MMI September 2004
Vol. 14, No. 9: September 2004
Table of Contents — Headlines
Lead-Free Issue Awaits Small Providers
One way or the other, the EMS industry will eventually convert to lead-free assembly. Much of the impetus will come from the well-publicized RoHS directive banning lead from nonexempt products sold in Europe starting July 1, 2006. But other factors will also come into play. After introducing lead-free components, many suppliers will not want to carry both leaded and lead-free parts indefinitely. At some point in the future, pricing and availability will begin to favor lead-free components. In addition, competitive pressures will increase on providers who cannot offer lead-free services.
For the largest EMS providers, the question of when to start offering lead-free services is moot. Most, if not all, have already done it (Aug., p. 1-2). But for smaller providers, this question is not generating such a uniform response. Some are forging ahead with a lead-free offering, while others are waiting for customers to require it.
Phil Zarrow, president of the consulting firm ITM (Durham, NH), finds that in his experience most of the smaller providers fall in the latter category. (He did not address European providers governed by the RoHS mandate.) It’s not as though smaller providers are in the dark about lead-free. “In general, most of them are at least aware of it. But most of them are reluctant to go forward until they basically have a customer that wants them to do it,” said Zarrow.
Most perhaps, but not all. At least a few lower-tier providers are starting to offer lead-free assembly. For example, this summer Vanguard EMS (Beaverton, OR) announced a lead-free manufacturing capability encompassing SMT, wave soldering, manual assembly and rework. Also, IEC Electronics (Newark, NY) had a dedicated lead-free line fully operational by May of this year.
The requirement for lead-free products “is a significant shift in the market, and we don’t want the OEMs to have to lead us into this,” said Tim Falk, VP of marketing and sales at Vanguard EMS. “We want to be ready to go when they need to because they’re going to have their hands full with a lot of other issues as far as converting their BOMs and the product to lead-free.”
Offering a lead-free capability is also in keeping with Vanguard’s strategy to provide tier-one level services.
For a small provider, developing a lead-free capability from scratch can be daunting task. One way to alleviate this problem is to share the work. That is Vanguard’s approach. “We’ve been working with a couple of Fortune 100 customers who provided the opportunity to work on specific projects, and those were both production and preproduction type boards as well as test vehicles that were designed specifically for comparing to leaded solder,” said Falk. The customers provided the test vehicles.
Sharing resources and intelligence with customers “is a great way to do it,” said Zarrow. Otherwise, a small provider might be at a disadvantage if it cannot afford to join the lead-free consortia, which act as conduits for lead-free intelligence. Still, he recommends that providers do some investigation first on their own “so your not both starting from square one.” According to Zarrow, the best case is to partner with a number of customers.
But lead-free manufacturing is not the only thing that an OEM needs for RoHS compliance. BOMs must be scrubbed to determine whether or not each component complies. Indeed, BOM scrubbing is a service already in demand, as reported in last month’s cover story. This procedure requires that somebody go through the painstaking process of creating a component database for RoHS compliance. Celestica, Solectron and probably other tier-one providers are building such component databases. But it’s not yet clear whether OEMs in most cases will want their providers, particularly the smaller ones, to take responsibility for the database. “I’ve heard in some cases where we’ve dealt with clients that the OEM will probably shoulder that responsibility,” said Zarrow.
BOM scrubbing is one of several non-manufacturing capabilities that could be offered in the lead-free area. Others include product conversion and product validation. Vanguard EMS has yet to bring on these services, but is planning to do so. Falk reports that a lot of OEMs “are looking for help above and beyond just the manufacturing.” Vanguard will partner with other companies to provide these services.
Nevertheless, tier-one providers aren’t the only ones with the resources to make available such expanded green services. IEC, according to its website, has design and component engineering teams geared up to support BOM/product conversions. The provider is also offering a lead-free prototype capability through the IEC Technology Center.
What is the biggest problem facing providers who want to produce lead-free assemblies? According to consultant Zarrow, it’s not equipment, but logistics. Yes, wave soldering machines may need to be retrofitted for use with a new solder alloy. More heating and cooling will be required of reflow ovens. Vision systems may need adjustment. But Zarrow classified all that as minor. He said the entire industry will face a major problem in logistics during the transition to lead-free. “How do you handle two processes, lead-free and leaded? How do you keep your materials from intermixing? How do you keep dual inventories? How do you deal with the costs of doing that?” he asked.
It’s no wonder then that there are smaller providers waiting for customers to request lead-free manufacturing. But waiting also involves risk. When a customer does come looking for a lead-free capability, a provider who has waited for that request could be at a disadvantage. A competitor who has forged ahead with a lead-free program “might be more attractive to the customer,” said Zarrow.
Those who wait may be in for a surprise. The conversion to lead-free “is going to come along faster than they would anticipate. And the transition is going to be faster than supports a wait-and-see attitude,” said Falk.
If he’s right, the clock is ticking for providers who have put off conversion to lead-free.
New Study of EMS and ODM Growth in China
Robust growth will continue for both the EMS and ODM markets in China, but as a percentage of total revenue, China will play a much large role for ODMs than for EMS providers, according to a new forecast from iSuppli (El Segundo, CA), a provider of supply chain information and analysis.
The firm predicts that China’s EMS revenue will rise from $17.7 billion in 2003 to $45.5 billion in 2008. These numbers yield a CAGR (compound annual growth rate) of 21%.
Kevin Wang, an industry analyst for iSuppli, lists a number of factors contributing to this growth.
• Global sales of electronic systems should continue to grow through at least 2008.
• OEMs will continue to outsource manufacturing.
• EMS and ODM companies will continue to add capacity in China over the next five years.
• More product manufacturing will be moved to China.
• Indigenous Chinese EMS providers will gear up more rapidly to attract overseas customers.
• New Chinese providers will appear, including those that spin off from large domestic OEMs.
• China’s domestic OEMs will gradually farm out more production to EMS players.
Despite the growth of the EMS market in China, iSuppli projects that EMS revenue from China will remain well below half of global EMS sales though 2008. According to an iSuppli chart, China’s EMS market will represent 20% of the global EMS business in 2004. Through 2008, the Chinese share of worldwide EMS revenue is expected to stay below 30%.
In contrast, China already accounts for a majority of the global ODM market, and iSuppli predicts that China’s ODM share will increase to some 74% in 2008. This year, China’s share will amount to 66%, according to the firm. The new forecast by iSuppli shows that China’s ODM revenue will grow to $108 billion in 2008, up from $39.6 billion in 2003. These figures equate to a CAGR of 22% over the forecast period.
Wang provides a number of reasons for the strong growth of the ODM market in China:
• Global sales of computers and peripherals are expected to grow by 10.3% for 2004 and to continue upward each year through 2008.
• Taiwanese ODMs will continue to diversify into consumer electronics and mobile communications.
• These ODMs will enhance their design capabilities to win more business from international OEMs.
• These ODMs will keep adding plant capacity in China.
• China’s system market will grow significantly over the next five years.
• Domestic OEMs and Taiwanese ODMs will jointly develop new products.
• Local ODMs will perform well in consumer electronics.
Soon iSuppli will publish an updated report on the EMS and ODM markets in China. The report is entitled China Research Q2 2004 China EMS/ODM Manufacturers.
Flextronics To Acquire FutureSoft
Will form software unit
A recent statement released by FutureSoft (Chennai, India), a provider of communication software and services, confirmed that the company has entered into an agreement to be acquired by Flextronics (Singapore). This deal was first reported on-line by an Indian business publication (Aug., p. 2). MMI has learned that FutureSoft will become part of a new software unit called Flextronics Software Systems.
Following Flextronics’ purchase of a controlling interest in India’s Hughes Software Systems (June, p. 1), the FutureSoft deal leaves little doubt that India has become the center for Flextronics’ thrust into software. (See also June, p. 1-2).
FutureSoft employs 524 software engineers and is expected to generate about $23 million in sales for its fiscal year ending March 2005. Like Hughes Software, FutureSoft has a growth rate of over 35% a year. Customers listed on FutureSoft’s website include Agere Systems, Alcatel and China’s Huwaei Technologies, Norway’s Nera Broadband Satellite, and the UK’s Trend Communications.
Focused on communication software, FutureSoft offers expertise in internetworking, broadband, telecom, wireless, network management and embedded systems. The firm enables customers to engage at any point in the product development cycle. In addition, FutureSoft’s product portfolio includes a range of protocol stacks for domains such as LAN, WAN, IP, internetworking, ATM, telecom signaling and network management.
According to Ash Bhardwaj, president of design and ODM services at Flextronics, FutureSoft is a datacom-related play for Flextronics as opposed to Hughes Software, which is a play in the telecom and convergence segments.
Both Flextronics and FutureSoft see this deal as opening up cross-selling opportunities for the services of each. Bhardwaj estimated that more than 50% of FutureSoft’s customers would be candidates for a combined hardware and software solution from Flextronics.
In addition, Flextronics expects that both FutureSoft and Hughes Software will play a crucial role in the development of ODM products for the communication infrastructure space. “About three years ago in a product, 40 percent of design work was software; 60 percent was hardware. Today, it’s 30 percent hardware, 70 percent software,” said Bhardwaj. He added that FutureSoft “could contribute within the next 12 months in some of our ODM initiatives.”
Flextronics has already begun the process of integrating Hughes Software and FutureSoft into a single operation. To that operation, Flextronics plans to add groups in South Africa, a group in Eastern Europe and a group in Sweden. The resulting organization will be called Flextronics Software Systems.
Terms of the FutureSoft deal were not disclosed for regulatory reasons. Subject to regulatory approvals, the deal is expected to close before the end of 2004.
Yet another investment, announced earlier in the year, is intended to give Flextronics access to other engineering capabilities in India. The company expanded its silicon development capabilities by partnering with inSilica (Santa Clara, CA) a fabless supplier of system-on-a-chip solutions with development resources in Bangalore, India. Flextronics and NewPath Ventures, an Indo-US based fund, together pledged an investment of $10 million in inSilica.
Flextronics continues to explore India for other possible investments. “It’s very apparent that we have to fill in the gap of hardware design in communication infrastructure [products] because we have the software footprint,” said Bhardwaj. The company is also looking in India at some software areas outside of communication infrastructure.
Celestica to Divest Power Business
Celestica (Toronto, Canada) has signed a definitive agreement to sell its Power Systems business to C&D Technologies (Blue Bell, PA), a producer of power storage and conversion products. The terms of the cash transaction were not disclosed. Closing is expected within 30 days.
Celestica becomes the second tier-one provider to divest non-core assets. As anyone who follows the EMS industry knows, Solectron had made a series of divestitures to rid itself of activities that were not central to its business. (See p. 5-6 for Solectron’s latest divestiture).
Under the agreement, Celestica will transfer its Power Systems assets and 160 employees to C&D. These employees are located in Toronto, Oregon and China. In addition, the companies have entered into a three-year supply agreement whereby Celestica will manufacture certain C&D power products.
The Power Systems business was originally part of the IBM Toronto operation that became Celestica.
Creation Expands US Footprint
Creation Technologies (Vancouver, BC, Canada) has gained a manufacturing presence in the Southern US by acquiring Second Source System, an EMS company in Richardson, TX. Creation focuses on manufacturing complex electronics, and the deal will give the company a Texas site offering EMS for medium-volume, highly complex products.
The Texas operation, which has been renamed Creation Technologies Dallas, becomes the second US manufacturing site for the Canadian provider. Creation Technologies established a manufacturing beachhead in the US when the company purchased Eder Industries of Milwaukee, WI, last year (July ’03, p. 4).
In operation since 1986, privately-owned Second Source had a 2004 sales forecast of $16 million. According to Creation, the operation is profitable. Its 15 customers participate in the communications, industrial control, computer, and medical markets. The Texas operation, which employs 35 people, will move to a new 40,000-ft2 location in Plano in January 2005. At 12,000 ft2, the current facility in Richardson is full.
“The Southern United States is a key area of focus for us as we believe this region is underserved by EMS companies who are able to provide full expertise in the area of complex electronics,” said Arthur Tymos, Creation’s president. “We became particularly interested in Texas given the number of potential customers and the associated growth opportunities for Creation.”
The provider believes Texas offers growth opportunities in Creation’s target markets: telecom, medical, industrial controls, transportation and instrumentation. Tymos said, “Obviously going back a couple of years, Texas was highly known for its telecom, which had suffered quite a bit with the tech meltdown. We see telecom companies starting to strengthen again, albeit they’re nowhere near where they were at the peak.”
Besides offering a Southern presence, the Texas operation has a customer profile that fits Creation’s focus on highly complex, medium- to low-volume product. In addition, Creation was impressed by the operation’s culture and people. All of these people, including co-owners Ray Bodensteiner and Tom Moe, are staying on.
Creation recently received a C$10-million investment from CIBC Capital Partners, a division of Canadian Imperial Bank of Commerce. Some of that money is being used for the Second Source purchase. The rest will be used to meet the requirements of Creation’s growing customer base as well as to fund its US acquisition plans.
“We have a longer term goal to continue to expand throughout North America. We do not have a specific plan in terms of where the next location will be,” said Tymos. Creation is interested in the US East Coast, a region where the provider lacks a production site.
The employee-owned company expects 2004 sales of around (US)$140 million, up from 2003 sales of around (US)$100 million. These figures depend on exchange rates as Creation tracks sales in Canadian dollars. For 2005, the company anticipates that it will continue to grow faster than the market.
In the past 15 months, Creation has added 15 new customers and expects this pace to accelerate in the future.
Creation employs 850 people and operates six manufacturing facilities in North America. The provider also offers offshore manufacturing through partners in Asia.
Israeli Provider Enters China
U.S.R. Electronic Systems (Karmiel, Israel), a privately-owned EMS provider, has expanded into China through the company’s acquisition of operations from Sankyo Technology HK Ltd. In this deal, U.S.R. has purchased Sankyo’s purchasing and logistics center in Hong Kong and its R&D center and 12,000-m2 factory in Shenzhen, China. The factory does mechanical and electronic assembly work.
U.S.R. employs more than 500 people in Israel.
Expanding in Latin America… Elcoteq Network (Espoo, Finland) will start manufacturing operations in Manaus, Brazil, during autumn 2004. The provider will initially operate in a rented space of 1500 m2. Elcoteq’s Monterrey, Mexico, location will act as the sister site to support the initial ramp-up of products. The Brazilian operation will begin with a particular emphasis on terminal products, or mobile phones. “As the second largest EMS provider of mobile phones in the world, it makes sense for us to be in Brazil, the fastest growing Latin American market,” stated Doug Brenner, president of Elcoteq Americas (Irving, TX)….The El Paso Times is reporting that Hon Hai Precision Industry (Tu-Cheng, Taiwan), a tier-one provider known by its Foxconn trade name, will hire an additional 2500 people over two years in Juarez, Mexico, which will become Foxconn’s center of operations in North America.
Distributor Sells EMS Unit
Component distributor Jaco Electronics (Hauppauge, NY) has sold its contract manufacturing subsidiary, Nexus Custom Electronics (Brandon, VT), to a new company, Sagamore Holdings, for $12.0 million and the assumption of certain liabilities. Jaco described Nexus as a non-core holding.
This sale likely marks the end of a chapter in the distribution business. According to MMI archives, Jaco was the last US-based distributor with a separate EMS business. In the past, several mid-tier distributors attempted to combine distribution with contract manufacturing. Their idea was to offer OEM customers components along with the manufacturing services that would utilize those parts. While sounding good in theory, the idea did not produce the requisite synergies. And one by one these distributors divested their EMS units except for Reptron Electronics, which sold its distribution business to focus on EMS.
But this sale doesn’t mean that manufacturing is totally gone from the distribution side. Arrow OEM Computing Solutions, a division of Arrow Electronics, offers an array of product integration services.
Nexus recorded trailing 12-month sales of about $22 million and employs some 140 people. According to Jaco, all the employees are being retained. Nexus operates a facility of about 36,000 ft2 in its Brandon, VT, home base and another plant of about 30,000 ft2 in Woburn, MA. In addition to PCB assembly, Nexus offers component sourcing, design engineering, testing and box build.
Under terms of the deal, Jaco will receive $9.25 million in cash at closing. The balance will be paid through a $2.75-million subordinated note issued by Sagamore, which was formed to make the acquisition. Jaco may also receive up to $1 million under a six-year earn-out agreement. In addition, Sagamore has entered into a contract that designates Jaco as a key supplier of electronic components to Nexus for five years.
Jaco acquired Nexus in 1994. The operation was originally founded under a different name in 1968, moved into contract manufacturing in 1972, and was bought by Dowty of the UK in 1985.
Back to TOC
New programs…Gizmondo Europe Ltd., a subsidiary of Tiger Telematics (Jacksonville, FL), has selected Flextronics to volume manufacture a new handheld gaming console called Gizmondo. Also, earlier this year China’s Hisense engaged Flextronics to produce color TVs in Sarvar, Hungary, for the Chinese company, according to an Internet report from the Budapest Business Journal. Reportedly, Flextronics will manufacture 150,000 TVs for the first year and twice that quantity the following year, with Europe the intended market for the TVs. The BBJ also described a second agreement that Flextronics struck in February with TCL, a Chinese consumer electronics manufacturer that had acquired a German TV brand. Finally, Flextronics is manufacturing cluster workstations for Orion Multisystems (Santa Clara, CA)….Over the next nine months, Overland Storage (San Diego, CA), a supplier of data protection products, will outsource all of its manufacturing and certain related activities to Sanmina-SCI (San Jose, CA). About 140 Overland employees at its San Diego facility will lose their jobs. Overland reported sales of $238.1 million in its fiscal 2004 that ended June 30….Corrigent Systems (San Jose, CA), a maker of packet add drop multiplexers for next-generation transport networks, has chosen Celestica to provide electronics manufacturing services in Japan. The selection of Celestica is part of Corrigent’s support of the Japanese market by adding local testing and quality control capabilities in Japan. The agreement involves Celestica’s Miyagi site, which specializes in testing and NPI for complex optical networking products….The UK operation of Fluke Precision Measurement has engaged Plexus (Neenah, WI) to supply PCB assem-blies….Research In Motion (Waterloo, Ontario, Canada), supplier of wireless solutions including Blackberry devices, has contracted with Elcoteq to augment RIM’s manufacturing capacity by undertaking certain manufacturing activities for RIM in Europe and Mexico….The Hibbing, MN, facility of Reptron Electronics (Tampa, FL) has received a multimillion-dollar contract from Hunt Technologies (Pequot Lakes, MN), a provider of automatic meter reading products and an existing customer of Reptron. Reptron will build RF-based subassemblies for a Hunt system that uses utility power lines to transmit and collect data from electric, gas and water meters….Sionex (Waltham, MA) has selected IEC Electronics (Newark, NY) to manufacture all of Sionex’s commercial products, which are based on a proprietary detection technology. This technology separates and detects ionized compounds based on their differential mobilities through a sensor chip.
Solectron to Take New Charges
In an SEC form 8-K filed this month, Solectron (Milpitas, CA) disclosed that it will take one-time charges totaling $73 to $87 million in its August fourth quarter. The charges consist of about $20 to $25 million for further restructuring, about $47 million for impairment of intangible assets, and a loss between $6 and $15 million stemming from the sale of Solectron’s minority interest in ECS Holdings.
Under the new restructuring, Solectron will reduce its work force in Europe and North America by about 500 employees. The company also plans to further consolidate facilities and continue the transition of operations to lower cost regions.
The charge for impairment of intangible assets results from Solectron’s decision to disengage from certain customer product lines in the PC and computing market. According to a report from Ingalls & Snyder analyst Alexander Blanton, the only Solectron acquisition that could have created $47 million worth of impaired intangible assets in the PC and computing space is the 1999 purchase of IBM’s ECAT (Electronic Card Assembly and Test) operation in Austin, TX. In that deal, Solectron became sole source for motherboards in IBM notebooks. Out of about $83 million Solectron paid in the transaction, some $53 million went for the rights to use certain IBM intellectual property. (Note that Solectron paid $17 million for IP rights when it acquired the IBM ECAT operation in Charlotte, NC, in 1998.)
Blanton reported that Solectron “has decided to discontinue making the customer product line because it can’t earn a sufficient gross margin or return on that program. Solectron said it had attempted to negotiate a higher price for the product, without success.”
Solectron received about $16 million in cash for its minority interest in ECS. As a result of the sale, Solectron is reviewing its investment in ECS and related entities. The loss on the sale of the minority interest is $6 million. In addition, ECS owes a Solectron a loan receivable balance of $9 million, which leads to a total loss of $15 million if the balance cannot be collected.
Singapore Technologies Electronics, the electronics arm of Singapore Technologies Engineering, bought a 21.35% stake in ECS from Solectron for S$24.8 million (about $14.6 million). Dow Jones reported that Solectron sold its remaining 2.15% interest in ECS to an unnamed buyer.
Solectron obtained its ECS stake from its 2001 acquisition of NatSteel Electronics. While Solectron has been in the process of selling noncore businesses, ECS was not part of the original group of noncore activities that Solectron had planned to divest.
ECS serves as the holding company for a group of five subsidiary companies. The group provides IT products and services to the Asian market.
Settles suit against customer
Meanwhile, SR Telecom (Montreal, Canada) has agreed to pay Solectron a total of $4 million to settle a claim that Solectron had filed against Netro, a company SR Telecom acquired last year. Solectron claimed that in 2000 it had purchased materials on the basis of Netro’s sales forecasts and was left with excess inventory that amounted about $14.5 million when carrying charges were added. Under the settlement, SR Telecom will buy excess inventory from Solectron for about $3 million and make an additional payment of $1 million. These payments will be spread over 12 months.
More financial news…Jabil Circuit (St. Petersburg, FL) reported that revenue for its fiscal Q4 ended Aug. 31 totaled $1.63 billion, up 25% from a year earlier. GAAP net income rose to $44.3 million from $20.1 million in the year-earlier period. Jabil’s core earnings increased 32% year over year to $54.7 million. Gross margin was 8.5%. For fiscal 2004, sales grew 32% to $6.25 billion. GAAP net income for the year amounted to $166.9 million compared with $43.0 million for fiscal 2003. Core earnings for the year increased 46% to $209.1 million, while core EPS increased 44% to $1.02. GAAP EPS came to $0.81, up from $0.21 for fiscal 2003. For fiscal 2005, Jabil’s guidance indicates revenue of $7.2 to $7.4 billion, core earnings growth of 18 to 22%, core EPS of $1.20 to $1.24, and GAAP EPS of $1.05 to $1.09. The provider reiterated its Q1 fiscal 2005 (November) guidance, which calls for revenue of $1.75 to $1.85 billion, core EPS of $0.30 to $0.32, and GAAP EPS of $0.26 to $0.28….Celestica has lowered guidance for the September quarter. The provider now expects revenue of $2.05 to $2.15 billion and adjusted net EPS of $0.07 to $0.11. Previous guidance was for revenue of $2.25 to $2.40 billion and adjusted net EPS of $0.11 to $0.17. The company blamed the revenue reduction on recent order reductions from some of its largest communications and IT customers. CEO Steve Delaney told analysts the revenue miss was probably “closer to” three-quarters communications….For the quarter ended July 31, SigmaTron International (Elk Grove Village, IL) posted sales of $25.1 million, up slightly from the year-earlier figure of $24.8 million. Net income decreased 18% from a year earlier to $1.0 million. Also, the company has acquired the remaining outside ownership of its affiliate SMT Unlimited (Fremont, CA). SMTU becomes a wholly owned subsidiary of SigmaTron. In the long term, the company plans to operate SMTU as a division. SigmaTron recently increased its stake in SMTU to just over 80% (Aug., p. 4)….For the fiscal year ended June 30, Sparton (Jackson, MI) reported sales of $161.0 million, down from $169.9 million in the prior year. The company recorded a net loss of $2.0 million for fiscal 2004, compared with net income of $9.0 million the year before, which included a favorable settlement of $3.6 million after tax….Nortech Systems (Wayzata, MN) reported that KPMG has resigned as the provider’s independent auditing firm. According to an SEC Form 8-K filed by Nortech, there were no reportable events for fiscal 2002 and 2003 and the interim period through Aug. 31, 2004, except that in August KPMG advised Nortech of a deficiency related to its ability to forecast financial results accurately enough to determine compliance with debt covenants at future quarter ends. The company believes it has taken the appropriate steps to remedy this deficiency by improving and expanding its monthly forecasting process put into place in early June….Micro Dynamics (Eden Prairie, MN) has closed on new financing with CHB Capital Partners (Denver, CO), a private equity firm, and Wells Fargo Bank. The new financing will allow for expansion in domestic and foreign markets. Over the last 12 years, Micro Dynamics has grown at a CAGR of 20% and expects to more than double that rate in 2004….Radiance Electronics, a China-based EMS provider, reported that second-half revenue for its fiscal year ended in June rose sequentially by 136% to S$63.7 million. Net profit for the period was S$3.1 million.
More restructuring…Plexus has announced a $10- to $13-million restructuring program that includes closing the company’s Bothell, WA, facility. This restructuring will eliminate about 160 jobs and 100,000 ft2 of capacity. The provider expects consolidation efforts to be completed by the end of the March 2005 quarter, subject to customer timelines. Plexus plans to transfer key customer programs to other Plexus locations primarily in the US. The company had earlier consolidated from two facilities to one in Bothell, a location that Plexus gained through its 1999 acquisition of SeaMED, a medical contract manufacturer. This restructuring charge also includes the impairment of certain fixed assets and additional costs for previously announced actions.
People on the move…With corporate governance standards in mind, the board of Benchmark Electronics (Angleton, TX) has decided to separate the roles of chairman and CEO. Donald Nigbor, chairman and CEO, will relinquish his CEO duties while remaining chairman. Cary Fu, president and COO, will become the new CEO and retain the position of president. Also, Benchmark will promote Gayla Delly to executive VP. She will continue to serve as CFO and treasurer….Solectron has named Marty Neese as executive VP, worldwide sales and account management. Neese most recently was VP of worldwide sales operations at Sanmina-SCI. Before that, he led the company’s program management activities. Neese’s experience also includes six years at Jabil Circuit….Celestica (Toronto, Canada) has appointed Robert Shanks as its new chief supply chain and procurement officer. With over 20 years of industry experience, Shanks previously worked at Dell, where he was responsible for developing Dell’s Asian supply chain. At Dell, he also held the position of VP of notebook and desktop procurement. In addition, Ronald Wichter has joined Celestica as senior VP, Global Services. His prior position was CEO of International Harbour, LLC, a consulting and international sourcing company. Before that, he served as senior VP of Global Manufacturing Solutions for Rockwell Automation….Edward Smith is resigning his position as president and CEO of SMTEK International (Moorpark, CA). He will continue as a director of the EMS company. Smith has been named senior VP of sales, Avnet Electronics Marketing, Americas. Avnet Electronics Marketing is the largest operating group of distributor Avnet (Phoenix, AZ). Smith had worked for Avnet before. He said, “I have decided for personal reasons to relocate to the area of the country that I call home.” Kirk Waldron, currently SMTEK’s senior VP and CFO, will serve as interim president….Nam Tai Electronics (Hong Kong) has appointed Charles Wong as CFO and Joseph Silva as assistant CFO. Current CFO, Koo Ming Kown, will hand over his duties to Wong before the end of the year. Starting January 1, 2005, Koo will assume the role of non-executive director of Nam Tai. At that point, Nam Tai’s board will consist of only non-executive directors, the majority of which are independent directors. Before joining Nam Tai, Wong was CEO and executive director of Bestway International Holdings, a group involved in production of polymer films. He was also an independent director of a Nam Tai subsidiary. Silva’s prior experience includes being CEO of an investment management firm as well as an investor relations company.
Taking the Long View
EMS companies cannot escape the quarter-to-quarter angst of their investors. But short-term demand and inventory changes though they can influence the price of a stock do not determine the future of an EMS company. That future is tied to the new business that a company brings in.
At first blush, that future looks bright for many EMS companies. After all, the secular trend of outsourcing remains in tact. The total penetration of outsourcing, both EMS and ODM, remains below 30% and is likely less than 25%. So there’s still a lot of room for growth. But the question is who will enjoy this growth. Will it be a case of all boats rising at roughly the same rate? Or will some flounder while others catch the outsourcing wave?
One way to frame the growth question is to look at which model gives a company the best chance of capturing new outsourcing business. Today, EMS providers can choose from two basic models: traditional EMS and EMS plus product design. Although staying put as a conventional EMS provider may seem a safe choice, a company would forego any ODM or other product design opportunities. In recent years, the ODM side of the outsourcing market has been growing faster than the EMS side. The disparity was quite apparent last year, when MMI found that a group of 12 ODMs expanded sales by 36% overall (May, p. 1-2). Not only that, ODM products typically enjoy higher margins than EMS programs do.
Indeed, one can argue that for the long term the number-one threat to EMS companies comes not from within, but from the ODM model, which guarantees that an ODM will manufacture the product that it designs. The EMS industry is effectively barred from participating in ODM-designed products.
Still, adopting the EMS/product design model is not without risks. Developing the necessary engineering skills for full product design takes time, money and management attention. Even if a provider wants to do strictly contract product design, these skills must first be in place, either in-house or through a design partner. And there’s no guarantee that an effort to build design skills will pay off. In addition, EMS providers pride themselves on their ability to manufacture a wide variety of products, as opposed to ODMs, who specialize in a few product areas. Designing a product from scratch takes an understanding of the product’s market as well as experience in developing that type of product. These capabilities, for the most part, don’t come naturally to an EMS provider.
For small providers lacking in resources, the EMS/product design model may not be a realistic choice, unless they can find a suitable design partner. But for others, this hybrid model should be considered an option, given that the model is becoming more popular among tier-one and -two providers. This model enables a provider to compete directly against ODMs or preempt them at a time when ODMs are moving into more and more product areas
Although this hybrid model is not an easy choice, it’s one that should be confronted if a company looks beyond the next few quarters.