some 1.2 million ft2. Indeed, Flextronics may well be the largest EMS provider in Scandinavia.
Merging with Flextronics “allows us to continue to focus on delivering superior service to our local customers, while adding the global capabilities and advantages of a world-class EMS provider,” comments Simo Parhankangas, managing director of Kyrel EMS.
Solectron To Bolster After-Sales Services With Sequel Deal
Solectron (Milpitas, CA) intends to acquire Sequel, Inc., a privately held company specializing in repair service and support for desktop and notebook computers, LCDs, system boards and disk drives. The pending deal will expand Solectron’s after-sales support offering, an area that the company has recently emphasized with the formation of a global Support Services division. Completion of the deal is expected by the end of this month. Terms were not disclosed.
Solectron will own Sequel’s operations in San Jose, CA; Memphis, TN; and Reading, UK. Sequel’s main plant in San Jose offers 375,000 ft2 with 50,000 ft2 of clean rooms. The Memphis hub facility can provide 24-hour rapid response for products such as mobile computers and handheld computing devices. Solectron will also assume Sequel’s ownership in joint ventures in Japan and Taiwan. Sequel lists a total of 500,000 ft2 in manufacturing facilities.
In addition, Solectron plans to offer jobs to about 550 Sequel employees.
With this acquisition, Solectron intends to expand support services by offering end-user support through call centers. When end users call these centers, repair technicians will provide technical support on Solectron-built products.
All Sequel operations will be integrated into Solectron’s Support Services division within six to 12 months after closing. The combined organization will operate under the Solectron Support Services name and will report to William Mitchell, president of the division. He joined Solectron from Sequel, where he served as CEO. He is credited with converting Sequel from a disk drive manufacturer to a depot service.
While all of Solectron’s sites can provide support services, dedicated factory service centers exist in California, Texas, Brazil and France. As part of Solectron’s growth plans for the Support Services division, the company intends to rapidly expand its network of factory service centers and quick-turn operations in Europe, Asia and Latin America within the next three years. Solectron believes in supporting products globally where they are sold, as opposed to where they are manufactured.
RTS To Merge With Operations in Asia
Reliance Technical Services (RTS), a CM in Sunnyvale, CA, has agreed to merge with the contract manufacturing operations of Goldtron Ltd., a public Singapore company, and Tongkah Holdings BHD, which is publicly traded in Malaysia. The combined company will have three EMS locations in Asia. Based on a stock for stock exchange, the merger is expected to close during the summer.
The resulting company, called Reliance Technical Services International, Inc. (RTSII), is expected to have combined sales in the $120- to $130-million range. RTSII will operate 180,000 ft2 in Sunnyvale; 120,000 ft2 in Penang, Malaysia; 100,000 ft2 in Shenzhen, China; and 117,000 ft2 in Shanghai. Together, these facilities contain 26 KME SMT lines and employ about 2590 people.
To be headquartered in Sunnyvale, RTSII will offer a full range of manufacturing, logistics and materials management services.
RTSII says it is making this deal for three reasons: to offer offshore volume manufacturing, to achieve greater size for economies of scale, and to establish a global presence.
“We have been looking for a combination that puts together the necessary strategic elements which allow the new company to compete effectively in the worldwide market for contract manufacturing services. The ECM business continues to grow rapidly, and this merger gives RTSII the base to grow with the market,” states Patrick Ng, chairman and CEO of RTSII.
James Smith, CFO of RTSII, says, “Our business plan is to grow our new and exciting company along with our customers through access to public funding down the line.”
The planned merger follows a 1998 strategic alliance among RTS and the offshore operations. Goldtron Ltd. owns one operation and holds 49% of the other, which is majority-owned by Tongkah Holdings with a 51% stake.
RTS was founded by Bette and Patrick Ng in 1981.
Chase Expands EMS Holdings
Chase Corp. (Bridgewater, MA), which already owns one contract manufacturer in New England, has bought a second one in the region. Last month, the company paid a total of $8 million in cash and notes for RWA, Inc., a CM in Melrose, MA.
This deal is Chase’s second EMS investment this year. In January, the company acquired the remaining interest in DC Scientific, a CM in West Bridgewater, MA. The CM’s name was recently changed to Sunburst Electronic Manufacturing Solutions to better reflect its range of EMS services.
RWA’s sales are currently about $10 million. Its facility contains about 30,000 ft2 with two SMT lines and some 80 employees. Like Sunburst, RWA focuses on the high-mix market and on the same industries — communications, medical and industrial. RWA operates principally in New England and the Northeast.
“Our goal is to focus on the New England area and particularly serve the high-mix, low-to-moderate volume segment of the EMS market with a particular focus on communications, medical and industrial,” says Andrew Chase, GM of Sunburst.
“Electronic manufacturing services is an industry that continues to demonstrate impressive market growth throughout North America and in particular the Northeast region,” comments Peter Chase, president and CEO of Chase Corp. The company cites Technology Forecasters’ estimate of $137 billion for the North American EMS market by 2002. He adds, “The acquisition of Sunburst EMS provided us the opportunity to understand first hand a market that we had identified as having strategic potential in 1996. Now, with the addition of RWA, we have established an EMS business unit that reflects our ongoing commitment to this growing industry segment.”
Andrew Chase says his vision is that the EMS business unit will be Chase Corp.’s “driver of growth for the future.”
Richard Aho, who founded RWA in 1984, will stay on as president. Both RWA and Sunburst will operate separately as wholly owned subsidiaries of Chase.
“RWA has grown with the industry, and the added management strength and resources of Chase will enable us to expand more quickly. We are also looking forward to capitalizing on the many synergies that exist with Sunburst EMS,” states Aho.
Chase Corp. is diversified company whose products include tapes and PCB conformal coatings. The company placed 36th on Business Week’s 1999 list of Hot Growth Companies.
C-MAC To Buy Telecom Plant
SR Telecom (St. Laurent, Quebec, Canada) intends to sell its plant in Kanata, Canada, to C-MAC Industries, a Canadian manufacturer in EMS and other businesses. In addition, the two companies have agreed to a five-year supply contract, where-by SRT will outsource the manufacture of a number of its products to C-MAC. SR Telecom makes digital wireless access products.
“This partnership with SR Telecom will enhance C-MAC capabilities in RF technology and strategically position C-MAC to take advantage of the fast growing wireless market,” states Dennis Wood, president and CEO of C-MAC.
Montreal-based C-MAC is the latest EMS provider to add RF capability by acquisition. Other providers that have made deals for wireless assets include Solectron with two RF deals (May, p. 7; April, p. 4) and Sanmina (Mar., p. 7).
Under the agreement with SRT, C-MAC will retain most of the SRT people employed in the Kanata facility of 9,000 m2 (97,000 ft2). SRT will also lease space in the plant for its R&D labs in Kanata.
SRT says the deal will allow it to focus more on engineering and mar-keting. The company expects significant benefits to flow from the economies of scale achieved by C-MAC.
C-MAC says the SRT acquisition will also grow its business in the Ottawa region, known as Silicon Valley North. The provider plans to supply other high-tech companies in the area.
The Canadian company has a record of integrating formerly captive facilities to extend its control over the supply chain. (See first article.)
Deals done…Distributor Bell Microproducts (San Jose, CA) has sold its Quadrus contract manufacturing division to Pemstar (Rochester, MN), a privately owned contract manufacturer of electronic, precision electromechanical and microcomponent assemblies. Pemstar paid about $34 million in cash, subject to adjustments, for Quadrus, which brought in 1998 sales of $86 million. The deal was reported earlier (May, p. 7)….Under a ten-year supply agreement, EFTC (Denver, CO) has obtained additional card assembly contracts from Honeywell Commercial Aviation Systems. These agreements cover Honeywell’s former Air Transport Systems Operations and its interest in Honeymex, an Tijuana, Mexico, manufacturing operation. As a result, about 300 additional employees will transfer to EFTC. The first transaction occurred earlier this year (April, p. 5).
Flash expands in Silicon Valley... Flash Electronics, a CM in Fremont, CA, has leased its second Fremont site in less than 18 months. The new 44,000-ft2 facility is located less than a mile from Flash’s 52,000-ft2 headquarters site, which went live in January 1998. Box build activity will be consolidated in the new facility, due to come on line in July. “This expansion nearly doubles our manufacturing capacity and should enable Flash to continue its 80% annual growth rate, sustained since our inception in July ’94. It is also gratifying that this growth has been funded entirely from operating revenues and internal resources,” comments Chin Fan, president of Flash. The company reports it is on track to enter the year 2000 with a run rate exceeding $100 million.
Asian CMs Enlarge Footprint
USI enters Scotland, while NatSteel opens in Hungary
Both Taiwan-based Universal Scientific Industrial Co. (USI) and Singapore’s NatSteel Electronics Ltd. (NEL) now have a manufacturing presence in each of the three major markets of the world.
With production sites in Asia and North America, these two large EMS providers had lacked a European facility. USI (Nan-Tou, Taiwan) has attained a global footprint with last month’s launch of a 32,000-ft2 facility in Irvine, Scotland. NEL has filled a European need by opening a plant in Hungary.
USI’s new Scottish facility sits on a 1.5 million-ft2 campus site owned by the company. It expects the new facility to employ 65 people by the end of the month, 130 by year end, 300 to 400 by the close of year 2000, and 700 by the end of 2001. The first SMT line is slated for operation by the end of Q3, and two more lines are planned for next year. Until the first SMT line goes in service, the Irvine facility will focus on system configuration and test, consolidation and countrification of systems, and repair at both the system and motherboard level. Customer order management for Europe is also handled at Irvine, which serves as European headquarters for USI.
IBM is a major customer of USI, and the new facility is already supplying IBM in Greenock, Scotland, as well as IBM’s customer base in Europe. USI does business with IBM in many areas, including system configuration and test, motherboard supply and component supply.
Proximity to IBM Greenock was one of a number of factors that led USI to Irvine. Others include the availability of skilled labor, a facility of the right size with room for expansion, the depth of technical education in the area, and the cooperation of various Scottish agencies in obtaining investment. USI received Regional Selective Assistance to aid in this project in North Ayrshire. The company has committed £15 million to the Irvine location, and £1 million went into refurbishing the building.
USI also operates 450,000 ft2 in Taiwan and 385,000 ft2 in Guadalajara, Mexico. Plus it shares ownership in joint ventures in Japan for repair and manufacturing and in China for manufacturing. The company is evaluating options for a low-cost manufacturing location in Europe.
NEL, on the other hand, went straight for a low-cost production site in Central Europe. The company’s new plant in Hungary measures 60,000 ft2 and will start with two assembly lines, reports Bloomberg News. NEL has reportedly invested $4.9 million in the plant.
Meanwhile, according to Bloomberg, NEL has started assembly of Intel boards in a new Penang, Malaysia, factory with two lines, which will increase to six by September.
New programs…Telular Corp. (Vernon Hills, IL) has contracted SCI Systems (Huntsville, AL) to produce Telular’s GSM radio module and CMC Industries (Santa Clara, CA) to manufacture certain fixed wireless terminals. At SCI, production will take place in Graham, NC….According to Bloomberg News, GES International Ltd. (Singapore) recently landed a three-year contract worth $100 million to build a point-of-sales system for Xn Corp. of the UK. The multimedia system includes a touch screen….Phoenix International (Fargo, ND) is manufacturing a controller for Freightliner’s new Step Deployment Unit for entering a truck’s cab….Polaris Pool Systems has selected Microelectronic Packaging Inc. (San Diego, CA) to provide manufacturing services for Polaris’ Watermatic product line….Recoton Corp. (Lake Mary, FL), has decided to outsource manufacturing of products associated with the closing of its audio amplifier manufacturing division. The company makes consumer electronic accessories, loudspeakers and car audio products.
Some financial results…For the fiscal Q3 ended May 28, Solectron reported sales increased 68% from the year-earlier quarter to $2.2 billion. Net income rose 54% from a year earlier to $75.7 million. Nine-month revenue totaled $6.0 billion, up 67% from the same period in fiscal 1998. Net income for the first three quarters increased 44% to $205.1 million….CMC Industries recorded sales of $58.7 million for its fiscal Q3 ended April 30, compared with $58.6 million for the prior Q3. The company posted a net loss of $572,000 for the quarter versus net income of $580,000 a year earlier. CMC says it is entering its Q4 with the largest backlog in nearly two years….According to wire service reports, net profit of JIT Holdings Ltd. (Singapore) was up 54% to S$21.0 million for fiscal 1999 ended in March….For the fiscal Q2 ended Mar. 31, Primetech Electronics (Montreal, Canada) reports sales of Cdn $16.4 million, down from Cdn $21.1 million in the prior Q2. Net income from continuing operations came to Cdn $1.3 million, a decline of Cdn $410,000 from a year earlier. Primetech expects significant volume growth in the second half of fiscal 1999 from Newbridge Networks business.
Some financial news…Wire services report that NatSteel Electronics Ltd. expects sales and profits for the first half of 1999 to increase by 50% over a year earlier. Also, NEL proposes to issue between $275 and $300 million in convertible bonds….The Dii Group (Niwot, CO) has filed for a public offering of 6 million shares, excluding overallotments….SMTEK International (Thousand Oaks, CA) recently sold 11.3 million presplit shares to Thomas Wheeler for $4.5 million. He now holds 39% of the company’s stock. The company paid off a $2-million note held by Wheeler. SMTEK has also completed a 1-for-20 reverse stock split and plans to transfer its listing from the New York Stock Exchange to the Nasdaq SmallCap Market.
Industry news…Business Week has listed the following EMS providers in its 1999 Information Technology 100: Solectron (no. 3), Flextronics (no. 17), Jabil Circuit (no. 22), Celestica (no. 26), and Benchmark Electronics (no. 83)….Based on analysis of 100 SMT lines at leading OEM and EMS facilities, CEERIS International (Old Lyme, CT) found that EMS providers averaged 54% line efficiency compared with 46% for the typical OEM line. Line efficiency is the ratio of the number of hours when a placement machine is actually delivering parts versus the time that a line is staffed. SMT lines at the CMs studied were staffed for an average of 112 hours, with the chipshooter placing parts 63 hours per week. At OEMs, weekly staffing time and placement time averaged 101 and 45 hours respectively.
People on the move…Kimball International (Jasper, IN) has appointed Don Charron to the newly created position of president for Kimball Electronics Group and executive VP for Kimball International. Before joining Kimball, Charron served as GM of Rockwell Automation — Allen Bradley Electronic Operator Interface. His background includes time at SCI. John Habig, the senior executive VP who led the development of KEG, is retiring. Also, Spiro Vamvakas has been named VP of design engineering for KEG. Hired last year, he is a veteran of GE….ACT Manufacturing (Hudson, MA) has promoted Gary Barnier to VP of operations and David Harrington to VP of worldwide materials management….Manufac-turers’ Services Ltd. (Concord, MA) has promoted John Walshe, formerly VP of information technology, to the newly created post of VP of program management….Plexus (Neenah, WI) has announced the following promotions: Dean Foate to executive VP, Robert Kronser to VP of sales and marketing, Paul Ehlers to president of Plexus Electronic Assembly, Dave Clark to VP of materials for Plexus Electronic Assembly, and Matt Knight to VP of customer development for the Electronic Assembly unit. Foate will also retain his current position as president of Plexus Technology Group….Elizabeth Foreman has moved up from VP of finance at Sanmina (San Jose, CA) to CFO. She replaced Bern Whitney, who resigned to join a technology start-up….Steve Fogolini has joined the Dii Group as its VP of business development.
Copyright 1999 JBT Communications