Cover Story
IBM Deal Puts Supply Chain in Lenovo’s Hands
World Markets
Event Focuses on Chinese Providers
Market Data
IDC Projects EMS and ODM Sales
Tech Trend
RFID Arrives in the EMS Industry
News
Elcoteq to Acquire Set-Top Operation from Thomson
New Player Emerges from Thales Deal
Delphi Unit Buys Peak Industries
Flextronics Sells Consulting Unit
Metretek Contract Mfg. Assets Being Sold
Last Word
Lenovo’s prospective acquisition of IBM’s Personal Computing Division will create the world’s third-largest PC business with about $12 billion in revenue based on 2003 results. The deal will also place China’s Lenovo in control of manufacturing for the combined business. Lenovo will oversee a $12-billion supply chain fed by both internal and outsourced manufacturing. This may be the first time that a Chinese company will have presided over a global electronics supply chain of this magnitude.
According to IBM, the transaction will have no effect on those who provide IBM’s PC business with contract manufacturing, ODM services or motherboards. But it will be Lenovo, not IBM, who will determine what outsourcing goes where when contracts are up. There’s speculation about what Lenovo might decide with regard to contract manufacturing in particular, but its intentions remain hidden from view.
As the EMS world is well aware, Sanmina-SCI builds desktop PCs for IBM. Sanmina-SCI acquired IBM’s NetVista PC manufacturing operations in North Carolina and Scotland in February 2002 for about $161.9 million. In February 2003, Sanmina-SCI and IBM entered into three-year supply agreements that extended their relationship to, among other things, PC fulfillment for customers in the Americas, Europe, the Middle East and Africa (Jan. ’03, p. 4). Therefore, one can conclude that Sanmina-SCI is protected by supply agreements during the three-year period, which would appear to end in January 2006.
MMI asked IBM how the sale of the PC business would affect those who are contract manufacturing PCs for IBM. A company spokesman replied that there should be no effect as a result of the transaction. Sanmina-SCI did not respond when contacted for this article.
IDC, for one, thinks that Lenovo is unlikely to transfer manufacturing from Sanmina-SCI sites to Lenovo facilities in China, at least in the short term. The market research firm cited the maturity and relative efficiency of existing PC manufacturing supply chains, Sanmina-SCI’s expertise in BTO and CTO, and synergies between IBM and Sanmina-SCI. The latter also provides reverse logistics support to IBM’s PC business, according to IDC.
“IDC, however, believes that the medium to long-term impact on the PC segment of the EMS industry could be significant and will depend on Lenovo’s future strategy for manufacturing,” wrote IDC in a new report. The report is entitled “Lenovo’s Acquisition of IBM’s Personal Computing Division: Impact on the Electronics Manufacturing Services (EMS) Industry.”
Notebook ODMs and motherboard companies also supply IBM’s PC business, and the IBM spokesman said there would be no change in the use of these suppliers as a result of the transaction. Quanta Computer and Wistron serve as notebook ODMs for IBM, while Gigabyte, Foxconn and Universal Scientific Industrial (USI) supply motherboards to IBM’s PC division. According to a statement from USI, the deal “will not impact USI’s business immediately.” The company stated that in the future the business, as always, will depend on the company’s quality, delivery, cost and technology.
Described as the largest PC manufacturer in China, Lenovo does PC assembly in Beijing, Shanghai and Huiyang (Guangdong province). The transaction will expand Lenovo’s manufacturing network in China because the deal includes the PC manufacturing portion of the International Information Products Company in Shenzhen, which is co-owned by IBM and Great Wall.
By Clive Jones, Managing Director, Economic Data Resources LLC
China’s government, which is bent on forging world name brands, recently staged an event to benefit Chinese EMS providers. China EMS Forum 2004, sponsored by the Chinese Ministry of Information Industry, was an official step to give more attention to needs and issues of Chinese EMS providers, which at times seem to have second-class status.
The forum took place November 16 at the immense Shanghai New International Exhibition Center, located in PuDong, Shanghai. In addition to broad-ranging presentations, some in Chinese with real-time translation, the forum provided a chance to meet and to develop perspectives on tier-2 and tier-3 Chinese EMS providers. Discussions at the forum led to the conclusion that many Chinese operations are hybrids.
China’s top 100 electronics OEMs, for example, often mix OEM and EMS or ODM. Skyworth Technology Group (Shenzhen) runs global revenues of approximately $1.5 billion, based on selling around 9 million TVs and 3 million DVDs. ODM sales, focused on video technology, account for an estimated 25% of Skyworth’s business,
Following a Taiwanese model, there are now Chinese ODMs that are adding OEM business. KXD Digital Entertainment LTD (Shenzhen) offers a new line of branded LCD TV/monitor products, supplementing its design expertise in manufacturing DVD players. KXD revenues topped $132 million in 2003.
Scores of joint ventures (JVs), smaller in size and attuned to export markets, also provide contract services, but do not own a brand. A good example is Shenzhen Shinelong Electronics Industrial Company Ltd (Shenzhen), a JV of Hong Kong Wintech and Japan’s Ryusyo. SEIC generated $30 million in 2003 sales with 13% profit on production of power supply and frequency inverter controllers in 2003.
Finally, according to China-based researchers, there are dozens of quality EMS providers. These include larger Hong Kong and Taiwanese companies as well as emerging Chinese EMS providers such as Brio Technology (Beijing) with its $60 million in 2003 sales and 40% revenue growth in recent quarters. JVs in China comprise its primary customers. Kong Yue Electronics & Information Industry, Ltd (Jiangmen) is another quality-conscious Chinese EMS provider, developing manufacturing practices through several years of contracts with Japanese IT companies in the printer and monitor space.
There also are hundreds of smaller local Chinese EMS providers, ranging down to the job shop, centered in Guangdong Province.
Evidence suggests small- to medium-size Chinese EMS companies grew faster than China’s top 100 electronics companies and global tier-1 contract manufacturers in 2004. According to the chief of statistics in China’s Ministry of Information Industry (MII), China’s electronics output grew 42% the first three quarters of 2004. While there may be some double counting in the totals, informed sources suggest MII percentage estimates are representative and probably reliable.
Sammy Yi, Flextronics VP, led off the event with an overview of IT convergence, total cost of ownership, and Flextronics global operations. Dr. Yongjiang Shi of the Center for International Manufacturing at Cambridge University spoke on global manufacturing networks. The author presented criteria used by OEMs in selecting EMS providers.
For lists of mid-size and smaller Chinese EMS companies and related information, contact Clive Jones at cjones@economicdataresources.com or 303-440-7626.
Growth will continue for both the EMS and ODM industries, but the ODM business will enjoy a higher compound annual growth rate (CAGR), according to forecasts issued by IDC (Framingham, MA). These projections appear in a new IDC report entitled, “Worldwide Electronic Manufacturing Services 2004-2008 Forecast.”
IDC predicts that the EMS industry will grow at a CAGR of 12.1% from 2003 to 2008. In contrast, the firm projects a CAGR of 18.2% for the ODM industry (see table, p. 3). A six-point higher CAGR means that the ODM industry will pick up market share. Using IDC’s forecast data, one can calculate an ODM share of 24.9% for 2004 rising to 30.6% in 2008.
For the current year, IDC expects that EMS industry revenue will total $104.25 billion, an increase of 11.8% over 2003 sales. This predicted growth rate is below the 20% sales growth that MMI calculated for nine US-traded providers based on the midpoints of their Q4 guidance (Nov., p. 1). But IDC finds that the tier-1 players are affected by different dynamics than the tier-2 and -3 provider are, said Flint Pulskamp, who manages the EMS program at IDC.
This year, IDC has EMS revenue growing 2 percentage points faster than ODM sales. (See last month’s edition, p. 1-3, for some different results.) Then in 2005, the ODM industry will pick up steam and grow at almost twice the rate of the EMS business, according to IDC (table). From 2006 to 2008, ODM industry growth year to year will continue to exceed that on the EMS side, based on the IDC forecasts, but the difference between the two growth rates will narrow to 5.2% by 2008.
The firm predicts that in 2008, the EMS industry will reach $164.89 billion in sales, while the ODM business will attain $72.6 billion. Combining these projections yields a total outsourcing market size of $237.5 billion in 2008. This figure comes close to a 2008 projection of $244.0 billion in outsourcing sales presented in a report by Electronic Trend Publications (July, p. 2-3).
For more on the IDC report, email fpulskamp@idc.com.
RFID, or radio frequency identification for those who never read the trade press, has been trumpeted as a can’t-miss solution for the supply chain. After all, RFID tags give a company the ability to track subassemblies, finished products and product pallets as they move through the supply chain. RFID promises supply chain visibility that has not been available before to OEMs and their EMS providers. But RFID tags cost money, 40 cents at a minimum says Gartner Group, and so does implementing RFID, which includes managing the information generated by the tags. While there’s no guarantee that RFID will proliferate in the EMS industry, the technology has gained a foothold in at least one EMS provider – Celestica – and possibly others.
Next quarter, Celestica will begin applying passive RFID tags at both the finished product and pallet level for a printer shipped from the company’s facility in Reynosa, Mexico. “Given the nature of the product – high volume – knowing where it is at all times is important,” said Iain Kennedy, Celestica’s CIO. And that includes giving the customer a quick read of what is being delivered.
Although Celestica is not tagging this printer at the subassembly level, it can be done. In fact, subassemblies can be tagged such that their tags logically connect to the tag of the printer containing the subassemblies. And then a pallet’s tag can be logically linked to everything inside the pallet at a serial number level. So when a pallet is received, “one quick scan gives you a whole breakdown of everything that’s in that pallet – every serial number of the printer plus every serial number of the components within the printer, if it’s tracked that way,” said Eileen Brown, VP of IT Business Solutions at Celestica.
Having seen RFID coming more than a year in advance, Celestica invested in the technology before any customer required it. “We’ve made certain choices about our investments with our strategic suite of applications, SAP and others, that have positioned us very effectively to implement this with minimal cost,” said Kennedy. “And that’s great because it gives us an ability to offer this capability to essentially any of our customers globally that are looking for an extended supply chain solution.”
Celestica estimates that it would take eight to ten weeks to turn on an RFID solution for a customer. “The tag itself and the [hardware] infrastructure in support of the tag are a piece of cake,” said Kennedy. What takes time is finding out from the customer what information to put on the tag and what response should be taken to the collected data.
The provider will not extend RFID to other sites until there is a customer demand to do so. Kennedy said that today Celestica has no plans to roll out this capability to other sites in the immediate future.
For Celestica, the benefit from using RFID internally is not as great as when the technology is applied outside of a Celestica plant. “With our initiatives on lean manufacturing and six-sigma approaches to process improvement, there’s probably a smaller degree of benefit to us given how focused and efficient we are at this point,” said Kennedy.
Although tags add cost to a bill of material, Celestica sees tag costs decreasing fairly rapidly. Kennedy believes that as costs come down, there will be a lot more usage. Still, adoption by the EMS industry won’t depend on tag costs, he said, but rather on customers buying into the supply-chain benefits of RFID.
One such benefit is lights-out receiving. “Pallets can be received without people at the dock,” said Brown. RFID makes it possible to scan pallets automatically. Customers also can get confirmations and advance ship notifications much sooner with RFID. “The quality of the information and the closed-loop process has been improved,” she said.
Meanwhile, two retailers in particular, are forcing the issue for consumer electronics. Wal-Mart has set a January 2005 target for its top 100 suppliers to be placing RFID tags on product cases and pallets headed to three distribution centers in North Texas. The number of distribution centers will increase during 2005, and by January 2006, the next 200 suppliers will begin tagging cases and pallets. Best Buy expects major suppliers to begin applying tags to cases and pallets by January 2006.
Celestica has not identified its RFID customer being served from Reynosa. It is known, though, that Celestica obtained the Reynosa operation through its 2004 acquisition of MSL, which was building inkjet printers for Lexmark in Reynosa.
Elcoteq Network (Espoo, Finland) and Thomson have reached an agreement that will enable Elcoteq to acquire Thomson’s set-top box manufacturing operation in Juarez, Mexico. Elcoteq expects the deal to boost company sales by about $300 million during 2005 and by $800 million to $1 billion during the period 2005-2007. This is the largest deal of its kind ever won by Elcoteq.
The provider will pay about $33 million for this purchase, which is scheduled to close on Dec. 31, 2004. Thomson’s employees in Juarez, Mexico, currently at about 2000, will join Elcoteq. The company will lease manufacturing space of about 17,000 m2.
Under the long-term manufacturing agreement, Elcoteq will produce Thomson’s set-top boxes in Juarez and become a preferred manufacturing partner for the company’s set-top box products.
The acquisition accelerates Elcoteq’s development of services for the home communications business and further diversifies its customer and product base within the communications technology segment. Elcoteq is focused entirely on that segment.
With this deal, Elcoteq will double its manufacturing capacity in Mexico.
Elcoteq expects the deal to have a positive impact on the company’s financial results in 2005.
Other new programs…Dedicated Devices, Inc. (Nampa, ID), a devel-oper of digital home networking solutions, has selected Western Electronics (Meridian, ID) to manage NPI, subassembly and final assembly, test, and end order fulfillment of DDi’s initial products. DDi’s first product serves as the home’s central networking point for sharing music, video and photos as well as Internet access, files, printers and other equipment throughout the home….Q Comm International (Orem, UT) has entered into a manufacturing relationship with Shera Technology, an American-run EMS provider located in Kunshan, China. Shera, along with Q Comm’s current supplier, Universal Electronics, will manufacture Q Comm’s point-of sale (POS) terminals. This contract will allow Q Comm to purchase terminals at a lower cost. The company is committed to purchasing a total of 5600 terminals, including 3780 units on order with Shera at an average unit cost of $225. Q Comm is a provider of prepaid transaction processing and electronic POS distribution solutions....LaBarge (St. Louis, MO) has won a $1.4-million contract to produce cable assemblies for a Lockheed Martin air defense missile system.
With so much outsourcing going to low-cost geographies, most people would not consider Western Europe a prime location for a new EMS player. Nonetheless, a new company offering design and manufacturing services has arisen from the divestment of Thales assets in France, Germany and Scotland.
France-based Thales, an electronics and systems group heavy in defense and aerospace, has sold its Thales Electronic Solutions business to a group of investors. The acquired business will operate as a contract design and manufacturing (CDM) company under the new name TES, or Technology Electronic Solutions. Involved in large- and medium-scale PCB assembly and engineering services, the acquired business is expected to generate 80 million euros in sales this year. The business employs over 600 people, more than half of which are design engineers.
Among the acquired operations are a high-volume facility in Grand-Fougeray with 4100 m2 of production space and a medium-volume plant in Langon with 6600 m2 of capacity. These two facilities in Brittany are the main French sites divested by Thales. The investor group also bought five design centers in France, seven design centers in Germany, one design center in Scotland, an RF center in Châteaubourg (France), and an evaluation facility in Toulouse (France).
The German design centers offer competence in system, digital IC and FPGA, analog and mixed signal IC, RF/wireless, hardware and software design. The Scottish design activity acts as a communication systems design service. The French design centers were part of Thales Microelectronics.
Making up the buyer group are three investment funds holding equal shares in the acquiring company. One fund is managed by CDC Entreprises Innovation (France), a subsidiary of CDC Entreprises; the second is run by VPSA (France), formerly Viventures; and the third is overseen by Shah Management (US). The latter is headed by Ajay Shah, former senior VP of Solectron and head of its Technology Solutions business. Shah joined Solectron when it acquired SMART Modular Technologies, which Shah cofounded and served as chairman and CEO. This year Solectron sold SMART Modular to an investor group that includes Shah Management.
“We firmly believe that there is demand for a provider of a full range of services with core competence in both design and manufacturing,” stated Shah. “Our vision is to expand globally and to create a world-class CDM company. To achieve this goal, we will grow both organically and externally, and the company will certainly be present on three continents in less than a year from now.”
In addition, the investors aim to further develop the acquired engineering teams to provide higher value-added services and intend to build momentum within the sales force to win new customers.
The investors have appointed Michel Desbard as president of TES. Desbard, a venture partner at CDC Entreprises Innovation, has held senior positions within Thales Semiconductor Division and the Memory Division of Fairchild Semiconductor and was chairman and CEO of Matra Semiconductor.
This divestment came after Thales implemented a new organization, which clarified Thales’ key markets. Thales described the deal as an important step in rationalizing its business portfolio.
Meanwhile, Taiwan may well have spawned another EMS provider. Taiwan’s ICP Electronics is now describing itself as a provider of EMS for application-specific fields. The company recently spun off its own-brand industrial computer business. In keeping with its position in design and manufacturing services, ICP in August announced the hiring of a former Solectron executive, Dr. Jordan Jiang, as COO. At Solectron, Dr. Jiang had served as GM of Solectron Taiwan. According to Internet source DigiTimes, ICP will focus on customized industrial computers in low volumes.
DigiTimes also reported that ICP started operations in Shanghai, China, last month.
Back to TOC
Delphi Medical Systems, a medical contract manufacturer and subsidiary of automotive supplier Delphi (Troy, MI), has acquired Peak Industries (Longmont, CO), a contract manufacturer with medical and other customers. The purchase price was $44 million for a business with sales estimated at $72 million for 2004.
According to Delphi Medical, the acquisition contributes to Delphi’s diversification strategy by providing access to new customers in its target markets of dialysis, infusion, patient monitoring and respiratory devices.
Peak, which was renamed Delphi Medical Systems Colorado Operations, is expected to support new business that Delphi Medical recently won from Zoe Medical. Under the $50-million contract, Delphi will supply all of Zoe’s vital signs monitoring devices and accessories.
The addition of the Colorado Operations should complement Delphi Medical’s existing capabilities by enhancing its expertise in medical device manufacturing compliance. Dephi’s new operations are compliant with FDA and ISO-13485 standards. The operations offer experience in medical test equipment, surgical devices, and disposable testing and monitoring devices.
Delphi Medical said it would continue to supply all of the acquired customers, including the non-medical ones.
As a contract manufacturer of electromechanical and electronic products, the Colorado unit specializes in complex system manufacturing. It focuses on low- to medium-volume production of complete systems in the medical, biotechnology, commercial, telecom, data storage, industrial, and semiconductor segments. The acquired operation employs 210 people in a 45,000-ft2 facility in Longmont.
Delphi Medical Systems was established in August 2001 and is led by managing director Christophe Sevrain. Site manager for the Colorado unit is Dave Berge. Mark Hopkins, Peak’s president, will stay on as a consultant at the Colorado location.
Sweden’s AcandoFrontec, a management and IT consulting company, and Flextronics Design have agreed that AcandoFrontec will take over a Flextronics unit staffed by 27 IT consultants in Göteborg, Sweden.
The unit being sold offers competencies in system development, testing, quality control and project management. According to a statement from AcandoFrontec, since Flextronics Design in Sweden is focusing its units on the development of products in infrastructure and telecom, IT-related competencies are no longer a focus for that operation.
The all-cash transaction is expected to generate goodwill of up to SEK 2.2 million (about $326,000) for AcandoFrontec and positively impact earnings from January 2005.
Metretek Technologies (Denver, CO) has decided to pull the plug on the contract manufacturing business held by one of its subsidiaries and sell the assets of the business. Metretek has entered into a non-binding letter of intent to sell the business and related assets of Metretek Contract Manufacturing (MCM), a majority-owned subsidiary of Metretek Inc. (Melbourne, FL), to InstruTech, a Colorado-based company with businesses in contract manufacturing, instrumentation and flow control.
Under the terms of the letter of intent, InstruTech will acquire MCM’s manufacturing assets and business, but will not assume most of MCM’s liabilities. InstruTech will continue to service MCM customers from MCM’s facility. The proposed sale is subject to execution of a definitive agreement and other customary conditions. Closing is expected to take place no later than December 31, 2004.
“We are taking decisive action to eliminate future losses from our consolidated Florida operations by disposing of all contract manufacturing assets and restructuring remaining operations to attain profitability going forward,” stated W. Philip Marcum, president and CEO. “While we are disappointed that the manufacturing business did not work out after two years of intensive work, it is time to pass this manufacturing business on to a company such as InstruTech that has the expertise to make it successful.”
Metretek Technologies recorded a Q3 loss of $3.9 million associated with discontinuing the contract manufacturing business.
InstruTech will provide future manufacturing services to Metretek, Inc., whose offering includes telemetry and automatic meter reading products.
Back to TOC
For the record…Libra Industries of Mentor, OH, acquired Quadratek, an Ohio firm that added design capabilities to Libra’s offering. Dragan Dugandzic, founder and president of Quadratek, joined Libra as design services manager. The transaction took place in August.
Some financial news…Sanmina-SCI (San Jose, CA) will delay filing its SEC Form 10-K as a result of an accounting issue at one of the company’s plants. The provider estimates that any adjustments from accounting reviews at the plant, together with the net effect of any other audit adjustments, could potentially result in a charge of up to 3 cents a share to previously reported GAAP results for fiscal 2004. Sanmina-SCI had recorded a net loss of $5.3 million, or 1 cent a share, on sales of $12.2 billion. The company is seeking an extension of up to 15 days to file its Form 10-K and expects that it will be in a position to file before Dec. 31, 2004. Sanmina-SCI is the second provider in recent months to conduct an accounting review related to one of its plants. An accounting review at PEMSTAR caused it to delay filing Form 10-Q for the September quarter (Nov., p. 7)….Elcoteq will issue fixed-coupon subordinated notes in the amount of 50 million euros. The company will use the notes to extend the average maturity of its loan portfolio and to strengthen its financial structure….VOGT electronic (Obernzell, Germany), an MMI Top 50 EMS provider in 2003, reported that earnings before interest and taxes for its fiscal 2004 (ended Sept. 30) returned to positive territory for the first time in two years. EBIT amounted to 6.9 million euros compared with a loss of 23.7 million euros in the previous year. Reflecting the sale of the subsidiary VOGT electronic FUBA GmbH, fiscal 2004 sales totaled 308.7 million euros, down from 445.3 million euros a year earlier. VOGT is now focusing on two core areas: components and EMS and has set up an independent business unit for each area….Five Rivers Electronic Innovations (Greeneville, TN), an American-owned contract manufacturer of TVs in Chapter 11 reorganization, expects to receive as much as $23 million in duties collected on Chinese-made TVs imported into the US, according to an article in The Greeneville Sun. Last year, the company and two labor unions charged in a petition that color TVs imported from China were being dumped in the US market. US authorities found that dumping existed and imposed tariffs….For the quarter ended Oct. 31, SigmaTron International (Elk Grove Village, IL) posted sales of $27.9 million versus $26.5 million for the year-earlier period. The provider earned net income of $1.3 million for the October 2004 quarter compared with $1.8 million a year earlier.
New facilities in China…Alco Electronics (Hong Kong), an MMI Top 50 EMS provider that also engages in ODM activities, recently established a 14,000-ft2 R&D center in Shenzhen, China. Alco made this move to leverage expertise available in China, shorten lead time for new product development, and reduce operating costs. To cope with a further diversified product range and increased business projections, Alco plans to expand the capacity of the new R&D center in the near future….Ionics EMS, an EMS provider based in the Philippines, has taken the initial steps to establish its second manufacturing facility in Southern China. The new plant will be located in Tang Xia, Dongguan.
Facilities being closed…Sanmina-SCI plans to close its enclosure plant in Westbrook, ME. About 325 jobs will disappear, according to local news sources. Reportedly, the closure will occur in March....PEMSTAR (Rochester, MN) will discontinue operations at its facilities in Taunton, MA, and Hortolandia, Brazil, and is eliminating surplus space at its Chaska and Rochester, MN, locations. The company is removing a total of about 190,000 ft2 of manufacturing space, or about 20% of North America capacity, compared with an original projection of 100,000 to 150,000 ft2 (Oct., p. 6).
Free DFM services…OCM Manufacturing (Ottawa, Canada) has introduced a new program designed to help entrepreneurs and companies with new product concepts. Under the Quick Start program, OCM will provide complimentary design-for-manufacturing services, which of course assess a new product’s design for manufacturing efficiency. The program also picks up some of the cost of producing the first prototype units by offering complimentary components and x-ray inspection services. In return, OCM hopes to get the manufacturing business of those who use the program. The provider estimates that the program will save a company between $1500 and $3000 on a typical prototype run. The program is the brainchild of OCM president Michel Jullian. Founded in 1988, OCM Manufacturing is a 40-person company that specializes in contract manufacturing for small and medium-size customers. The company was formerly known as OCM Technology.
Some company news…Foxconn, the trade name of Hon Hai Precision Industry (Tu-Cheng, Taiwan), intends to manufacture automotive parts and components, according to DigiTimes. The Internet source reported Foxconn chairman Terry Gou as saying that this move is part of the company’s efforts to diversify and that Foxconn is looking at some Japanese auto parts companies for possible investment or acquisition….Jabil Circuit (St. Petersburg, FL) has deployed Webplan’s RapidResponse solution, which is designed to bridge the gap between planning and execution. According to Webplan (Ottawa, Canada), Jabil has said RapidResponse ensures that the provider can respond to any demand change with a cost impact back to the customer within 48 hours. In addition, Jabil Global Services, Jabil’s post-manufacturing services subsidiary, has implemented a global service parts planning and inventory optimization solution from Xelus (Rochester, NY).
People on the move…Flextronics has promoted Thomas Smach to CFO replacing Robert Dykes, who is leaving the company to become CFO and executive VP, Business Operations, at Juniper Networks (Sunnyvale, CA). Smach has served as senior VP of finance for Flextronics since he joined the company through its 2000 acquisition of the Dii Group, where he held the CFO position. Dykes will join Juniper on Jan. 1, 2005, but will continue to advice and assist Flextronics on a variety of projects as required in Q1 2005. At Flextronics, Dykes was CFO and president, Systems Group. At Juniper, he will oversee finance, legal, IT, human resources, investor relations and manufacturing operations. …PEMSTAR has promoted Roy Bauer from executive VP and COO to president and COO. He will be responsible for not only global operations, but also finance and sales and marketing. Al Berning, chairman and CEO, has relinquished the position of president. Prior to joining PEMSTAR, Bauer was CEO of Key Teknowledgy, a management consulting firm. His resume includes 20 years at IBM….Elcoteq has announced three appointments. John-James Farquharson will join the company as senior VP, human resources. He brings experience in business development, sales and HR from working in different international companies including BP Oil and BASF. The provider has also named Harri Ollila as senior VP, strategic partners, and Bruno Cathomen as VP, communications network equipment business area….Steve Korn has joined Kimball Electronics Group (Jasper, IN) as subsidiary VP, business development. Korn spent the last 17 years with Sanmina-SCI, most recently as VP and plant manager for its Fountain plant in Colorado. Kimball Electronics Group, an MMI Top 50 EMS provider, is a subsidiary of Kimball International….Western Electronics (Meridian, ID) has made Robert Subia its COO. Subia had served as president and chief sales and marketing officer of MCMS, an Idaho-based provider whose assets went into a Chapter 11 auction….Nortech Systems (Wayzata, MN) has hired Keith Pieper as VP of operations, a new position. Most recently, he was director of manufacturing for Landoll Corp., a manufacturer for the agriculture, transportation, material handling, OEM and government markets. Gregory Tweed, formerly executive VP and COO of Nortech, has accepted the position of VP and GM of the company’s wire products operations in Bemidji, MN, and Augusta, WI….Ann Wood, corporate VP of operations at IEC Electronics (Newark, NY), has resigned for personal reasons. Don Doody, who has joined the company from Plexus, has replaced her. At Plexus, Doody oversaw its lean manufacturing and six-sigma initiatives….Larry Panattoni, president of Servatron (Spokane, WA), will retire at the end of the month. The company named Tod Byers as the new president. He has five years of sales and business development experience at Servatron, which was spun off from Itron in 2000.
Over the last few years, the EMS industry has been largely defined by two strategies: restructuring and diversification. The downturn forced providers into both. Although the need for restructuring has faded, the need for diversification has not in spite of industry growth this year. MMI believes that diversification is the one strategy that nearly every provider can benefit from, small providers included.
As the EMS world knows, diversification solves two problems: too much reliance on a few customers and too much dependence on one or two industry segments. If this strategy is so obvious, why is there a continuing need for it? Part of the explanation has to do with the way EMS providers often evolved. They continued to seek business in the segments they knew.
Major customers also contributed to the problem. These clients would give their providers more business because they knew the providers would be more responsive. And the providers were reluctant to place limits on the amount of business they would accept from a large customer for fear of alienating that customer. At the same time, these providers knew they were taking on risk.
Sometimes, the risk proved all too real. The troubles that can result from the loss of a major customer have plagued the industry for years. For example, IEC Electronics lost its Motorola business, which accounted for 55% of IEC’s sales in fiscal 2003. Motorola decided to revert to in-house manufacturing for most of the products that were supplied by IEC. Although IEC’s fiscal 2004 sales were down by 42%, the company was able to improve account concentration through diversification efforts. Six accounts represented 82% of IEC’s fiscal 2004 sales, compared with two accounts responsible for 87% of sales in the prior year.
Another example is Suntron. Applied Materials, which accounted for 25% of Suntron’s Q3 sales, intends to move substantially all of its current Suntron business to other providers (Nov., p. 7).
But it’s one thing to commit to diversification; it’s quite another to achieve it. Pursuing this strategy means spending more money on sales efforts to drum up new business, often in new markets where a provider has little experience. So it can be a tougher sell as well. And the new programs resulting from these efforts won’t earn their keep for some months. More programs also mean more overhead to support them. Notwithstanding these difficulties, diversification is the only way to achieve balance in a customer portfolio.
Many large providers have been diversifying for some time and should continue to do so. Smaller providers, even though they are often niche oriented, should take a hard look at their customer lists. If the loss of a major customer would create too large of a revenue hole to backfill, then some form of diversification is in order. Remember customers can be unpredictable.