MMI March 2007
Vol. 17, No. 3: March 2007
Top 50 Enjoyed Above Average Growth in 2006
Cutoff moves beyond $200 million
For the third year in a row, the aggregate growth rate for the MMI Top 50 EMS providers exceeded 15%. Top 50 growth in 2006 amounted to 18.4%, which is above what is usually considered an average year for the EMS industry. It’s also better than last year’s Top 50 growth rate of 15.3% (Chart 1). But one company, Hon Hai Precision Industry, influenced the 2006 result. Without Hon Hai’s contribution, Top 50 growth would have dropped into the more ordinary of realm 11.6% (Chart 2, p. 4).
Given 18.4% growth, it is not surprising that Top 50 sales in 2006 easily topped the previous year’s record. Together, the 50 largest EMS providers accounted for 2006 sales of $129.2 billion, compared with the 2005 Top 50 total of $110.1 billion. (This total was adjusted to reflect Hon Hai’s actual sales in 2005).
The minimum sales required to make the Top 50 also increased; the cutoff point went above $200 million for the first time. To join the 2006 version of this club, an EMS provider needed sales of $213 million, up from the 2005 minimum of $183 million. The cutoff was 16% higher in 2006. It is likely that the days are gone when a provider with less than $200 million in sales could expect to have a chance at taking a spot in the Top 50. Indeed, the cutoff level has been rising since 2001, with greater increases occurring over the last two years (Chart 3, p. 4).
Top 50 EMS providers were ranked according to calendar 2006 sales in US dollars. Where possible, sales of non-EMS businesses were excluded. When two providers reported the same sales, they were listed in alphabetical order and given a shared rank. See the three tables below. Nine providers that responded to the Top 50 survey did not make the cutoff. They appear in a fourth table.
Hon Hai cemented its hold on the number-one position for 2006. As measured by consolidated annual sales, Hon Hai is now more than twice the size of its nearest EMS competitor. Hon Hai’s sheer size it represented about 30% of the Top 50’s sales gives it the ability to move the Top 50’s needle and, by extension, the industry’s growth rate. For 2006, however, Hon Hai affected the Top 50 less than in 2005 when the company’s results raised Top 50 growth by over 12 percentage points. Hon Hai’s boost of 6.8 percentage points to the Top 50 rate in 2006 reflects an estimated growth rate of 38% (in US$) for Hon Hai, but significantly down from its 2005 increase of 75%.
Flextronics retained its number-two position in the Top 50 order. For the number three and four positions, Solectron bested Jabil Circuit by a mere $16 million. Both rose in the standings, Jabil by two positions, compared with 2005. Among other top-10 providers, Sanmina-SCI dropped from number three to five in the order, while Celestica and Venture each moved down by one position. Two providers, Elcoteq and Benchmark Electronics, kept their place in the top 10 (first table).
In addition, New Kinpo Group, a new player, joined the top 10 for 2006. New Kinpo Group was formed in 2006 when Cal-Comp Electronics, Kinpo Electronics and power supply maker Acbel were placed under the same management. Cal-Comp alone was ranked number 11 in the 2005 Top 50.
Four EMS providers made the Top 50 for the first time. Two of them, V.S. Industry and VTech Communications, are Asia-based. The other two, Creation Technologies and LaBarge, operate in North America (table, p. 4).
As in the past, MMI used Top 50 data to calculate two productivity ratios. A set of 45 providers reporting sales and space data averaged $771 in revenue per square foot of facility space. That’s up by 12% from the 2005 ratio of $689 per square foot. The other 2006 ratio, $146,200 in sales per employee, came from a set of 49 companies with the necessary data. In 2006, sales per employee were down slightly from the year-earlier ratio of $148,600 (which excluded Hon Hai). Note that these productivity ratios are approximate since not all employee and square footage data are exact or correspond to year end. Also, year to year comparisons may be influenced by differences in the mix of providers from one year to the next.
The Top 50 is a useful but imperfect proxy for the EMS industry. A potential source of inaccuracy arises from the estimated sales of Hon Hai. (The company is not required to report consolidated sales until the end of April.) That consolidated sales are estimated introduces some degree of potential error. But it is more concerning that Hon Hai does not break down its sales. Some portion of them comes from outside the outsourcing space and thus should not be counted in the Top 50 analysis. In particular, Hon Hai is building a channel business through which the company sells branded products such as motherboards, graphic cards, chassis and barebones systems. Also, Hon Hai, more than any other provider, enjoys a substantial merchant business in OEM components.
Finland’s Incap Makes Move in India
It might be assumed that obtaining an EMS presence in India would be reserved for the largest EMS providers. However true this assumption might have been in the recent past, it no longer holds water.
Incap (Oulu, Finland), a European EMS provider with 2006 sales of 89.3 million euros ($117 million), has signed a letter of intent to acquire TVS Electronics’ contract manufacturing unit in India. As a result, Incap, whose operations are in Finland and Estonia, will gain its first Asian site in the fast-developing EMS industry of India.
The provider plans to acquire operations in Tumkur, South India, near Bangalore. Some 260 employees currently work in the unit, which manufactures power supplies and medical electronics, among other products, for customers in India and Europe. Factory floor space measures about 6,000 m2. In addition to manufacturing and product integration, the unit’s services cover materials procurement, distribution and logistics as well as maintenance.
With this deal, Incap seeks growth and internationalization in accordance with its strategy. The company’s target is to gain revenue of about 10 million euros from its India business in 2007.
Having maintained a sales office in New Delhi since early 2006, Incap has been exploring the possibility of starting manufacturing operations in India. “Already in early stages of our study, we concentrated in searching for a local partner in India, because it is the fastest way to realize our chosen strategy. In addition to a well-functioning production facility, we will also receive an established customer base, because TVS Electronics’ contract manufacturing unit has a stable market position,” stated Juhani Hanninen, Incap’s president and CEO.
“We will also have TVS Group’s support in developing our business further in the future. Actually, this is more about building a partnership in India with the recognized TVS Group rather than just an acquisition,” he said.
TVS Electronics, part of the 95-year-old TVS Group, is one of the largest manufacturers of computer peripherals in India.
Deal done…AWS Electronics Group (Newcastle-under-Lyme, UK) recently acquired another UK-based EMS provider, Cemgraft Electronic Manufacturing, which operates at Greenham near Newbury. Cemgraft has become AWS’s center of excellence for SMT and rapid prototyping. The addition of Cemgraft, a £14-million-a-year business, means that total group turnover is about £30 million ($58 million) going into 2007. This deal follows AWS’s earlier acquisition of Jantec Electronic Services (Sept. 2006, p. 6).
Deal underway…Neways Electronics International (Son, The Netherlands) has signed an agreement to take over activities, including some employees, of ThyssenKrupp Technologies in Germany. The acquired operations will be merged with the activities of Neways Neunkirchen and Neways Kassel. Part of Germany’s ThyssenKrupp group, ThyssenKrupp Technologies is an international manufacturer of high-tech plant and machinery and an automotive supplier.
New business…Redline Communications (Markham, Ontario, Canada) has chosen Elcoteq (Espoo, Finland) as the primary EMS provider for Redline’s family of WiMAX base station and end-user devices as well as its line of backhaul products. Covered by a multiyear contract, Elcoteq will provide low- to medium-volume production, full system integration, and will offer Redline’s customers after-sales services such as warranty repair and order fulfillment. NPI and manufacturing services will be handled through Elcoteq’s NPI center in the US and its facility in Juarez, Mexico….The US Department of Defense has awarded Sypris Electronics (Tampa, FL) a five-year contract for encryption equipment. This award, termed an indefinite delivery indefinite quantity contract, covers the products of two vendors, including Sypris. The contract’s value is not to exceed $400 million. Sypris Electronics is a subsidiary of publicly held Sypris Solutions.…Dot Hill Systems (Carlsbad, CA), a supplier of storage solutions, has entered into a manufacturing agreement with Taiwan’s MiTAC International, a provider of contract manufacturing and ODM services, and SYNNEX, an IT product distributor that also offers contract assembly. Under the agreement, MiTAC will supply Dot Hill with manufacturing, assembly and test services from MiTAC facilities in China, and SYNNEX will perform final assembly, testing and configure-to-order for Dot Hill through SYNNEX facilities in Fremont, CA, and Telford, UK….Incap will manufacture rectifier systems for Efore Group (Espoo, Finland) at Incap’s Estonian factory. Producing continuous direct current, these systems are designed especially for telecom and industrial use. Essential functions include a battery control unit and remote usage possibility. The manufacture of rectifier systems covers customer-specific product entities, and the product versions are typically tailored to order….According to a press release posted on the website of Military Embedded Systems, Crane Aerospace & Electronics, a segment of publicly held Crane Co., has received a contract to manufacture the main board assembly for a navigation unit developed by Athena Technologies (Warrenton, VA) for manned or unmanned vehicle programs.
New facility in US…Key Tronic, which uses the trade name KeyTronicEMS, is establishing a new SMT production facility at its Spokane Valley, WA, headquarters to provide for low-volume and highly specialized PCB assembly for programs that require domestic sourcing.
CalPERS puts EMS provider on underperformer list…The California Public Employees’ Retirement System (CalPERS) has placed Sanmina-SCI (San Jose, CA) on its annual Focus List, which this year has targeted 11 companies for lagging stock, financial and governance performance. “The long-term performance of all 11 companies is at least 20 percent behind their peers, and they have resisted appeals to change corporate practices that make their boards unresponsive to shareowner interests,” stated Rob Feckner, CalPERS board president. Sanmina-SCI would not agree to adopt a clawback policy to recapture bonus and incentive payments in the event of officer fraud or misconduct. The pension fund uses its Focus List to call attention to companies that have failed to make CalPERS’ requested changes.
Jabil Announces Charges Stemming from Options Review
Jabil Circuit’s evaluation of its stock option practices has largely been completed, and the company estimates that it will record additional non-cash compensation charges totaling about $54.3 million for the fiscal years 1996 through 2005. Of that amount, about $48.9 million was related to options granted to employees who were neither executive officers nor directors at the time of the grants. About $1.7 million was associated with options given to executive officers, and the remaining $3.7 million was related to options awarded to a director over five years for providing consulting services.
The company’s review found that in almost all cases Jabil used the date of a board committee meeting or decision when determining option exercise prices and accounting treatment. But the SEC has ruled that if options are approved for a group of employees the accounting measurement date for those options does not occur until the list of recipients and the amount of their awards are final. In some cases, the amount of each employee’s option award was not finalized until after the board committee acted. As a result, Jabil incorrectly calculated stock-related compensation charges. In other instances, Jabil misapplied accounting guidance or administrative errors or other events occurred that contributed to compensation charges not being recorded.
As a result of the review, Jabil has now concluded that its 2003 financial statements can no longer be relied upon. The company plans to adjust its 2004 statements by an immaterial amount. Previously, Jabil said it needed to restate its 2005 financial disclosures. For 2005, the company estimates it will increase stock-related compensation expense by about $35.0 million.
Because Jabil is evaluating its historical recognition of revenue for certain periods, it is unable to finalize the preparation of financial statements.
But the company did report February quarter revenue of $2.93 billion, up 27% year over year. Jabil expects revenue in the range of $2.9 billion to $3.0 billion for both the May and August quarters (fiscal Q3 and Q4).
During a March conference call, president and CEO Tim Main said, “Jabil’s growth over the next two quarters will be below our previous expectations, principally due to a few isolated factors within our consumer sector. Revenue in our consumer sector is expected to decline sequentially for the balance of 2007.” He cited several reasons for this. First, Jabil has a weak product position with one of its largest customers. Second, the company is moving its relationship with one large customer toward more product development and another relationship from a horizontal supply chain to a more vertical solution. Third, Jabil is exiting areas in the consumer sector with poor returns.
More financial news…Through subsidiaries, Hon Hai Precision Industry (Tu-Cheng, Taiwan) this month acquired an 8.89% stake in battery pack maker Simplo Technology for NT$1.43 billion ($43.3 million). Simplo is one of the largest suppliers of notebook battery packs. It would appear that the investment puts Hon Hai in a position to obtain batteries from Simplo. Simplo’s chairman told DigiTimes.com that this partnership will aid Simplo’s development, especially in the single-core battery business. Hon Hai also spent $14.0 million for a 45% interest in Ampower Holding, reportedly a supplier of LCD components. What’s more, Hon Hai recently made 11 indirect investments in China totaling $118.9 million. These investments point to Hon Hai’s expanding footprint in China. For example, the group is funding PCB manufacturing sites in Qinhuangdao, Hebei Province, and Yingkou, Liaoning Province; both sites are in Northeast China….Elcoteq posted Q4 2006 sales of 1.10 billion euros, down from 1.18 billion euros in the year-earlier quarter. Income before taxes was -0.8 million euros versus 19.7 million euros in Q4 2005. For 2006, sales rose 2.8% to 4.28 billion euros, as income before taxes declined by 67.6% to 19.2 million euros. Also, Elcoteq expects to transfer its domicile from Lohja, Finland, to the city and country of Luxembourg on Jan. 1, 2008. The move was approved by shareholder vote at the company’s annual meeting held this month….Publicly held CTS (Elkhart, IN), a components supplier and EMS provider, expects that its investigation of payables and inventory at its EMS location in Moorpark, CA, and related account reconciliation will be completed no later than March 30. The company postponed release of Q4 2006 results due to accounting issues at the Moorpark location….SMTC (Markham, Ontario, Canada) reported Q4 2006 sales of $76.1 million, up 31% year over year. Net income for the quarter amounted to $2.1 million, an increase of 49% from the year-earlier period. The company’s sales for 2006 grew year over year for the first time since the year 2000 (see table p. 3). Net income for 2006 was a record $10.5 million, including one-time items of $5.0 million, compared with a loss of $0.1 million for 2005….For 2006, Nortech Systems (Wayzata, MN) recorded net income of $1.3 million on sales of $105.2 million. Net income rose 41% from a year earlier, while sales increased 25%. Q4 2006 sales of $27.7 million grew 17% year over year. Q4 net income remained flat at $434,578 compared with $430,571 for the year-earlier quarter.
Senior Staff Changes at Celestica
Functions being consolidated
Celestica is undergoing major changes in its executive ranks with the departure of six senior executives and the naming of a new executive VP of global operations. Four out of the six positions are being eliminated as part of a streamlining of the company’s management organization.
Executive VP and CFO Anthony (Tony) Puppi, a founding executive of Celestica, will retire from the company on April 1. Celestica has appointed Paul Nicoletti, its senior VP of finance, as interim CFO. The company is searching for a permanent replacement for Puppi and is considering both internal and external candidates.
The provider has named John Peri executive VP of global operations in place of James Rowan, who has left the business. Peri’s previous job as president of Celestica’s Asia operations will not be filled, and he will continue to carry out the responsibilities of his old job.
Also retiring is CTO Dan Shea, another founding executive. His global engineering and technology organization will now be aligned with the operations planning team.
In addition, the company’s corporate strategy staff will now be consolidated with Celestica’s strategic business development group. As a consequence, Art Cimento, senior VP of corporate strategy, is leaving Celestica.
Likewise, the company’s sales function will now fall under the appropriate market segment teams and will be aligned with global customer business units. As a result, Robert Sellers, senior VP of global sales, is departing the company.
Lisa Colnett, senior VP of human resources and yet another founding executive, is also leaving. Taking over responsibility for the global HR organization will be Elizabeth DelBianco, who will also continue in her role as chief legal officer.
“Our new organization design will consolidate functions within the current organization, reducing overlap and duplications in roles and responsibilities and driving clearer accountability, greater simplicity and increased speed,” stated Craig Muhlhauser, president and CEO.
Muhlhauser told the National Post that Celestica reduced its staff of senior officers by about a third.
The company also hired Guy Delisle to oversee Celestica’s operations in Monterrey, Mexico. With over 20 years of experience in the EMS industry, Delisle is joining the company from Sanmina-SCI. Operational execution issues in Monterrey resulted in EBIAT losses of $46 million in Q4 2006, and turning this site around is a major objective for Celestica.
More people on the move…Kaj Samlin has become CEO and president of Top 50 provider NOTE (Norrtälje, Sweden). Samlin succeeds Arne Forslund, who said he and the board had differing views of the company’s rate of change and future focus. From 1986 to 2004, Samlin served as CEO of cable producer Habia Cable. Also, Curt Lönnström has been proposed for election as NOTE’s chairman. He is a current member of NOTE’s board and serves on four other company boards. Sten Dybeck, main shareholder of the company and current chairman, has declined re-election to that position. Dybeck said he intends to remain a significant shareholder of the company….Kimball Electronics Group (Jasper IN), another Top 50 provider, has appointed Paul Plante to the newly created position of VP, Medical Industry Solutions. Plante formerly served as president and CEO of Reptron Electronics, which Kimball acquired last month. In addition to focusing on the growth of Kimball’s medical business, Plante will be responsible for Kimball’s facilities in Tampa, FL, and Fremont, CA….Plex-us (Neenah, WI) has named Kristian Talvitie VP of marketing, branding and communications….Sanmina-SCI recently announced that Michael Missios, head of Sanmina-SCI’s PC division, was leaving the unit….SMTC has appointed Paul Blom as senior VP supply chain. With ten years of senior management experience in the EMS industry, Blom most recently worked as senior VP, global supply chain management operations for a top-tier EMS provider….LaBarge (St. Louis, MO) has named William Bitner VP of operations. He succeeds Vernon Anderson who is retiring. Bitner’s background includes VP and GM of operations for Rolls-Royce….Elcoteq has appointed Carsten Barth director, corporate strategy and global marketing. Barth has eight years of marketing leadership experience including a stint with GE in Germany.