MMI March 2002
Vol. 12, No. 3: March 2002
Table of Contents
MMI Top 50 Rings Up $77.9 Billion in Sales
In spite of a dismal 2001 for the EMS industry, the MMI Top 50 EMS providers still managed to bring in an estimated $77.93 billion in EMS-related sales last year. That’s no chicken feed. Overall sales were down, as one would expect, but the decline was not large. Based on the sales data of 49 Top 50 companies, MMI computed a sales decrease of 6.5%. If all 50 companies were counted, the decline would probably be less than 5% and possibly below 3%.
At the top of the EMS ladder as ranked by sales, Solectron and Flextronics maintained their number one and two positions respectively from the year before (see tables, p. 2-4). On a pro forma basis, the newly merged Sanmina-SCI took over the number-three spot, with Celestica following in fourth position. It took $10 billion in 2001 sales to make the top four. Jabil Circuit’s $4.0 billion in sales put it in the fifth slot. These five are often viewed as separating themselves by size from the rest of the industry.
But perhaps there is one company in a position to make a run at these Big-Five providers. For the first time, Hon Hai Precision Industry Co., better known by its Foxconn trade name, has not only made the Top 50, but has easily qualified for the top 10. Why? Foxconn’s system-assembly business grew so fast last year that box-build sales alone would have given Foxconn the sixth position. Known as a supplier of connectors, cable assemblies and PC enclosures, Foxconn has adopted a vertical integration strategy of supplying components, modules and systems.
Although Foxconn has not broken out sales in these three areas for the year 2001, one can estimate based on 10 months of data that Foxconn has released. Subtracting component sales from Foxconn’s total revenue of $4.3 billion, one obtains $3.5 billion for sales of mechanical and electronic modules and system build. This number, which presumably includes enclosures, is not all classic EMS, but the majority of it is.
To make the Top 50, a provider needed sales of $119 million. This minimum has remained largely unchanged since 1999. But the bar to enter the top 10 was lowered in 2001 due to sales declines and two acquisitions. In 2001, sales of $1.2 billion would put a company in the top 10, compared with a 2000 minimum of $1.7 billion.
The 2001 MMI Top 50 includes 12 new members, and all but three are Asia-based. In alphabetical order, the Asia-based providers are Alco Electronics, Beyonics Technology, Cal-Comp Electronics (Thailand) Public Company Ltd., Elite Industrial Group, Flairis Technology, Foxconn, GES International, Ionics EMS and LMS/Silitek. In addition, two US providers – LaBarge and the Agilitas division of VisionTek – joined the list, as did VIDEOTON Holding from Europe.
Of the 12 departures from the 2000 list, six resulted from mergers or acquisitions, and three from sales declines. The remaining three companies declined to participate in the Top 50 process for 2001.
Data collected in the Top 50 process allows one to calculate at least two efficiency ratios. Based on data from 47 companies, revenue per square foot of facility space averaged $622 in 2001, well below the prior year’s figure of $870. Likewise, data from a similar set of 47 companies yielded $180,500 of revenue per employee, down from $205,700 in 2000. (This 2001 ratio was revised slighted from the printed version, based in data that came in after printing.) Although the 2000 ratios represent a somewhat different group of Top 50 companies, overcapacity is a likely cause for the lower ratios in 2001.
Methodology. Vertically integrated EMS companies sometimes do not break out pure EMS sales from sales of such items as PCBs and enclosures. In the past, this practice created a problem when attempting to rank providers by EMS sales. For the 2001 Top 50, the decision was made to accept sales of such items in the ranking process as long as the majority of a provider’s sales still came from EMS or related services. But companies were asked to exclude sales from non-EMS businesses such as branded products.
Companies that derive a majority of their sales from electromechanical work did not qualify even though they may have some EMS capability. MMI also did not consider companies that operate purely as ODMs (original design manufacturers).
Sales obtained in currencies other than US$ were converted to US$ using average annual exchange rates.
Note: Ionics EMS data was revised from the printed version, based on data that came in after printing.
Jabil To Acquire Facilities from Alcatel and Compaq
Jabil Circuit (St. Petersburg, FL), not known as a prolific deal maker, recently announced two deals to purchase OEM assets. The provider has entered into agreements to acquire Alcatel’s Brest, France manufacturing facility and Compaq’s Ayr, Scotland facility. Each facility contains about 400,000 ft2, though manufacturing area measures 140,000 ft2 in Scotland and less than 200,000 ft2 in France.
Alcatel has signed a memorandum of understanding to outsource the European manufacturing of its PBX (private branch exchange) systems and IP-based PCX (private communications exchange) corporate telephone systems to Jabil. Based on a three-year supply agreement, Jabil will continue the manufacturing of these systems at the Brest plant. The deal expands Jabil’s existing relationship with Alcatel.
Alcatel will transfer 700 employees to Jabil when the deal is closed. Completion is expected by the end of April and is subject to regulatory approvals and consultation with worker councils. Financial terms were not disclosed.
“The Brest site is engaged in very advanced system integration and test services in addition to PCBA assembly and NPI services. We believe these advanced capabilities will be a strategic addition to our global business development activities,” stated Timothy Main, Jabil president and CEO. The provider will seek additional manufacturing business for the site.
In the Compaq deal, Jabil has signed an agreement in principle to acquire the building in Ayr, Scotland, and other facility assets including equipment to build, test, handle and ship server PCB assemblies. Plans call for a three-year supply agreement making Jabil the sole source of Compaq’s server product subassemblies currently manufactured in Ayr and future products. Jabil will also be designated a strategic global supplier to Compaq.
Under the proposed deal, about 240 Compaq employees in Ayr will join Jabil. The acquisition is subject to employee consultation and execution of definitive agreements.
“Jabil’s strategic objective to continue to broaden our participation in the high-end server sector and to boost our European profile is well served with this agreement,” stated Main.
Christina Hanger, VP of Compaq’s Enterprise Supply Chain, said, “This agreement furthers Compaq’s strategy to streamline manufacturing and focus resources on our core strengths of system integration and complex configuration. It also enables us to consolidate our European systems manufacturing onto one site, in Erskine, Scotland.”
MATCO Electronics Assets Sold To New EMS Company
American Manufacturing Services (AMS), a new EMS company with offices in Binghamton, NY, recently bought the manufacturing locations of The MATCO Electronics Group (Vestal, NY), a provider that had financial problems even before last year’s downturn. In January, AMS acquired the assets of six MATCO Electronics subsidiaries, four of which are ongoing operations. AMS took over facilities in Endicott, NY; Hallstead, PA; Deerfield Beach, FL; and Conway, SC. All except the Conway location are engaged in EMS; the Conway operation does cable assembly. Each location was auctioned off through a voluntary liquidation process, and AMS emerged as the successful bidder in each case.
MATCO Electronics’ financial troubles began about two years ago with the Chapter 11 filing of a major customer, Smith Corona. Soon after, a second customer defaulted on its contract, putting MATCO Electronics in violation of financial covenants with its senior lender. In an attempt to free itself from the lender and the restrictions then imposed by the lender, MATCO Electronics planned to sell its Florida and New England facilities. The company hoped to sell the Florida operation to the former SCI Systems, but that deal fell through. Still, MATCO was able to sell its New England operation to PEMSTAR in May 2001 (May ’01, p. 5). That deal gave MATCO a little breathing room, as the company continued to shop Florida and other facilities, negotiated with suppliers, and sought new financing.
But the US economy began to take its toll on MATCO over the summer of 2001. By September, business levels had dropped dramatically, and the provider had to face the Chapter 11 filing of another significant customer, General Datacom. “That was the kiss of death,” said Larry Hargreaves, former president of MATCO Electronics, who was brought in to help rescue the company. According to Hargreaves, MATCO was left with two choices. “File bankruptcy, which would kill the company,” he said. A buyout was “the only chance we had.”
On Nov. 30, MATCO Electronics ran out of time with its the bank syndicate, which started to claim all of the provider’s cash. That action effectively put the provider out of business.
Meanwhile, AMS was formed in October to acquire the assets of MATCO Electronics, which was down to 450 employees and fading fast. The new company attracted ten investors and committed 20% ownership to employees. Larry Hargreaves continues to lead AMS as president, CEO and chairman.
“We have been successful in attracting nearly all of MEG’s [MATCO Electronics Group’s] old customers and are in the process of trying to recover old MEG customers who have exited. We have a very knowledgeable team, are well financed and do not have any E&O [excess and obsolete] issues that are currently plaguing the industry. We have entered into a collaboration agreement with a company in Mexico and are currently negotiating the same with a number of off-shore companies,” said Hargreaves.
But the story of MATCO Electronics has not ended. In February, nine of MATCO’s creditors filed a petition for involuntary bankruptcy against MATCO. The Binghamton Press & Sun-Bulletin reported that in this petition “creditors claim executives of MATCO Electronics sold the struggling company to American Manufacturing, which is controlled by former MATCO officers and outside investors, in an attempt to divert assets from creditors.” Before the legal action, MATCO had outlined the liquidation plan to the company’s 20 largest creditors.
“In my opinion, the petition cites an incredible amount of incorrect assertions to justify their position,” said Hargreaves. He pointed out he is the only MATCO officer involved in AMS. “I only came in at the end to salvage the company,” said Hargreaves of his former role at MATCO.
He declared, “I would not be involved in any action to defraud creditors.”
Children of James Matthews, the owner of MATCO Electronics, are minority investors in AMS. Only one Matthews family member works at AMS, and he has a junior sales position.
According to the Binghamton newspaper, attorneys for the creditors said their clients would like to see AMS stay in operation. AMS has established normal terms with over 60 suppliers, including all but one of the creditors in the legal action.
Suntron buys a piece
MercuryEMS (Colorado Springs, CO), which had expanded its EMS operations from the Midwestern US into Colorado, Washington and Florida, is being broken up. Some parts have or will be sold off, and others have been placed in Chapter 11.
Suntron (Phoenix, AZ), the newly merged combination of EFTC and K*TEC Electronics, has purchased substantially all the assets of Midwestern Electronics, a wholly owned subsidiary of MercuryEMS. With a focus on high mix, Midwestern’s offering includes PCB assembly, box build and after-market repair. Suntron intends to operate the acquired business from Midwestern’s leased facilities in Olathe, KS, and Garner, IA. Terms were not disclosed.
“This acquisition reflects Suntron’s commitment to expansion and growth and provides an outstanding opportunity to increase our customer base, add additional revenue and expand our midwestern presence,” stated James Bass, Suntron president and CEO.
Not counting the acquisition, newly merged Suntron operates 10 facilities in North America with more the 1 million ft2 and employs about 3000 people. The company is a vertically integrated provider of high-mix services.
Meanwhile, the Washington, Colorado and Illinois subsidiaries of MercuryEMS have filed Chapter 11. The Washington unit in Redmond, WA, is in liquidation. MercuryEMS’s president, David Anderson, is pursuing a Section 363 purchase of the Colorado unit, Skyline Electronics, in Colorado Springs, CO. In addition, the MercuryEMS operation in Havana, FL, is reportedly being sold.
Last year, MercuryEMS recorded sales of $75 million, down from $80 million in 2000.
More deals…Venture Manufacturing (Singapore) has signed a memorandum of understanding to acquire a 67% equity interest in Univac Precision Engineering (Singapore), which specializes in plastic injection molds and precision mechanical assemblies. Its key customers include HP, Palm, 3Com, Philips and Sony. The purchase price will be no more than S$88.4 million….Neways Electronics International (Son, The Netherlands) has announced the acquisition of the electronics assembly activities of Semecs Neunkirchen (Germany). A total of 50 Semecs employees are to join Neways. Neways expects this acquisition to contribute about 10 million euros for 2002.
Partnerships…Beyonics Technology (Singapore) has entered into a joint venture with Scinetic Engineering to boost Beyonics’ contract product design and development services. Beyonics will own 60% of this venture called Beyonics-Scinetic Interna-tional….Nam Tai Electronics (Hong Kong) intends to purchase a 6% equity interest in PRC state-owned TCL Holdings, the parent company of the TCL Group of Companies, for about $12 million. Nam Tai and the TCL Group aim to create a mutually supportive partnership to develop new business in the manufacturing and marketing of consumer electronics in China and worldwide. In 2000, Nam Tai acquired an interest in a TCL company that produces mobile phones in China.
Deal not done…SMTEK International (Thousand Oaks, CA) and Electronic Product Integration (Southfield, MI) have ended exploratory talks regarding a possible acquisition of EPI by SMTEK. There are no plans, at present, to re-open discussions. Thomas Wheeler is the largest stockholder in SMTEK, and EPI is largely owned by some members of his family.
Flextronics Unveils Repair Unit
Also making a push in design services
Joining the likes of Jabil Circuit and Solectron, Flextronics (Singapore) has created a separate business unit to offer reverse logistics and repair services. The new unit, Worldwide Reverse Logistics and Repair, combines the repair and refurbishment services of a dozen manufacturing sites with Flextronics’ logistics network.
While the repair unit services both high-volume consumer products – everything from handhelds to PC-based products – and complex infrastructure products, Flextronics handles the two types of products differently. To process high-volume products that need to be turned around fast, the company has set up three quick-turn hubs called Logistics Depots in Singapore, Memphis and The Netherlands. Flextronics plans to add two more depots, one in Brazil and one in China, for in-region services. Low-cost repair centers at industrial parks in Hungary, Mexico, China and Brazil support the Logistics Depots.
Using existing infrastructure in logistics and low-cost repair centers “allows us to operate at the lowest possible operating cost,” said Michael Walkey, VP of Worldwide Reverse Logistics and Repair. Flextronics’ ability to model a reverse logistics supply chain also enters into the cost equation. “Developing the optimum routing through that process is what enables us to have the lowest overall costs,” Walkey added. “We’re able to take advantage of moving the products into a centralized location, but still leverage the low-cost aspects of our industrial park network.”
Typically, products are received by a Logistics Depot, tested, dispositioned, and for high-labor content products, shipped to a lower-cost region for repair.
Flextronics applies a different repair strategy to complex infrastructure products. Because these products have higher technical requirements and longer turnaround times than in the high-volume case, repair services are normally centered around the site that originally manufactured the products.
Does Flextronics see the need to make acquisitions in the after-sales space as Solectron has done? Walkey said the company would not rule out acquisitions, but will focus on supporting third-party partnerships that its customers already have. “We believe that partnerships in things such as call centers and liquidation services are attractive to our client base as we can leverage their current providers in those spaces. We will also have third-party relationships of our own that we can bring to any solution required,” he noted.
“Establishing a world-class reverse logistics and repair business completes our logistics services offering and allows Flextronics to provide our customers such as Motorola and Hewlett-Packard with a complete array of postmanufacturing solutions,” stated Michael Marks, chairman and CEO of Flextronics.
The company hired Michael Walkey to run the Worldwide Reverse Logistics and Repair business. He has been involved in reverse logistics and supply chain design for some 12 years, most of it at Ingram Micro.
Though reverse logistics and repair are the most recent thrust of Flextronics’ end-to-end supply chain strategy, the company has been expanding its front-end capabilities as well. Borrowing from the ODM model, Flextronics has been investing in product design capability. “We currently have product design capabilities being developed in cell phones, PDAs, printers, set-top boxes, communication products, storage products, server products and photonic components,” said Marks in a recent conference call. “We have won quite a number of development projects from customers, and you will see this emerging as a substantial differentiator for our company in the coming years.”
As one example of this front-end investment, Flextronics picked up cell-phone design capabilities from its 2001 acquisition of Vanteon (San Diego, CA).
Of course, Flextronics’ design services also include industrialization of customer designs. Last month, Flextronics Design inked a contract to provide services including engineering, prototype manufacturing, test development and industrialization for Ericsson’s 3G mobile-phone reference designs and platforms.
New programs…Solectron (Milpitas, CA) has landed what is described as a sizable program to provide manufacturing services for Delphi Automotive Systems. Solectron says this is one more example of its emergence in the automotive sector. Another market that Solectron has targeted for growth is the digital consumer sector. Pace Micro Technology (Shipley, UK), a developer of digital set-top boxes, has selected Solectron as the primary EMS provider for Pace Micro’s products worldwide. Reportedly, Pace Micro previously used three other contract manufacturers. Also, Solectron will manufacture and repair an automated call distributor platform for Aspect Communications (San Jose, CA). Finally, the provider will perform prototyping through repair for a new Juniper (Sunnyvale, CA) system that manages cable modem data over the last mile of broadband infrastructure….Under a new program from Digital Lightwave (Clearwater, FL), a supplier of optical networking products, Jabil Circuit will serve as Digital Lightwave’s primary contract manufacturer for its circuit board and product assembly. Jabil will also provide engineering design services. In addition, Hewlett-Packard has awarded Jabil a program for a new server platform, and server production will begin in Jabil’s fiscal Q4. Jabil is also expanding its HP relationship by providing design and development and repair services to other HP groups. Another new organic program comes from Enel Distribution, an electricity supplier in Italy and a subsidiary of the utility company Enel. Jabil will produce electronic meters for the Italian market in Jabil’s Italy and Hungary operations….Logitech (Fremont, CA) has chosen PEMSTAR (Rochester, MN) as its EMS provider for North America. Manufacturing of Logitech’s cordless mice and receivers has begun in PEMSTAR’s facility in Guadalajara, Mexico, which is expected to get more products from Logitech. PEMSTAR will also serve as manufacturing partner for a DWDM system developed by Xtera Communications (Allen, TX). Finally, Tunable Photonics (Altadena, CA) has selected PEMSTAR to provide manufacturing design verification and mass production for Tunable’s multiwavelength locker….CIENA has tapped Sanmina-SCI (San Jose, CA) to manage electronic assembly-related NPI services for CIENA’s long-haul and metropolitan transport and switching products. Sanmina-SCI will set up an NPI center close to CIENA’s Linthicum, MD, facility. The provider will hire a number of CIENA employees and lease manufacturing space from CIENA….Flextronics recently won additional programs from Nokia, EMC, Toshiba, Epson and HP. Also, Flextronics Network Services (Stockholm, Sweden), a unit of Flextronics, will provide engineering services and technical expertise for the Swedish 3G network rollout by 3G Infrastructure Services, jointly owned by Vodafone, Hi3G Access and Orange….Silicon Graphics, Inc. (Mountain View, CA) has renewed its contract with eCycle (Milpitas, CA), a provider of postmanufacturing reverse logistics services. Under this multiyear, multimillion-dollar agreement, eCycle will support SGI’s demo and trade show marketing programs by providing a range of services including web-based ordering, equipment management, asset tracking, product refurbishment and configuration, and trade show logistics. …Sparton (Jackson, MI) has been awarded two US Navy contracts totaling $22.6 million for the manufacture of sonobuoys….LaBarge (St. Louis, MO) will produce and integrate electronic components for a military airborne radar system from Northrop Grumman….Under a $2.5-million contract, DRS Technologies (Parsippany, NJ) will manufacture subassemblies, including electronic power conditioners, for a Boeing GEO Satellite System, billed as today’s most powerful commercial communications satellite.
MEMS agreements…Flextronics Photonics, a unit of Flextronics, and Silicon Light Machines (Sunnyvale, CA), an optical subsidiary of Cypress Semiconductor, have announced an agreement by which Flextronics Photonics will provide packaging design services and telecom equipment manufacturing to SLM. This company utilizes Grating Light Valve technology, which combines standard CMOS processing technology with microelectromechanical systems (MEMS) to create a light modulator on the surface of a silicon chip….Umachines, a developer of MEMS optical networking modules, will license to Sanmina-SCI certain technology for building MEMS and other optical networking modules. Sanmina-SCI will provide engineering and contract manufacturing for Umachines’ product line.
New facilities…Elcoteq (Espoo, Finland) will locate a new plant at the Nokia-led Xingwang Industrial Park in Beijing, China. Plans call for about 11,000 m2 of production space and a work force estimated at 1200 people. The plant will manufacture mobile-phone electronics for Nokia and other customers. Production ramp-up is slated for Q1 2003. In addition, Elcoteq has decided to build NPI centers in Beijing and in Monterrey, Mexico. …Flextronics is completing a 350,000-ft2 enclosures plant on its Doumen, China campus….CEI Contract Manufacturing (Singapore) is building a 35,000-ft2 facility on the outskirts of Ho Chi Minh City, Vietnam. CEI plans to have the facility ready for production in Q4. It will start with two SMT lines. The company says the new facility will complement its plant in Batam, Indonesia. “We are going to Vietnam because I believe they have a large pool of resourceful and hard-working people,” stated Tien Sing Cheong, executive chairman of CEI.
Award…Integrated Microelectronics, Inc. has won the Philippine Quality Award at the top level for the award.