MMI March 2004
Vol. 14, No. 3: March 2004
Table of Contents — Headlines
Top 50 Resumes Growth in 2003
Data collected from the MMI Top 50™ EMS providers in 2003 confirm what individual EMS companies have been saying lately. Growth has returned to the EMS industry. Aggregate sales increased 7.5% for 49 Top 50 companies that provided data or allowed for estimates. What’s more, MMI figures that revenues for the full 50 grew by 7.4 to 7.5%. That’s a solid start for an industry in recovery.
The MMI Top 50 can be considered as a proxy for the EMS industry. In 2003, Top 50 sales totaled $78.3 billion, a figure based on real data from 49 companies and one estimate. EMS market forecasts for 2003 averaged $94.9 billion for three market research firms (Dec. 2003, p. 2). So the Top 50 accounted for 83% of EMS industry sales last year.
Asia-based providers helped to lift the 2003 growth rate for the Top 50. Nine US-traded providers representing $52.5 billion of Top 50 sales posted an aggregate revenue increase of just 1% (Feb., p. 7). In contrast, nine Asia-based providers reported 2003 sales increases of 20% or better, and six recorded gains of more than 30%. These results reflect the health of the Asian EMS market, which enjoys growth from two sources: contract work that originates outside the region and outsourcing from OEMs within the region.
A prominent example of Asia-based growth is Hon Hai Precision Industry, also known as Foxconn, which surpassed Celestica to take the number-four spot in the 2003 Top 50. Flextronics retained its number-one rank as the world’s largest EMS provider, while Solectron and Sanmina-SCI stayed in the second and third positions respectively. Celestica dropped one position to number five. Rounding out the top tier was Jabil Circuit, which maintained its slot at number six. See table below.
Providers were ranked by calendar 2003 sales. It took a minimum of $142 million in sales to make the Top 50 in 2003. The cutoff point increased from $130 million in 2002.
An influx of seven new members ensured that the Top 50 minimum would be higher in 2003 than in 2002. Four additions came from Asia, and they are 3CEMS, Jurong Technologies, SIIX and Wong’s Electronics. Two US-based providers, MC ASSEMBLY and TFS (Three-Five Systems) also joined the list, as did a European company, Kitron.
Of the seven companies that came off the Top 50, five did not meet the minimum sales requirement. One company was acquired, and one provider declined to participate for whatever reason.
Top 50 data allow one to calculate productivity ratios for employees and facility space. MMI computed an average of $655 in revenue per square foot for 45 companies that provided data on facility space. In one case, Flextronics, a sales estimate was made to match the square footage provided. Revenue per square foot was up by 25% compared with $525 calculated from a somewhat different group of 45 companies for 2002. It is likely that restructuring played a big part in the 2003 ratio.
Based on data from 48 companies in 2003, revenue per employee came to $168,400. That’s a 19% increase from last year’s ratio of $141,200 representing 45 companies. Again, the effects of restructuring should have been seen here as well. Note that both revenue per employee and revenue per square foot slumped in 2002.
Methodology: Sales in foreign currencies are converted to US dollars by using average exchange rates for the year in question. In 2003, this method created a year-over-year advantage for companies that reported in euros due to the decline of the dollar.
China Doesn’t Always Win
As popular as China has become for outsourcing, it is not a slam dunk for every program requiring an Asian source. Believe it or not, China does have competition in some niches.
Take disk drives. It would seem these high-volume devices would be well suited to China. But that is not always the case. “If you look at all the new models for all the next-generation optical disk drives and next-generation hard disk drives that are coming forth, all of those are not built in China,” said Arthur Tan, president and CEO of Integrated Microelectronics Inc. in Laguna, Philippines. “They’re built in the Philippines, Thailand, or somewhere else where time to market becomes an important factor because then you can protect your ASPs [average selling prices] before everybody else jumps in.” According to Tan, when such products reach the mature state where a number of companies are selling them and Taiwanese components for available for them, the drives are transferred to China.
About half of IMI’s business comes from optical and hard disk drives. Last year, IMI’s sales increased 15% to $94.0 million, and a majority of that growth was driven by the company’s disk drive business.
IMI customers are deciding to put more production into the Philippines, according to Tan. Although China has the edge when it comes to cost, “for turnaround times and things like that, the logistics process in China does not compare to the Philippines,” he said. Tan also pointed to IMI’s productivity and quality as key factors that win over OEMs who need to bring their new products to market quickly.
“If you look at the process of where the new models from Japan are delivered, they come to me first. We build it, and we allow them to take advantage of it in the market. Then, when everybody else has the same technology the slimmer drives, the multiple drive type, or higher per platter capacity hard drives those are then transferred over to China,” Tan said. For example, he observed that the majority of hard drives from 2 ½ in. down to 1.8 in are not made in China.
But the EMS market in the Philippines rests upon a narrow foundation of semiconductor-based multinationals that have operations in the country. These companies still dominate the EMS market there. Bypassed for tier-one operations, the EMS industry in the Philippines consists of IMI, Ionics EMS, some dedicated contractors brought in to serve Japanese companies there, and a few small local operations. Tan believes that the government of the Philippines has not done enough to encourage the growth of the country’s EMS industry and reduce the industry’s dependence on semiconductor-based multinationals.
“So my hedge on that is we continue to be a presence here in the Philippines, but at the same time we have to start looking at expanding in the ASEAN region,” said Tan. (ASEAN stands for the Association of Southeast Asian Nations, a group of ten nations in the region.) IMI has made an offer to acquire another EMS company located in the ASEAN region but outside of the Philippines. In addition, IMI is looking at a venture with a European company that supplies the automotive market. This venture, IMI’s second in Europe, would give IMI access to a facility in Poland.
Optoelectronics is another area that China does not have sown up. “In certain kinds of work, like optoelectronics assembly, there’s probably more expertise in Southeast Asia than there is in China, at least currently,” said Robert Fried, president of Contract Manufacturing Consultants in Bellevue, WA.
Expertise in the manufacture of optoelectronics has emerged in Thailand, which has built upon skills learned in the production of disk drives and automotive parts. The hub of this activity may well be Fabrinet, a Top 50 EMS provider based in Pathumthani, Thailand. Fabrinet took the disk drive skill sets it inherited as a former Seagate operation and applied them to optoelectronics manufacturing.
When Fabrinet acquired its factory from Seagate in January 2000, the provider possessed no optical know-how. “Our first couple of OEM customers that recognized the skill sets that we had and how valuable these would be in optoelectronic manufacturing really taught us optics,” said Mark Schwartz, senior VP of strategy and corporate affairs at Fabrinet. “We’ve obviously growth those skill sets from that point forward.”
Optical requirements such as soldering and epoxy work, visual mechanical inspection, precision alignment, laser welding, hermetic sealing and clean room disciplines are also found in disk drive manufacturing.
Fabrinet’s optical expertise has worked to its advantage in competing against China. “We’ve been chosen to manufacture optical transceivers over competitors that had facilities in China largely because of our experience with other customers in building optical transceivers,” said Schwartz. Fabrinet presents itself as the world’s largest outsourced manufacturer of optical transceivers, with production averaging 4 million units a year.
The company has also won out over China when it comes to complex active optical devices. Examples of these devices include laser sources in butterfly packages and EDFAs (erbium-doped fiber amplifiers). “When you get into those complex technologies, we find that we compete very well against what’s available in China. And that may change over time. It probably will,”
It may already be happening. Oplink Communications (San Jose, CA) offers manufacturing of optical networking components and subsystems from 500,000 ft2 in Zuhai, China.
Optical capabilities aren’t the only thing bringing customers to Fabrinet. Schwartz has also seen customers giving Thailand a second look because of the SARS outbreak and their perception of how it was handled by some Chinese authorities.
Fabrinet’s niche as a precision manufacturer of complex optical and optomechanical devices is generating growth. The company has hired 600 people in the last three months and is in negotiations to acquire a second facility in Thailand. Located about 7 miles from the existing plant, this new facility will provide 115,000 ft2, slated to be operational in June. Fabrinet is also planning to put an additional 200,000 ft2 on the new campus, with completion expected in about a year. At that point, floor space will total 550,000 ft2.
Another area that China has yet to dominate is advanced-technology PCB assembly. According to consultant Freid, advanced PCBA “has historically not been a strength for China.”
“For certain die attach work, chip-on-board type work, there’s a lot of expertise elsewhere in Asia. So for that kind of work, because of yields and scale, China is not necessarily going to be lower cost,” said Freid. He added that once you reach a certain level of complexity in a board assembly, “those kinds of more advanced technology products will be better suited in Southeast Asia than they are in China.”
“Things are changing in China. There’s a lot more expertise that’s coming in, especially from Taiwan. But at least up until now from what I’ve seen, for more advanced technology printed circuit board assembly work China is riskier than other areas,” said Freid. “The level of technical expertise is not as strong as in other areas that have more experience. What that translates to, of course, is quality and also cost.”
“I think that there are as low or lower costs elsewhere in Asia for that kind of work compared to China sourcing. I’m sure that will change,” he said.
Solectron Agrees To Sell Two More Units
Based on a previously stated plan to divest non-core holdings, Solectron (Milpitas, CA) has reached definitive agreements to sell its Stream International call center business and its Kavlico sensor product business. Solectron has now announced buyers for four out of the seven businesses that it is selling off (Feb., p. 5).
Buying the Stream business is H.I.G. Capital, the parent company of ECE Holdings (Garland, TX), also a call center business. Terms of the sale were not disclosed. Stream employs about 9000 people.
Schneider Electric (Rueil-Malmaison, France), an international manufacturer of electrical distribution, industrial control and automation equipment, is purchasing the Kavlico business for about $195 million in cash. Kavlico has 1300 full-time employees, and its sales amounted to $156 million for the fiscal year ended August 2003.
Elcoteq To Divest Industrial Business
Elcoteq (Espoo, Finland) continues to buck the industry trend of market diversification. The provider has reached an agreement to divest its industrial electronics business in line with its previously announced strategy to focus on communications technology customers. Elcoteq will sell the industrial business to a new company formed by Ahlström Capital Oy and the management of this business. The deal is expected to close on April 1, subject to approval by competition authorities.
The industrial electronics business being divested generated sales of about 127 million euros in 2003 and was profitable. It will sell for about 40 million euros, subject to closing adjustments. Elcoteq will record a profit of over 6 million euros in Q2 from the transaction, which does not include communication technology-related applications in industrial electronics.
According to the agreement, Elcoteq will transfer industrial electronics plants in Baden, Switzerland, and Lohja and Vaasa, Finland, to the new company. About 650 employees will join the new company on April 1, with 240 people in Switzerland and 410 in Finland.
In addition, the new company and Elcoteq have reached an agreement that will enable the new company to service its customers in Hungary through Elcoteq’s plant in Pécs, Hungary. The parties have also agreed that the new company can offer its customers Elcoteq’s manufacturing capacity in Beijing, China.
In Lohja, Elcoteq is divesting its Länsi-Louhenkatu plant, one of two facilities there. The other plant, a communications network equipment facility at Elcoteq’s Gunnarla location, is being retained along with some NPI and group office personnel there.
Reijo Itkonen, president and CEO of the new company, stated, “We see solid business opportunities in industrial electronics with global customers such as ABB, Kone and Bombardier as well as with a number of important local customers. Like Elcoteq, we will have a very clear focus on our target business, which is industrial electronics. We are convinced that we can develop the new company to become a global leader in industrial electronics manufacturing services.”
Meanwhile, Elcoteq has decided to move production from Espoo, Finland, to Tallinn, Estonia, after concluding personnel negotiations at the Espoo plant. The provider took over the Espoo plant from Tellabs at the end of 2003 (Jan., p. 6 and Nov. 2003, p. 4). Roughly 170 employees at the plant will lose their jobs.
TFS Acquires Integrex Business
Publicly held Three-Five Systems, or TFS (Tempe, AZ), has acquired the customer base of Integrex (Bothell, WA), a privately held EMS provider, in a move to boost TFS’s sales in the military, medical and industrial segments. TFS has also hired about 40 Integrex employees, representing a majority of Integrex’s staff.
TFS will immediately begin working with Integrex customers to transfer existing programs from Integrex’s Bothell location to TFS’s facility in Redmond, WA. This process is expected to take about six weeks. The 52,000-ft2 Bothell facility will close.
“Integrex has penetrated certain market segments, including military applications that represent target growth areas for TFS. We believe we can expand upon this business by leveraging our outstanding manufacturing quality in Redmond with our high-volume efficiencies at our Asian manufacturing locations and thereby continue our initiative to become a dominant EMS provider in the Northwest,” stated Jack Saltich, CEO of TFS.
Founded in 1999 as a full-service provider, Integrex has penetrated three market segments targeted by TFS. In addition to the military market, Integrex has developed business in two other target areas, medical and industrial.
TFS is buying raw material inventory from Integrex as needed to begin manufacturing for Integrex customers and is making a one-time payment to offset customer transition costs at Integrex. In addition, TFS is providing an advance to Integrex against payments that are contingent upon receipt of sales revenue from acquired customers. TFS spokesperson Elizabeth Sharp described the contingency arrangement as “a low-cost way to take new business.” The purchase price was not disclosed. Sharp said closing the cash deal did not involve a substantial amount of cash.
This is the second EMS deal that TFS has made in the US Northwest in the past 15 months. TFS gained its Redmond operation when it acquired ETMA in December 2002. Already in medical manufacturing, the Redmond operation is in the process of obtaining FDA class 3 certification, expected in the mid-year time frame.
Primary investors in Integrex included Benaroya Capital, Fluke Venture Partners and Sunrise Capital. According to the investor group, several companies bid on the Integrex business. Reportedly, TFS was selected because of its presence within the Northwest, combined with its offshore manufacturing and solid balance sheet.
As a result of the transaction, TFS is increasing its second-half forecast of revenue and is raising the midpoint of its 2004 revenue guidance from $185 million to $190 million.
Norwegian Provider To Control Swedish CM
Kitron (Billingstad, Norway) intends to acquire a majority interest in Nye HGL Flen AB, a Swedish EMS provider formerly known as HGL Flen AB. Kitron plans to purchase 51% of the Swedish company’s shares during the quarter to enhance Kitron’s presence in the Swedish EMS market.
In November 2003, Kitron signed a management contract that included options for the takeover of the predecessor company, HGL Flen. Kitron made this move to gain strength in the industrial and medical sectors of the Swedish EMS market. Under the contract, Kitron assisted the company’s owners in structuring the operation for future profitability and growth. To ensure a good platform for future growth, the owners transferred the operation to a new company, Nye HGL Flen, and signed a new options contract with Kitron. Based on HGL’s customer base, expertise and expectations of profitable operations in the current year, Kitron intends to exercise the option to acquire 51% of the new company’s stock at SEK 1.00 per share. Kitron and the existing owners of the company will each contribute up to SEK 5 million in subordinated loan capital. Kitron also has various options to buy the remaining 49% of the shares during a four-year period.
Combined with Kitron’s existing business in Sweden, this acquisition will make Kitron one of the three largest players in the Swedish EMS market, according to Kitron. Sales for HGL Flen in 2004 are expected to hit about NOK 200 million ($29 million).
OEM Worldwide Adds Power Supply Maker
EMS provider OEM Worldwide (Watertown, SD) has acquired Resonant Power Technology (Milpitas, CA), a medical-grade power supply manufacturer. By adding RPT’s analog design capabilities and line of medical AC/DC converters, OEM Worldwide enhances its ability to offer a total system solution to medical electronics OEMs.
OEM Worldwide has served as a manufacturer of RPT’s products for more than ten years. On the medical side, OEM produces both subassemblies and finished products for such companies as GE Medical Systems, Medtronics, Cardiac Science, Smith & Nephew Endoscopy, Zeiss Meditech, Karl Storz Endoscopy, Gyrus ENT and Guidant.
RPT will become a wholly owned subsidiary of OEM Worldwide. Manufacture and shipment of RTP’s products will take place at OEM in South Dakota, while RPT will continue to maintain sales, customer service and design offices in California. Financial terms were not released.
In addition, OEM has announced a new Watertown facility, arranged for straight-line manufacturing from one end of the building to the other. Reportedly, OEM has moved operations to the new 70,000-ft2 facility. The company planned to put four SMT lines in the building, resulting in a significant increase in capacity.
OEM is a member of the Everett Smith Group (Milwaukee, WI), a privately held investment company whose holdings include Maysteel, an enclosure manufacturer.
Deal done…Celestica (Toronto, Canada) has completed its acquisition of MSL (Concord, MA). Celestica will issue about 14.3 million subordinate shares to holders of MSL common stock and certain holders of MSL preferred stock (Oct. 2003, p. 1-2). Also, Celestica will pay about $50.6 million in cash to certain MSL preferred stock holders.
Some new programs…Elcoteq will manufacture high-speed connection devices for Schmid Telecom, a Swiss manufacturer of telecom equipment. Production is due to start at Elcoteq’s plant in St. Petersburg, Russia, during Q2….Brillian (Tempe, AZ) has selected Suntron (Phoenix, AZ) for production of Brillian’s 65-in. rear-projection HDTV, slated for introduction in the second half of the year. Assembly will take place at Suntron’s North American facilities. Ultimately, Brillian expects to use Suntron for multiple HDTV products. Brillian, a spinoff from Three-Five Systems, has already chosen TFS for PCB assembly (Feb., p. 6)….APEX-Micro Manufacturing (Delta, BC, Canada) will manufacturing electronic assemblies for final testing and assembly by Unity Wireless (Burnaby, BC, Canada), a developer of wireless subsystems and power amplifiers.
Asemtec (San Jose, CA) has reached a major milestone in the EMS business. The company is celebrating its 20th anniversary as an EMS turnkey manufacturer.
Under the leadership of founder and president Bill Frandsen, Asemtec has earned the loyalty of both employees and customers. Out of 45 employees, 15 have been with the company over ten years.
“We spend a lot of time in engineering and do a lot of communication with customers,” said Frandsen. “Most customers average four to five years with us at a minimum.”
What’s more, customers are not limited to the Bay Area. Asemtec serves two companies in Europe as well as customers on the US East Coast.
Asemtec recently gained certification to ISO 9001:2000. The company plans to continue operating from its 22,000-ft2 facility, since the building’s lease was just renewed for another five years.
New facilities…Flextronics (Singapore) has new facilities under construction at three sites in China and one site in Malaysia….Sparton (Jackson, MI) has opened a 10,000-ft2 medical manufacturing area in its DeLeon Springs, FL, facility. This area offers enhanced environmental and cleanliness controls for the manufacture of class 1, 2 and 3 medical devices….Genesis Electronics Manufacturing has moved EMS operations to a 50,000-ft2 facility in Tampa, FL, with nearly double the floor space of its old facility in Oldsmar, FL. GEM bought the facility from Jabil Global Services, which operated it as a repair facility. Along with the facility, GEM acquired equipment for test, repair and refurbishment, and the company has expanded its offerings to include rebuilding of monitors, keyboards and telecom equipment.
FCI and Hon Hai Settle
FCI, a supplier of interconnect systems, and tier-one provider Hon Hai Precision Industries, also known as Foxconn (Tu-Cheng, Taiwan), have reached a settlement in their lawsuit involving FCI’s ball grid array (BGA) connector technology as used in socket applications. The settlement comes after an American jury found Hon Hai liable for infringement of two FCI patents relating to FCI’s BGA connector technology.
Under the settlement, FCI has granted a worldwide license to Hon Hai for the use of FCI’s BGA patented technology for socket applications. Financial terms were not disclosed.
According to a previous FCI statement, Hon Hai was liable for multimillion dollar damages as a result of this infringement, which the jury found to be “willful.”
The sockets in question are used in computer notebooks, desktops and servers containing BGA socket technology.
FCI is a subsidiary of the Areva group (Paris, France).
Some financial news…For the quarter ended Feb. 28, Solectron reported sales of $2.9 billion, up 7% from the prior quarter and up 22% from the year-earlier quarter. The company recorded a GAAP net loss of $89.7 million from continuing operations for the February quarter….At Jabil Circuit (St. Petersburg, FL), revenue increased 30% year over year for the quarter ended Feb. 29 and amounted to $1.5 billion. GAAP net income was $40.0 million compared with $10.1 million a year earlier.