MMI March 2006
Vol. 16, No. 3: March 2006
Top 50 Cracks $100 Billion
While 2005 was not a stellar year for some large EMS companies, the MMI Top 50™ EMS providers for 2005 still managed to set a new sales record of $109.2 billion. Combined revenue for the 2005 Top 50 surpassed adjusted total sales for the 2004 Top 50 by $13.9 billion, or 14.6%. (2004 sales were revised to replace estimated sales with actual numbers.)
But the composition of the Top 50 changes somewhat from year to year. To come up with a true 2005 growth rate, one must do an apples-to-apples comparison of 2004 and 2005 sales for one group the 2005 Top 50 providers. On an aggregate basis, 2005 revenue for the Top 50 group increased by 14.4% over the group’s 2004 total of $95.4 billion.
Because the Top 50 now represents such a large share of the EMS industry probably well over 80% it can serve as a proxy for the entire industry. Top 50 growth for 2005 indicates that total industry sales probably expanded at a double-digit rate.
Still, all the news was not good. Although a 14+% growth rate points to a healthy environment for outsourcing, this Top 50 growth rate reflects the estimated results of one company Hon Hai Precision Industry, also known by its Foxconn trade name. Without Hon Hai, the other 49 providers in the group would have a combined growth of 3.1%. Hon Hai makes such a big difference for two reasons. It is now by far the largest EMS company by total sales. And indications are that its 2005 consolidated sales enjoyed unusually high growth for a company its size.
Because of the Hon Hai effect, Top 50 results can be interpreted in another way. Some providers who do not identify with Hon Hai’s business model that includes large component and motherboard businesses may wish to benchmark their growth against the other 49 Top 50 providers. Using this yardstick, 2005 was a tepid year for growth, and any provider that hit double digits was doing well.
Top 50 EMS providers were ranked according to calendar 2005 sales in US dollars. Where possible, sales of non-EMS businesses were excluded. See the first table below. To make the Top 50 list, a provider needed sales of at least $183 million in 2005. The Top 50 cutoff was $29 million greater than in 2004, creating a higher bar for candidates to clear. Based on Top 50 survey results, 13 EMS providers with revenue above $100 million did not make the cutoff. They appear in the second table below.
In 2005, Hon Hai took a commanding lead as the largest provider in the Top 50. MMI had to estimate the company’s consolidated 2005 sales because Hon Hai is not required to report them until the end of April. This estimate primarily consists of the company’s non-consolidated sales plus a contribution from its majority-owned handset subsidiary, Foxconn International Holdings. However, according to reported comments by Hon Hai chairman Terry Guo, the Hon Hai group’s combined sales in 2005 exceeded NT$1 trillion, or $31.1 billion, when sales of other subsidiaries were added. It is possible that MMI’s estimate of $27.5 billion does not account for the full extent of subsidiary sales that are consolidated. Nevertheless, MMI believes that its estimate includes most if not all of Hon Hai’s EMS sales.
Flextronics, which barely lost the 2004 sales contest to Hon Hai (May 2005, p. 1), took a firm hold on second place in the 2005 Top 50. The order of providers in the remaining top-10 positions was unchanged from 2004. Top-10 revenue represented 84.5% of the Top 50’s sales.
Seven providers who were not on the 2004 list joined the 2005 Top 50. Four are Asia-based, and they consist of Cal-Comp Electronics; Hana Microelectronics; Integrated Microelectronics, Inc.; and Topscom Electronics. The remaining three Enics, Kitron and NOTE hail from Europe. Hana had appeared in some 1990s-era Top 50 lists, but the rest are being ranked for the first time.
As in past years, MMI has used Top 50 data to calculate two productivity ratios. Data from 47 providers yielded an average of $148,600 in revenue per employee, while a set of 45 companies averaged about $689 in sales per square foot of facility space. Note that in computing the latter ratio, it was assumed that Solectron’s square footage at year end was unchanged from August 2005.
Outsourcing Continues in Comm Segment
Although communications equipment is often described as a mature segment for outsourcing, a new market study estimates that outsourced production of comm equipment is still well below 50% of total COGS (cost of goods sold) for the segment and will remain so through 2010.
According to the new report from Electronic Trend Publications (San Jose, CA), comm equipment COGS totaled $192.08 billion in 2005, of which $60.69 billion was outsourced. These figures yield an outsourcing penetration rate of 31.6% in 2005. In 2010, outsourced comm equipment will amount to $101.66 billion in COGS out of a total of $276.10 billion. Do the math, and outsourcing will penetrate 36.8% of comm equipment production in 2010.
The ETP report projects that outsourced manufacturing of comm equipment will grow nearly twice as fast as in-house production. Over the forecast period of 2005 to 2010, outsourced production expressed as COGS will increase at an estimated CAGR (compound annual growth) rate of 10.9%, while in-house manufacturing will see a CAGR of 5.8%.
Outsourcing will prove to be most popular for commodity and high-volume products for which cost reduction and time to market are important, writes ETP. Demand for in-house production will remain solid but uninspired, and dominated by Asian OEMs that prefer not to subcontract, according to the study.
As one might expect, the Asia/Pacific region will post the highest forecasted growth rate for comm equipment outsourcing. The ETP report predicts that outsourced production (COGS) in the region will expand at a CAGR of 13.6% from 2005 to 2010. In comparison, outsourced comm manufacturing will grow modestly in the Americas and EMEA (Europe, Middle East, Africa) with projected CAGRs of 5.5% and 6.1% respectively. The study forecasts that comm equipment COGS as a whole will end up with a CAGR of 7.5%.
Within the communications equipment segment, the ETP report identifies cellular handsets, cellular infrastructure and wireless LANs as having the fastest growing COGS over the five-year period with CAGRs of 8.8%, 8.7% and 8.6% respectively.
The ETP report goes by the title The Worldwide Communications Equipment Assembly Market, 2006 Edition. For more information, email firstname.lastname@example.org.
Double-Digit Growth in Asia and Europe
According to a new forecast for the CEM (contract electronics manufacturing) market in Asia and a separate outlook for the CEM business in Europe, both regions will enjoy compound annual growth rates above 11% from 2005 to 2009. While it’s no surprise to see double-digit growth forecasted for the CEM market in Asia, a double-digit projection for Europe, if true, will come as welcome news to a region that continues to undergo EMS restructuring.
In an article posted on the website of EMSNow, an analyst from iSuppli (El Segundo, CA), a market intelligence service, projected a CAGR of 11.5% for Europe’s CEM market from 2005 through 2009. The analyst wrote that the automotive and industrial electronics segments of that market will exhibit the highest CAGRs, estimated at 18.0% and 24.5% respectively. These findings appear in a new iSuppli report entitled European EMS Players Thriving in the Niche, which is available in the firm’s market intelligence service for EMS and ODM.
Asia has earned the title of the world’s largest contract electronic manufacturing market, according to market research firm In-Stat (Scottsdale, AZ). The firm estimates that the Asian CEM market amounted to $73.35 billion in 2004 and projects the region’s sales to reach $161.90 billion by 2009. These numbers equate to a compound annual growth rate of 17.2%.
A recent report by In-Stat finds that CEM square footage in Asia accounted for almost 52% of global CEM capacity last year. In-Stat forecasts that CEM capacity in Asia will grow to 65% of the world’s CEM capacity by 2009, naturally with China leading the way. The firm says countries such as India, Thailand and Vietnam are emerging as strong contenders for low-cost manufacturing.
Among other findings of the report, many top and mid-tier contract manufacturers are forging closer ties with Asian suppliers. In-Stat also observes that with rich technical talent available locally, electronics manufacturers in Asia have the potential to move into design services, thereby improving their margins considerably.
Covering the CEM market in Asia, the In-Stat report is entitled Asia CEM and Assembly Capacity by Country. For more information, email email@example.com.
China Tackles Lead Issue
Following in the footsteps of the European Union, Chinese authorities have promulgated an administrative measure to control pollution caused by electronic information products. Like the EU’s RoHS directive, the Chinese measure identifies lead and five other materials as toxic or hazardous substances in electronic products. The new regulation takes effect March 1, 2007.
But unlike the EU, China will take a two-step approach to restricting lead and other pollutants in electronic information products. When the regulation takes effect, a manufacturer or importer will be required to list certain information regarding a product’s hazardous substances either on a product label or in a user’s manual. In step two, products that appear in a special catalog to be created must be free of hazardous substances by substitution of other materials or must meet limits set by standards. The timelines for the restriction and prohibition of hazardous substances in step two have yet to be determined. Step-two products must also meet 3C certification before entering the market.
In general terms, the regulation refers to electronic information products and their accessories in the following areas: radar, communication, broadcast TV, computer products, household electronic products, measuring instrument products, products for special use, electronic components, electronic application products and electronic materials. China’s Ministry of Information Industry has issued a more extensive list to give OEMs an idea of which products will be regulated.
Editor’s note: This article was based on an unofficial translation of the regulation obtained from the website of Grace Compliance Specialist, www.graspllc.com. A Q&A posted on the website also provided information for the article.
Reports Say Hon Hai To Invest in India
A number of news sources have reported that Hon Hai Precision Industry (Tu-Cheng, Taiwan), also known as Foxconn, plans to invest $110 million in new activities within India’s Tamil Nadu State. Reportedly, Hon Hai will spread the investment over five years. The information was attributed to India’s Communication and IT minister, Dayanidhi Maran.
Although these sources differ somewhat on the details, they do agree that Hon Hai proposes to jointly develop a special economic zone with Motorola and the Tamil Nadu government. The SEZ would be located in Sriperumbudur near Chennai. According to some reports, Hon Hai also plans to manufacture at the Nokia SEZ in Sriperumbudur.
Once again, this news underscores India’s importance as an emerging center for EMS, driven by fast growing domestic demand in such areas as cell phones and telecom infrastructure.
More new facilities…Nexlogic Technologies, a provider of PCB design, fabrication and assembly services, has moved to a larger, 30,000-ft2 facility in San Jose, CA. The old facility, located down the street, was 11,000 ft2….Publicly listed Incap (Oulu, Finland) plans to expand its Kuressaare, Estonia, operation by having a leased facility built with 3,700 m2 of total floor space as a first phase. The operation, which currently occupies 1,600 m², will move into the new premises in the spring….Technology Conservation Group (Crystal River, FL), an electronic recycler, has expanded its operations to include an 80,000-ft2 facility in Singapore.…Procurement services provider iPro Solutions (Haddenham, UK) has set up three international procurement centers to support customer low-cost sourcing programs. These centers are located in Penang, Malaysia; Shanghai, China; and Hong Kong.
New programs…Verigy (Singapore), an Agilent subsidiary that develops and manufactures test systems for the semiconductor industry, has selected Flextronics (Singapore) as its primary contract manufacturer and will shift its production to Flextronics facilities in China. The two parties have entered into a four-year manufacturing agreement and plan to enter into an asset purchase agreement under which Verigy will transfer certain assets and employees to Flextronics. At present, Verigy uses internal and contract manufacturing for its system-on-a-chip (SOC) tester platform and a pure CM model for its memory tester platforms. Flextronics will continue to do limited early production runs of the SOC platform in Germany. Verigy, which has filed for an IPO, generated $355 million in fiscal 2005 revenue from products, of which cost of sales amounted to $228 million.…Celestica (Toronto, Canada) has become the main contract manufacturer for Telit Communications (Trieste, Italy), a wireless communications developer and distributor. In 2005, Telit’s major contract manufactured product came from Solectron, and a traditional leaded process was used. Telit will utilize a lead-free process at Celestica’s facility in Rajecko, Czech Republic, while calling upon other EMS facilities for prototyping and small production runs….Jabil Circuit (St. Petersburg, FL) will manufacture a line of tankless electric water heaters for SKYE International (Chandler, AZ). Manufacturing will take place in Jabil’s Tempe, AZ, facility, obtained in Jabil’s 2005 acquisition of Varian’s Electronics Manufacturing unit.…Occam Networks (Santa Barbara, CA), a supplier of broadband loop carrier equipment to telecom companies, has moved manufacturing operations to Flash Electronics (Fremont, CA), an MMI Top 50 EMS provider in 2005 (see p. 3)….Under a new three-year agreement, bed retailer Select Comfort will reduce its dependence on Winland Electronics (Mankata, MN), which has been sole supplier of electronic assemblies to Select Comfort, Winland’s largest customer. Effective July 2006, Winland will manufacture about 50% of Select Comfort’s assemblies as the bed retailer is bringing on another EMS provider….CirTran (Salt Lake City, UT) has received a $250,000 order from Aegis Assessments (Scottsdale, AZ) to build a next-generation product for interconnecting incompatible radios at emergency sites. Previously, CirTran was awarded a contract to redesign the product.
TES Acquires US Design Center
TES Electronic Solutions (Langon France), an electronic design and manufacturing company, has purchased the assets of eDFX Services, creating the first TES design center in the US.
The deal allows TES to offer local design support to its growing customer base in the US and enhances the company’s design resources as well. With this acquisition, TES increases its global design staff to more than 500 design engineers in 17 design centers.
Based in Silicon Valley, eDFX offers a range of hardware design and product development capabilities to systems and semiconductor companies. As part of TES, the design center will operate under the name TES Electronic Solutions US and has established a new location in Santa Clara, CA.
TES resulted from the 2004 divestiture of a design and manufacturing unit from Thales.
Philips Sells Contract Manufacturing Unit
Royal Philips Electronics (Amsterdam, The Netherlands) has sold a Philips business called Contract Manufacturing Services France SAS (CMS), a manufacturer of high-frequency niche telecom applications, to Groupe Attel (Paris, France). Financial details were not disclosed. The deal closed in January.
CMS employs about 80 people in Louviers, France, who will transfer to Groupe Attel, a manufacturer of high-frequency wireless applications.
Another deal done…Top 50 EMS provider Simclar Group (Dunfermline, Scotland) has completed the acquisition of certain assets of the Litton Interconnect Technologies assembly business from Northrop Grumman (Jan., p. 6). The business is a supplier of high-performance backplane interconnect solutions.
Sparton To Make Medical Deal
Sparton (Jackson, MI) has signed a letter of intent calling for Sparton to acquire privately held Astro Instrumentation (Strongsville, OH), which designs, manufacturers and sells medical products, generally involving medical laboratory test equipment.
Astro’s sales in 2005 totaled $33.6 million, with strong earnings, Sparton reported.
The deal is subject to completion of a due diligence review and execution of a definitive purchase agreement. Closing is expected before June 30.
This is not the first time Sparton has pursued a medical acquisition. Last year, Sparton proposed to acquire another medical manufacturer, HDJ Company (Lancaster, PA), but the deal fell through.
Equity partnership…Venture (Singapore) paid a total of S$82.5 million ($50.9 million) for a 20.66% stake in DMX Technologies Group, a Singapore-listed system architect providing broadband network infrastructure, digital video, and advanced mobile solutions to service providers and corporate customers. Acquiring this stake will allow Venture to expand its range of value-added services for customers in digital media and communications. The stock purchase consisted of 83 million new shares and 12 million existing shares of DMX.
Tier-one financial results…For the fiscal Q2 ended Feb. 28, Jabil Circuit recorded sales of $2.31 billion, up 35% from the year-earlier period. On a GAAP basis, operating income for Q2 fiscal 2006 increased 44% year over year, while net income rose 50% to $69.0 million. GAAP EPS grew 45% from a year earlier to $0.32. Core operating income for the February quarter, which was up 41% year over year, came in at 4.2% of revenue. Core earnings increased 43% to $78.7 million, while core EPS rose 37% to $0.37. Jabil raised its fiscal 2006 guidance to 32% growth, corresponding to revenue of $9.9 billion for the current fiscal year. This figure is $600 million higher than previous guidance, provided in December 2005. The company expects to grow core EPS by 33% to $1.70 for fiscal 2006, and it estimates a GAAP EPS of $1.50….In Solectron’s fiscal Q2 also ended Feb. 28, sales totaled $2.50 billion, down 9% from the year-earlier quarter but up 2% from the prior quarter. GAAP net income for Q2 fiscal 2006 amounted to $30.4 million, or $0.03 per share, including a gain of about $13.3 million from discontinued operations, as compared to a GAAP net loss of $2.2 million in the year-earlier period. GAAP net profit from continuing operations in the February 2006 quarter was $17.1 million versus a net loss of $3.1 million from continuing operations in the year-ago quarter. Non-GAAP net profit for Q2 fiscal 2006 came to $29.7 million, compared with $44.7 million a year earlier.
People on the move…Michael Marks, former CEO of Flextronics, recently joined Kohlberg Kravis Roberts & Co., a private equity firm. He is also chairman of Flextronics’ board, which recently added Rockwell Schnabel, a partner and founder of Trident Capital, who served as the US Representative to the European Union from 2001 to 2005….CTS (Elkhart, IN), a supplier of components and sensors as well as an EMS provider, has named Rohit Rai as VP, strategy and corporate development. His most recent experience was with Pratt & Whitney….Reptron Electronics (Tampa, FL) has appointed Chris O’Brien as VP of sales and marketing. A veteran of the distribution industry, O’Brien once served as executive VP of Reptron’s former distribution division….Alexander Verhees, who was CFO and joint CEO at EPIQ (Tessenderlo, Belguim), has relinquished his executive duties, but remains a board member. As a result, Gilles Bernard, who shared CEO duties with Verhees, has become CEO….Knut Pogost has joined NOTE (Norrtälje, Sweden) as president of its NOTE Components subsidiary, the strategic sourcing arm of the company. He comes from Future Electronics, where he ran European operations, and previously worked at EMS provider Kitron.
An interim receiver has been named to oversee operations of UTTC United Tri-Tech Corporation (Cornwall, Ontario, Canada), a newly acquired EMS subsidiary of Mindready Solutions (Saint-Laurent, Quebec, Canada).
After acquiring UTTC on Dec. 1, 2005, Mindready discovered major discrepancies between UTTC assets and their respective values related to UTTC’s bank credit facilities. These discrepancies placed UTTC in default of its agreements with JPMorgan Chase Bank (JPMC), which issued a demand for payment of CDN$13.9 million, as well as a notice to realize its security and a petition to appoint an interim receiver.
Under a court-approved agreement involving Mindready, UTTC and JPMC, JPMC will provide financing support to UTTC so that it may continue stable operations until a turnaround/restructuring plan has been implemented.
The purchase price for UTTC was CDN$11.0 million in Mindready stock and warrants. For the 12 months ended Sept. 30, 2005, UTTC had sales of CDN$50 million and EBITDA of CDN$4 million.
Mindready bills itself as a supplier of end-to-end solutions for new product introduction.
Restructuring in Finland…Online editions of Finnish newspaper Helsingin Sanomat and Plastics & Rubber Weekly reported that Foxconn International Holdings, Hon Hai’s mobile-phone manufacturing unit, will downsize its Lahti, Finland, operation, which will lose 400 jobs….According to a story on the website eFinland, Flextronics will close its plant in Oulainen, Finland, which the company lists as an enclosure systems operation. …Elcoteq (Espoo, Finland) is starting personnel negotiations regarding the possible restructuring of its Lohja plant, its product development unit and the NPI unit in Finland. The actions contemplated would affect up to about 120 people out of about 870 employees in Finland.