Cover story
Electromechanical Players Grab Piece of Outsourcing Pie
11 of the Largest Providers of Electromechanical Services for Electronic Products
Feature articles
Poll Confirms More Outsourcing Across the Board
News
Flextronics To Acquire Kyrel EMS
Solectron To Bolster After-Sales Services With Sequel Deal
RTS To Merge With Operations in Asia
When partaking of the fruits of outsourcing, EMS companies are not necessarilythe only ones invited to the table. Want proof? Just look at Nortel's recentdisclosure of the operations that it intends to divest initially (May, p.2). Out of ten activities slated for divestiture, four are electromechanicalassembly operations. Chances are one or more large providers of electromechanicalservices will be considered as possible buyers for these operations. Indeed,a whole group of large suppliers, increasingly global in reach, have emergedon the electromechanical side of the outsourcing space (see table below).Starting with an electronics enclosure as their core offering, these providershave branched out into value-added services that often include mechanicaland tooling design, supply chain management, and integration of enclosuresubassemblies.
For now at least, electromechanical providers maintain peaceful coexistencewith EMS companies in the OEM supply chain. Whether or not that holds truein the future remains to be seen. One thing is clear, though. Electromechanicalservices have become big business.
How big is the market for electronics enclosures and related services?An estimate of about $20 billion pops up in several places. But in new reportentitled Electronics Manufacturing Supply Chain, U.S. Bancorp Piper Jaffray(Minneapolis, MN) comes up with an addressable market of about $45 to $60billion when value-added services are factored in. It's difficult to saywhich numbers are more valid because study of this market, long overlooked,has only just begun.
In recent years, companies supplying enclosures for electronic productswere often described as "metal benders," if they were noticedat all. And usually they weren't because the enclosures business was a highlyfragmented industry mainly populated by small companies that built emptyframes and boxes for local customers. The system worked because shippingbulky enclosures over long distances made little sense.
Then a funny thing happened on the way to the OEM customer. OEMs beganto see the merits of outsourcing more than just an empty enclosure. Whynot have the enclosure supplier add such things as cables, a power supply,a backplane, and thermal management? And why have one supplier provide themetal parts, while another molds the injected plastics? Let's deal witha single supplier and make it responsible for providing additional itemswithin the enclosure, customers started to say. Not only that, the suppliercould help with the electromechanical aspects of product design.
At the same time, large OEMs were moving to or already practicing multiregionalmanufacturing around the globe. The one item, above all else, that neededto be made locally was the enclosure. Again, shipping enclosures full ofair was not a good idea. But how do you ensure that enclosures designedin one place are duplicated exactly with consistent quality in every manufacturinglocation worldwide? And who will handle the sourcing of the additional partsand subassemblies that can be outsourced along with the enclosure?
The need to supply more parts and services in more locations favors largerproviders over smaller ones. "Customers are asking us for globalizationand scale," said Mark Stevenson, chairman of electromechanical providerEM Solutions, in a recent EMS conference held by Thomas Weisel Partners.
Moreover, U.S. Bancorp Piper Jaffray believes that scale will be thesingle largest contributor to the future success of enclosure suppliers.The firm offers other reasons that bigger is better. OEMs with large programsseek providers that are big enough to finance them. Also, OEMs that wantto shrink their supply base look for scale in their partners. Finally, largeproviders have purchasing leverage for cost reductions. U.S. Bancorp PiperJaffray predicts that the top five to ten providers should grow 15% to 20%per year.
It's no secret that the quickest way to achieve scale is through mergersand acquisitions. A number of large electromechanical providers owe theirsize to M&A. According to U.S. Bancorp Piper Jaffray, over the lastthree years the top providers have acquired more than 30 companies. As aresult, consolidation is underway in the electromechanical sector.
The emergence of large electromechanical players with integrated servicesand multinational facilities is familiar to anyone that has followed theEMS industry. Just as the change from metal bender to electromechanicalprovider parallels the earlier evolution of board stuffer to EMS provider.The electromechanical business "is where contract manufacturing inelectronics was in the '90-'91 time frame," says Hardie Harris, VPof business development at electromechanical provider CMS Hartzell. He oughtto know. Harris served in senior management at both AVEX Electronics andGroup Technologies in the EMS industry.
MMI has compiled a list of 11 electromechanical providers with electronics-relatedsales of more than $200 million (see table). As far as MMI knows, this isthe first time such a list has been published. Because electromechanicaloutsourcing is poorly documented, the list is not presented as complete.MMI may not have covered every electromechanical provider that belongs onthe list. Many players are either private or operate as units within largercompanies. Any companies belonging on the list should contact MMI.
Some of the largest players may be familiar, and others may not. Theyare listed roughly in order of 1999 or annualized sales of electronics enclosuresand value-added services. The list should not be used for ranking becausedata is insufficient. In some cases, the order represents MMI's best guess.Here is a brief rundown on each player.
Applied Power. This public company has made a huge investmentin its enclosures business. In the last two years, Applied Power has spent$1.05 billion on 11 acquisitions for that business. The company is now focusingon growing at least 20% a year. By far, Applied Power has more plant locationsthan any other electromechanical provider (table). A reorganization recentlywent into effect, splitting the company into two segments: APW Industrialand APW Electronics. The latter will serve as a single point of contactto supply electronics OEMs with enclosures, power supplies, thermal systems,backplanes and cabling either as products or integrated as a system.
Hon Hai Precision. Better known under its Foxconn name, this Taiwan-basedcompany believes it is the largest enclosure provider to the PC industry.Hon Hai plans to ship about 25 million enclosures to that industry thisyear. Remarkably, the company has been in the PC chassis business for justthree years. Hon Hai also sells connectors, which are included in reportedsales. It does not break out enclosure-related sales. The company was ranked33rd on Business Week's Information Technology 100, out this month.
Rittal. This Germany company claims to be the world's largestenclosure manufacturer. But privately held Rittal does not disclose itsrevenue, much less sales of electronic enclosures. It is unclear whetherRittal's sales in the electronics market would be on par with Applied Poweror Hon Hai. U.S. Bancorp Piper Jaffray estimates that electronic enclosuresmake up less 50% of sales. Unlike the typical large electromechanical house,Rittal does not engage in build-to-print work required for custom enclosures,although value-added assembly is done for certain customers.
Fullarton Computer Industries. Part of the UK-based Laird Group,Fullarton serves as one model for what can happen when electromechanicalservices converge with contract manufacturing. Fullarton started out inelectromechanical assembly and gained an EMS operation through the 1997acquisition of Mimtec. This unit contract manufactures PCs in Scotland,where its main plant produces over one million PCs a year. Before the acquisition,Fullarton had supplied chassis to Mimtec, which used them to build PCs forIBM. Three electromechanical sites turn out a weekly total of about 90,000units up to and including power packs and disk drives. In Scotland, Fullartonnow runs two plants dedicated to full PC build, with the Mimtec unit employingover 1000 people.
EM Solutions resulted from the 1998 merger of Electronic ManufacturingSystems based in Longmont, CO, and RSP Manufacturing of Fremont, CA (Dec.'98,p. 3). Electromechanical assembly focuses on complex electronic productswith big price tags. Typical products supported include complex serversand large data storage systems. EM Solutions won't supply metal only. Servicesinclude enclosure design, prototyping, metal fabrication, cable assembly,supply chain management, and parts integration. As a result of the merger,McCown De Leeuw & Co. became the majority shareholder of EM Solutions,which remains private. The company has its sights set on reaching $1 billionin the next few years.
Chatham Technologies. There is perhaps no better example of aroll-up strategy at work in electromechanical services. In August 1997,Chatham was formed by the simultaneous acquisition of seven companies. Asa result, Chatham started out with about $150 million in annualized revenue.The privately held company is the brainchild of Kidd & Company. Chathamhas also taken part in OEM divestitures, with the acquisition of electromechanicaloperations from Ericsson. Like its competitors, Chatham is touting its abilityto provide an integrated electronic package.
Pentair. A diversified public company, Pentair operates in threemarkets: professional tools and equipment, water and fluid technologies,and electrical and electronic enclosures. The Electrical and ElectronicEnclosures Group consists of Hoffman Enclosures, Schroff, and Pentair Enclosures.Billed as number one in electronic enclosures for Europe, Germany-basedSchroff also supplies North America and Asia, selling direct to industrialelectronics manufacturers. Pentair Enclosures provides custom enclosuresand integrated solutions to telecom, datacom and server OEMs. Hoffman sellsto electrical enclosure markets through distribution. In 1998, sales ofthe Electrical and Electronic Enclosures Group totaled $564.0 million. Pentairdescribes itself as the first consolidator in the global enclosures business.Since the fall of 1998, the company has made two enclosure acquisitions.
Trend Technologies. This company got its start as Trend Plastics,an injection molding operation that was purchased by an investor group inMarch 1997. Three acquisitions followed to add capabilities such as sheetmetal fabrication and to put Trend Technologies into Europe through a Dublinsite. Trend molds plastic parts; fabricates sheet metal items; assemblesplastic and metal pieces; mounts other parts such as fans, cabling and powersupplies; and performs electrical testing. Trend promotes its ability tomake its own tooling. Design and engineering capabilities include settingup new product introduction teams to perform design for assembly analysisand the like.
Shinei Group, Singapore Shinei Sangyo Pte Ltd. One electromechanicalprovider called Shinei a formidable competitor. Shinei operates two facilitiesin Singapore, one in China and one in the U.S. Like Hon Hai Precision, Shineimaintains a small customer base, with the computer industry as a major marketfor ser-vices. The Singapore-based company also offers PCB assembly throughanother company, Hokuriku Pte.
CMS Hartzell. This electromechanical house originated from a platformcompany called Continental Metal Specialty in the metal stamping and assemblybusiness. After acquiring a sheet metal house in the Silicon Valley arealast year, CMS merged with Hartzell Manufacturing, an injection moldingand die casting operation, at the end of the year. Then in 1999, CMS Hartzellacquired a Texas company to add engineering, quick-turn prototyping andtooling, and short-run injection molding. CMS Hartzell is committed to providingcustomers with an integrated solution that unites its capabilities in electromechanicaloutsourcing.
Mack Molding. This turnkey enclosure supplier also owns an MMITop 50 contract manufacturer -- Mack Technologies. Although Mack Moldingsupplies some of the enclosures that Mack Technologies uses, the two companiesmaintain separate operations. According to Mack Molding, a full-serviceenclosure supplier to major computer and business equipment OEMs must offersupplier management, manufacturing engineers, program managers, part designin addition to design reviews, and global logistics.
Despite the rise of large players specializing in electromechanical work,electromechanical capabilities also exist among some EMS providers. Theseproviders may form a small group, but they do create a precedent for theintegration of electromechanical and EMS capabilities.
For a good example of this integration, take C-MAC Industries. AmongEMS providers, C-MAC is one of the most vertically integrated. It can manufactureeverything from the bare board and backplane to a finished and tested product.That includes manufacturing sheet metal card cages, racks, and indoor andoutdoor cabinets as well as providing thermal management.
C-MAC is noteworthy for another reason. It recently boosted internalcapabilities on the electromechanical side with the January acquisitionof R & M Metaltek, a sheet metal house with 165,000 ft2 in Montreal,Canada, and 55,000 ft2 in Seymour, CT. C-MAC can build an enclosure in houseor farm it out depending on what is best for a given program. C-MAC's sales,employees and plants related to enclosures stack up against the large electromechanicalplayers (table).
But C-MAC is not the only EMS provider to add capacity recently on theelectromechanical side. It may not be common knowledge, but SCI Systemsgained some mechanical capacity when it acquired manufacturing assets fromIntergraph (Oct., p. 3-4). That capacity, primarily sheet metal cabinetsand housings, is being moved to the SCI campus, where a building is beingadded to house the new capacity.
What's more, some people may not realize that SCI's plant no. 4, a six-buildingcomplex in Laceys Spring, AL, is dedicated to mechanical work. Some of thiswork is purely mechanical in nature, and some consists of building chassis,racks and housings for the electronic products that SCI manufactures. Internallybuilt enclosures are not a majority of what SCI uses, but are "a significantamount of it," says Olin King, chairman and outgoing CEO of SCI. Heputs the value of these enclosures at "tens of millions of dollarsa year."
SCI's electromechanical capability dates back to its very beginning."We had a sizable machine shop in month two of our history," Kingpoints out. That capability has been retained from SCI's days as an aerospace-militaryhouse and enhanced.
He stresses that today SCI's elec-tromechanical capability is adequate,and SCI does not need to expand it. Still, the company is keeping its optionsopen. "We have looked and continue to look at how we might appropriatelyexpand that," says King.
One can find more examples of such internal capability in the EMS business.K*TEC Electronics, another proponent of vertical integration (Sept.'98,p. 1), performs injection molding and metal fabrication within its EMS facilityin Texas. And Flextronics International controls the supply of plasticsto its industrial parks through equity in its plastics subsidiaries. Evena small EMS operation like I-PAC Manufacturing, a subsidiary of Photomatrix,can participate on the electromechanical side (Feb., p. 5).
The answer to this question determines who gets the lion's share of thevalue add. Will it be the EMS provider who can build and test the electronicsor the electromechanical house who can supply the enclosure and electromechanicalaccessories? It is likely that instead of a single answer, multiple solutionswill appear. Here some potential scenarios:
(1) The EMS provider becomes the tier-one supplier and subcontracts enclosuresto the electromechanical house, which acts as the tier-two supplier. AnOEM may set the parameters for an enclosure AVL, but the EMS provider willhave purchasing authority.
(2) The EMS provider vertically integrates electromechanical capabilitiesas above and takes over the metal and plastics portion of the supply chain.
(3) The OEM decides its enclosure should not be shipped around. So itstays at the electromechanical house for final assembly and test. The EMSprovider supplies board assemblies. As a result, the electromechanical companybecomes the tier one supplier and the EMS provider is relegated to tiertwo.
(4) The electromechanical provider vertically integrates board assemblyand test as well as final assembly and test. The supply chain then belongsto the electromechanical house.
(5) The OEM decides that for whatever reason final assembly and testshould remain on its premises. So the EMS provider and electromechanicalhouse continue as separate suppliers to the OEM.
Most if not all of these schemes probably have a place in the future.Scenarios (1) and (5) largely represent the status quo with (5) diminishingover time. For the most part, (1) will likely be the scheme that (2), (3)and (4) must beat.
Scheme (2) requires EMS providers to invest in capabilities outside oftheir traditional core competencies. And this need to invest may continueas new customers bring added requirements for metal or plastics. But (2)has a start. Scenario (3) can work only if electromechanical houses obtainsystem configuration and test capabilities. Number (4) puts an even greaterburden on the electromechanical house, which must either buy SMT lines oracquire an EMS company. Still, outsourcing large, complex products may favor(2), (3) or (4).
Electromechanical providers such as CMS Hartzell will pass on verticalintegration and remain content to supply turnkey enclosures to whomeversits atop the supply chain. But those who do have designs on the supplychain must be ready to beat the EMS providers at their own game. So far,enclosure companies are behind the curve, reports one analyst. "I thinkoperating efficiencies and operating models of enclosure companies are notas refined as EMS companies are," says Roger Norberg of U.S. BancorpPiper Jaffray. He recently found that four enclosure companies generatedsales per ft2 that ranged from $191 to $317, while the top ten EMS companiesaveraged $888 per ft2. Norberg also concluded that enclosure companies shouldboost return on assets to make up for declining margins, as EMS companieshave done.
If there were any doubt about vendor-managed inventory (VMI) as a hottrend in contract manufacturing, consider this. One logistics provider,Virtual Integration Associates (VIA), is shipping product to 11 differentcontract manufacturers under VMI programs. Of those CMs, eight are in thepilot stage. So not only is VMI emerging as a trend (see April, p. 1), it'sabout to blossom.
A recent talk with Gerry Gentile, president of VIA (Markham, Ontario,Canada), reveals a number of issues facing those who would undertake a VMIprogram:
# How does a logistics company ensure that it will have warehouse spaceavailable in every VMI location required by its EMS customers?
# Is VMI limited to the largest EMS companies with the greatest purchasingpower?
# Who pays for this VMI service and how much does it cost?
# Are all VMI programs the same?
# Who is driving this trend: component suppliers or their EMS customers?
# What happens when a component supplier must provide VMI delivery totwo or more CMs in the same locale?
For an EMS company, VMI combines two irresistible qualities. One is fastdelivery of buffer inventory from a local, third-party warehouse -- a mustfor build-to-order programs. The other attraction is that buffer inventorystays off the CM's books until consumed, improving the financial metricsthat depend on inventory. In addition, VMI offers other benefits such asfreeing up EMS facility space that had been used for warehousing and eliminatingthe confusion of numerous truck deliveries with a single truck from theVMI warehouse.
Now that a growing number of CMs, particularly in the upper ranks, areasking for VMI, logistics providers face a potential dilemma. How do theyprovide warehousing in all the locations that CMs might ask for? One solutionis to have or be willing to set up warehouses everywhere they are needed.Hence, VMI can favor global logistics providers that operate ware-housesin many locations (April, p. 1).
But VIA, for one, has taken a different approach to meeting the needfor a large number of VMI locations. In major markets, VIA still sees theneed to have its own buildings. Rather than paying for brick and mortarin every location, though, VIA looks for partners to provide warehouse spacein markets that VIA might otherwise pass up. As a result, VIA has createda network of about 10 logistics companies, sharing a common IT system, programmanagement and ISO process. These partners allocate a certain amount ofspace to VIA, which puts its own people and warehouse management systemon site.
"Whereas before [the network] we would look at a contract manufacturerand say to ourselves if these guys don't have about $50 million in materialthroughput, it's not going to be a viable solution for us. Now we can sayeven if they have only $5 million in material throughput, because I canjust book only the amount of space that I need from a partner locally withouthaving to put up a whole site, I can do it," says VIA's Gerry Gentile.For the smaller CM buying components through distribution, VIA treats thedistributor as another supplier that can use a VIA hub for product delivery.So VMI need not be limited to the largest CMs.
VIA lists 40 sites in the U.S., 20 in Canada, and two in Mexico. TheMexican locations consist of a warehouse in Guadalajara and a start-up operationin Monterrey. In addition, VIA has entered an agreement with a global logisticscompany to provide facilities in selected locations in Europe and Asia.
Today, about $4 billion in material flows through VMI programs withinVIA. About 60% of VIA's business typically comes from CMs, and Gentile expectsthat percentage will continue to grow. "It will probably be closerto 80 to 90 percent by the end of next year," he predicts.
Although CMs are the customers for materials delivered under VMI, theyusually do not pay VIA for this service. Gentile reports that "in atleast 90% of the cases" suppliers -- part manufacturers or distributors-- pay. "So the ECM gets a great deal," he remarks.
The cost of VIA's services is activity-based and depends on such thingsas the amount of space needed, the number of ins and outs, and value-addedservices to be performed. Still, Gentile says, "Ten years of experiencehas taught us that most opportunities fall under less than half a percentof the value of goods per month, even though we don't quote that way."
Given VIA's exposure to the VMI programs of 11 CMs, the company has noticeddifferences among their programs. "Some [CMs] basically are isolatingjust the critical parts that they use every day," reports Gentile."Some are sweeping right across the board....They're trying to capture100% of their components and putting them on the program." He alsosees differences in the level of automation ranging from EDI at every stepof the process to the use of phone calls, fax or email for a major portion.
What's more, CMs do not follow a universal strategy for withdrawing material."Some are pulling entire bills of material under one number. And someare pulling individual part types," Gentile notes. There are also differencesin the services that VIA provides to its EMS customers, some of whom wantVIA to prepare their parts for manufacturing. "They get a returnabletote, and in the tote they have the complete kit, detrashed, prepped, programmed,tape and reeled, and ready to go to the line. And some are still doing thosetypes of activities inside their own building," he observes.
Moreover, not all CMs want to be immersed in VMI details. "In somecases, the contract manufacturer wants nothing to do with the actual nutsand bolts of the VMI [program]," says Gentile. The CM tells its suppliersto provide VMI deliveries, and the suppliers look for a logistics provider."So we set ourselves up to work with either side of the equation,"he points out. If a supplier won't furnish VMI without VIA, then the companyhas achieved its objective.
Working with a single logistics provider, whoever it may be, makes sensefrom a supplier's standpoint. Supporting multiple CMs with multiple VMIprograms tends to hinder economies of scale (April, p. 2). Also, Gentilepoints out that a supplier must do EDI mapping for each logistics providerit uses. And this problem can come to a head if a supplier is asked to supporttwo VMI warehouses in the same city.
Take Guadalajara. Rather than splitting up parts among separate VMI programs,some suppliers are serving multiple CMs in Guadalajara out of a single VIAhub. Naturally, one can expect initial resistance from EMS competitors whoseinventory is being colocated. But VIA takes precautions to ensure that afirewall exists between one CM's inventory and another's.
In essence, VMI creates a potential tug of war between CMs and theirparts suppliers. CMs typically want the freedom to fashion their own VMIprograms with logistics providers of their choice. Suppliers, on the otherhand, are not anxious to tie up inventory in numerous VMI locations operatedby a variety of logistics companies. Which side has the strongest pull?Ask the major OEMs. Ultimately, it is they who must be satisfied with thesupply chain that feeds their products.
To show that VMI is not limited to top-tier providers, consider MCMS.The company calls its VMI concept the Supplier Superstore.
Over a year ago, MCMS recognized the need to build a more responsiveand efficient supply chain management program by using a demand-pull modelfor material flow. "Our goal was to develop a plan that would takeour supply chain initiative to the next level," says Robert Subia,CEO. To achieve this end, MCMS created the Supplier Superstore, a logisticsand material management program that synchronizes inbound material flowwith manufacturing demand. MCMS rolled out the first phase of the Superstoreto its tier-one distributors in January.
In the Supplier Superstore program, a warehouse managed by a third-partystores supplier-consigned materials about a half mile from MCMS' flagshipfacility in Nampa, ID. That third party is Air Van Logistics, a local agentfor North American Van Lines. Materials are delivered to the facility ondemand. MCMS assumes ownership of the materials upon receipt at the plant.Suppliers manage inventory levels in the Superstore based on forecasts andactual demand data. MCMS and suppliers have access to in-transit data, statusof on-hand materials, and historical pull data through an online logisticsand inventory management system. MCMS reports that the program allows itto pull materials in exact quantities just in time for manufacturing, whileproviding suppliers greater visibility to demand and a buffer to accommodatechanges.
MCMS has advanced the Superstore program into a second phase to includestrategic OEM suppliers, which provide materials directly to MCMS ratherthan through distribution. Ultimately, the company's goal is to receiveabout 80% of its raw materials from the Superstore.
According to responses from 87 OEMs, 84% of them intend to increase theiruse EMS providers over the next 12 months. This initial result comes fromthe 2nd Annual Electronics Manufacturing and Supply Chain Survey recentlyconducted by Bear, Stearns & Co. (New York, NY).
The firm polled 120 leading OEMs in five segments: computers and peripherals,consumer and related, data networking, telecom hardware and other electronics.Respondents so far number 87 companies, representing some $329 billion incost of goods sold, or over half of the estimated $650 billion in globalCOGS. Of these participants, 60% plan to modestly increase their use ofEMS providers over the next 12 months, while 24% foresee a substantial increaseover that period.
This total of 84% expecting an increase is up from 74% in last year'spoll, which netted 54 responses out of 80 surveys (July '98, p. 4).
Bear Stearns believes that telecom hardware presents the largest growthopportunity for EMS providers over the next 12 months. The survey foundthat, when weighted by COGS, only 20% of manufactured product from telecomrespondents is outsourced (see table). Although 96% of them already usecontract manufacturers, the same percentage expect to increase their useof EMS over the next 12 months.
Despite views to the contrary, Bear Stearns holds that still more outsourcingwill come in computers, especially in the notebook and high-end computermarkets. A reported 79% of participants in the computer, storage and peripheralssector said they would increase use of contract manufacturers, with 89%already outsourcing. Bear Stearns believes that since most major computercompanies have announced increased use of CMs, there is upside to the sector'scurrent level of outsourcing. That level is 28% of manufactured product,based on COGS-weighted responses (table).
The survey shows EMS penetration is greatest in the data networking market,where responding companies outsource 57% of manufactured product. What'smore, all of the networking companies surveyed use CMs, and 73% expect toincrease that use. Still, Bear Stearns sees increased outsourcing opportunitieswith emerging networking companies such as NetCore Systems and Avici Systems.
Bear Stearns describes consumer and related products as the other sleepinggiant (besides telecom) for outsourcing. An eye-opening 100% of respondingOEMs in this consumer category expect to increase their use of EMS. Allthem report some outsourcing. This category includes set-top box producers,cell-phone makers, and diversified consumer giants. Weighted by COGS, only28% of product from these companies is outsourced. Bear Stearns cautionsthat because it received only ten responses in this category, results maynot reflect the consumer electronics industry. Still, Bear Stearns remainsbullish on outsourcing of consumer electronics based on competitive trends,especially in Japan.
Finally, the Bear Stearns survey covers a category called other electronics,including companies in semi-conductor equipment, office equipment, defenseand avionics, medical, automotive and point-of-sale hardware. This categoryis underpenetrated with 17% of product outsourced, and 71% of respondentsin the category intend to use CMs more. Some 79% already do some outsourcing.
Overall, 53% of OEMs in the survey said the primary reason for outsourcingwas to reduce costs. Capacity constraints and time to market were citedby 28% and 20% of OEMs, respectively. Telecom companies were most concernedwith reducing costs, which accounted for 67% of their responses, comparedwith 25% for capacity constraints and 8% for time to market. Computer-relatedOEMs cited lower costs 51% of the time, time to market in 26% of cases,and capacity in 23%. Responses from networking companies were divided equallyamong the three reasons.
On June 14, Flextronics International (San Jose, CA) said it enteredan agreement to acquire the Finnish contract manufacturer Kyrel EMS Oyj.The deal will expand Flextronics' business with Kyrel's two largest customers-- Nokia and Alcatel.
Flextronics expects to issue about 1.9 million shares to make this deal,which would be worth about $105 million based on the June 14 price of Flextronicsstock. Pending government approval in Finland, the deal is expected to closein Q3. It will be accounted for as a pooling of interests and will resultin a one-time charge of $3.0 to $3.5 million expected in Q3.
An EMS provider since 1983, Kyrel EMS operates two plants in Finlandand one in Lunéville, France. Headquarters are in Kyröskoski,Finland. For the end of 1998, Kyrel reported about 225,000 ft2 of plantspace and about 19 SMT lines. The company just added 6000 m2 (65,000 ft2)to its main plant in Kyröskoski. Kyrel employs about 900, and its runrate is $230 million. Based on Finnish GAAP, the company was profitablein 1998. Kyrel is projecting a revenue increase of about 30% for 1999.
Nokia and Alcatel represent the majority of Kyrel's sales. Kyrel attractedFlextronics because of Kyrel's relationship with these two telecom companiesand its management strength. Kyrel manufacturers cell phone accessories,cell phone cards and office phones for the two customers. For example, Kyrel'sFrench operation in Lunéville supports an Alcatel factory near Strasbourg,France. What's more, Kyrel is expecting to begin a major project for Alcatelin August.
"The addition of Kyrel, with its experience and key customers inthe telecom industry, will strengthen Flextronics' position as a leadingEMS provider to telecom customers. This merger, in conjunction with therecent acquisitions of ABB and Ericsson operations in Sweden, will allowFlextronics to offer present and future customers better service due toimproved experience and increased economies of scale," states RonnyNilsson, president of Flextronics, Western Europe.
Flextronics did not need Kyrel to establish a substantial presence inScandinavia. Without Kyrel, the company's six sites in the region totalsome 1.2 million ft2. Indeed, Flextronics may well be the largest EMS providerin Scandinavia.
Merging with Flextronics "allows us to continue to focus on deliveringsuperior service to our local customers, while adding the global capabilitiesand advantages of a world-class EMS provider," comments Simo Parhankangas,managing director of Kyrel EMS.
Solectron (Milpitas, CA) intends to acquire Sequel, Inc., a privatelyheld company specializing in repair service and support for desktop andnotebook computers, LCDs, system boards and disk drives. The pending dealwill expand Solectron's after-sales support offering, an area that the companyhas recently emphasized with the formation of a global Support Servicesdivision. Completion of the deal is expected by the end of this month. Termswere not disclosed.
Solectron will own Sequel's operations in San Jose, CA; Memphis, TN;and Reading, UK. Sequel's main plant in San Jose offers 375,000 ft2 with50,000 ft2 of clean rooms. The Memphis hub facility can provide 24-hourrapid response for products such as mobile computers and handheld computingdevices. Solectron will also assume Sequel's ownership in joint venturesin Japan and Taiwan. Sequel lists a total of 500,000 ft2 in manufacturingfacilities.
In addition, Solectron plans to offer jobs to about 550 Sequel employees.
With this acquisition, Solectron intends to expand support services byoffering end-user support through call centers. When end users call thesecenters, repair technicians will provide technical support on Solectron-builtproducts.
All Sequel operations will be integrated into Solectron's Support Servicesdivision within six to 12 months after closing. The combined organizationwill operate under the Solectron Support Services name and will report toWilliam Mitchell, president of the division. He joined Solectron from Sequel,where he served as CEO. He is credited with converting Sequel from a diskdrive manufacturer to a depot service.
While all of Solectron's sites can provide support services, dedicatedfactory service centers exist in California, Texas, Brazil and France. Aspart of Solectron's growth plans for the Support Services division, thecompany intends to rapidly expand its network of factory service centersand quick-turn operations in Europe, Asia and Latin America within the nextthree years. Solectron believes in supporting products globally where theyare sold, as opposed to where they are manufactured.
Reliance Technical Services (RTS), a CM in Sunnyvale, CA, has agreedto merge with the contract manufacturing operations of Goldtron Ltd., apublic Singapore company, and Tongkah Holdings BHD, which is publicly tradedin Malaysia. The combined company will have three EMS locations in Asia.Based on a stock for stock exchange, the merger is expected to close duringthe summer.
The resulting company, called Reliance Technical Services International,Inc. (RTSII), is expected to have combined sales in the $120- to $130-millionrange. RTSII will operate 180,000 ft2 in Sunnyvale; 120,000 ft2 in Penang,Malaysia; 100,000 ft2 in Shenzhen, China; and 117,000 ft2 in Shanghai. Together,these facilities contain 26 KME SMT lines and employ about 2590 people.
To be headquartered in Sunnyvale, RTSII will offer a full range of manufacturing,logistics and materials management services.
RTSII says it is making this deal for three reasons: to offer offshorevolume manufacturing, to achieve greater size for economies of scale, andto establish a global presence.
"We have been looking for a combination that puts together the necessarystrategic elements which allow the new company to compete effectively inthe worldwide market for contract manufacturing services. The ECM businesscontinues to grow rapidly, and this merger gives RTSII the base to growwith the market," states Patrick Ng, chairman and CEO of RTSII.
James Smith, CFO of RTSII, says, "Our business plan is to grow ournew and exciting company along with our customers through access to publicfunding down the line."
The planned merger follows a 1998 strategic alliance among RTS and theoffshore operations. Goldtron Ltd. owns one operation and holds 49% of theother, which is majority-owned by Tongkah Holdings with a 51% stake.
RTS was founded by Bette and Patrick Ng in 1981.
Chase Corp. (Bridgewater, MA), which already owns one contract manufacturerin New England, has bought a second one in the region. Last month, the companypaid a total of $8 million in cash and notes for RWA, Inc., a CM in Melrose,MA.
This deal is Chase's second EMS investment this year. In January, thecompany acquired the remaining interest in DC Scientific, a CM in West Bridgewater,MA. The CM's name was recently changed to Sunburst Electronic ManufacturingSolutions to better reflect its range of EMS services.
RWA's sales are currently about $10 million. Its facility contains about30,000 ft2 with two SMT lines and some 80 employees. Like Sunburst, RWAfocuses on the high-mix market and on the same industries -- communications,medical and industrial. RWA operates principally in New England and theNortheast.
"Our goal is to focus on the New England area and particularly servethe high-mix, low-to-moderate volume segment of the EMS market with a particularfocus on communications, medical and industrial," says Andrew Chase,GM of Sunburst.
"Electronic manufacturing services is an industry that continuesto demonstrate impressive market growth throughout North America and inparticular the Northeast region," comments Peter Chase, president andCEO of Chase Corp. The company cites Technology Forecasters' estimate of$137 billion for the North American EMS market by 2002. He adds, "Theacquisition of Sunburst EMS provided us the opportunity to understand firsthand a market that we had identified as having strategic potential in 1996.Now, with the addition of RWA, we have established an EMS business unitthat reflects our ongoing commitment to this growing industry segment."
Andrew Chase says his vision is that the EMS business unit will be ChaseCorp.'s "driver of growth for the future."
Richard Aho, who founded RWA in 1984, will stay on as president. BothRWA and Sunburst will operate separately as wholly owned subsidiaries ofChase.
"RWA has grown with the industry, and the added management strengthand resources of Chase will enable us to expand more quickly. We are alsolooking forward to capitalizing on the many synergies that exist with SunburstEMS," states Aho.
Chase Corp. is diversified company whose products include tapes and PCBconformal coatings. The company placed 36th on Business Week's 1999 listof Hot Growth Companies.
SR Telecom (St. Laurent, Quebec, Canada) intends to sell its plant inKanata, Canada, to C-MAC Industries, a Canadian manufacturer in EMS andother businesses. In addition, the two companies have agreed to a five-yearsupply contract, where-by SRT will outsource the manufacture of a numberof its products to C-MAC. SR Telecom makes digital wireless access products.
"This partnership with SR Telecom will enhance C-MAC capabilitiesin RF technology and strategically position C-MAC to take advantage of thefast growing wireless market," states Dennis Wood, president and CEOof C-MAC.
Montreal-based C-MAC is the latest EMS provider to add RF capabilityby acquisition. Other providers that have made deals for wireless assetsinclude Solectron with two RF deals (May, p. 7; April, p. 4) and Sanmina(Mar., p. 7).
Under the agreement with SRT, C-MAC will retain most of the SRT peopleemployed in the Kanata facility of 9,000 m2 (97,000 ft2). SRT will alsolease space in the plant for its R&D labs in Kanata.
SRT says the deal will allow it to focus more on engineering and mar-keting.The company expects significant benefits to flow from the economies of scaleachieved by C-MAC.
C-MAC says the SRT acquisition will also grow its business in the Ottawaregion, known as Silicon Valley North. The provider plans to supply otherhigh-tech companies in the area.
The Canadian company has a record of integrating formerly captive facilitiesto extend its control over the supply chain. (See first article.)
Deals done...Distributor BellMicroproducts (San Jose, CA) has sold its Quadrus contract manufacturingdivision to Pemstar (Rochester, MN), a privately owned contract manufacturerof electronic, precision electromechanical and microcomponent assemblies.Pemstar paid about $34 million in cash, subject to adjustments, for Quadrus,which brought in 1998 sales of $86 million. The deal was reported earlier(May, p. 7)....Under a ten-year supply agreement, EFTC (Denver, CO) hasobtained additional card assembly contracts from Honeywell Commercial AviationSystems. These agreements cover Honeywell's former Air Transport SystemsOperations and its interest in Honeymex, an Tijuana, Mexico, manufacturingoperation. As a result, about 300 additional employees will transfer toEFTC. The first transaction occurred earlier this year (April, p. 5).
Flash expands in Silicon Valley...Flash Electronics, a CM in Fremont, CA, has leased its second Fremont sitein less than 18 months. The new 44,000-ft2 facility is located less thana mile from Flash's 52,000-ft2 headquarters site, which went live in January1998. Box build activity will be consolidated in the new facility, due tocome on line in July. "This expansion nearly doubles our manufacturingcapacity and should enable Flash to continue its 80% annual growth rate,sustained since our inception in July '94. It is also gratifying that thisgrowth has been funded entirely from operating revenues and internal resources,"comments Chin Fan, president of Flash. The company reports it is on trackto enter the year 2000 with a run rate exceeding $100 million.
Both Taiwan-based Universal Scientific Industrial Co. (USI) and Singapore'sNatSteel Electronics Ltd. (NEL) now have a manufacturing presence in eachof the three major markets of the world.
With production sites in Asia and North America, these two large EMSproviders had lacked a European facility. USI (Nan-Tou, Taiwan) has attaineda global footprint with last month's launch of a 32,000-ft2 facility inIrvine, Scotland. NEL has filled a European need by opening a plant in Hungary.
USI's new Scottish facility sits on a 1.5 million-ft2 campus site ownedby the company. It expects the new facility to employ 65 people by the endof the month, 130 by year end, 300 to 400 by the close of year 2000, and700 by the end of 2001. The first SMT line is slated for operation by theend of Q3, and two more lines are planned for next year. Until the firstSMT line goes in service, the Irvine facility will focus on system configurationand test, consolidation and countrification of systems, and repair at boththe system and motherboard level. Customer order management for Europe isalso handled at Irvine, which serves as European headquarters for USI.
IBM is a major customer of USI, and the new facility is already supplyingIBM in Greenock, Scotland, as well as IBM's customer base in Europe. USIdoes business with IBM in many areas, including system configuration andtest, motherboard supply and component supply.
Proximity to IBM Greenock was one of a number of factors that led USIto Irvine. Others include the availability of skilled labor, a facilityof the right size with room for expansion, the depth of technical educationin the area, and the cooperation of various Scottish agencies in obtaininginvestment. USI received Regional Selective Assistance to aid in this projectin North Ayrshire. The company has committed £15 million to the Irvinelocation, and £1 million went into refurbishing the building.
USI also operates 450,000 ft2 in Taiwan and 385,000 ft2 in Guadalajara,Mexico. Plus it shares ownership in joint ventures in Japan for repair andmanufacturing and in China for manufacturing. The company is evaluatingoptions for a low-cost manufacturing location in Europe.
NEL, on the other hand, went straight for a low-cost production sitein Central Europe. The company's new plant in Hungary measures 60,000 ft2and will start with two assembly lines, reports Bloomberg News. NEL hasreportedly invested $4.9 million in the plant.
Meanwhile, according to Bloomberg, NEL has started assembly of Intelboards in a new Penang, Malaysia, factory with two lines, which will increaseto six by September.
New programs...Telular Corp.(Vernon Hills, IL) has contracted SCI Systems (Huntsville, AL) to produceTelular's GSM radio module and CMC Industries (Santa Clara, CA) to manufacturecertain fixed wireless terminals. At SCI, production will take place inGraham, NC....According to Bloomberg News, GES International Ltd. (Singapore)recently landed a three-year contract worth $100 million to build a point-of-salessystem for Xn Corp. of the UK. The multimedia system includes a touch screen....PhoenixInternational (Fargo, ND) is manufacturing a controller for Freightliner'snew Step Deployment Unit for entering a truck's cab....Polaris Pool Systemshas selected Microelectronic Packaging Inc. (San Diego, CA) to provide manufacturingservices for Polaris' Watermatic product line....Recoton Corp. (Lake Mary,FL), has decided to outsource manufacturing of products associated withthe closing of its audio amplifier manufacturing division. The company makesconsumer electronic accessories, loudspeakers and car audio products.
Some financial results...Forthe fiscal Q3 ended May 28, Solectron reported sales increased 68% fromthe year-earlier quarter to $2.2 billion. Net income rose 54% from a yearearlier to $75.7 million. Nine-month revenue totaled $6.0 billion, up 67%from the same period in fiscal 1998. Net income for the first three quartersincreased 44% to $205.1 million....CMC Industries recorded sales of $58.7million for its fiscal Q3 ended April 30, compared with $58.6 million forthe prior Q3. The company posted a net loss of $572,000 for the quarterversus net income of $580,000 a year earlier. CMC says it is entering itsQ4 with the largest backlog in nearly two years....According to wire servicereports, net profit of JIT Holdings Ltd. (Singapore) was up 54% to S$21.0million for fiscal 1999 ended in March....For the fiscal Q2 ended Mar. 31,Primetech Electronics (Montreal, Canada) reports sales of Cdn $16.4 million,down from Cdn $21.1 million in the prior Q2. Net income from continuingoperations came to Cdn $1.3 million, a decline of Cdn $410,000 from a yearearlier. Primetech expects significant volume growth in the second halfof fiscal 1999 from Newbridge Networks business.
Some financial news...Wire servicesreport that NatSteel Electronics Ltd. expects sales and profits for thefirst half of 1999 to increase by 50% over a year earlier. Also, NEL proposesto issue between $275 and $300 million in convertible bonds....The Dii Group(Niwot, CO) has filed for a public offering of 6 million shares, excludingoverallotments....SMTEK International (Thousand Oaks, CA) recently sold11.3 million presplit shares to Thomas Wheeler for $4.5 million. He nowholds 39% of the company's stock. The company paid off a $2-million noteheld by Wheeler. SMTEK has also completed a 1-for-20 reverse stock splitand plans to transfer its listing from the New York Stock Exchange to theNasdaq SmallCap Market.
Industry news...Business Weekhas listed the following EMS providers in its 1999 Information Technology100: Solectron (no. 3), Flextronics (no. 17), Jabil Circuit (no. 22), Celestica(no. 26), and Benchmark Electronics (no. 83)....Based on analysis of 100SMT lines at leading OEM and EMS facilities, CEERIS International (Old Lyme,CT) found that EMS providers averaged 54% line efficiency compared with46% for the typical OEM line. Line efficiency is the ratio of the numberof hours when a placement machine is actually delivering parts versus thetime that a line is staffed. SMT lines at the CMs studied were staffed foran average of 112 hours, with the chipshooter placing parts 63 hours perweek. At OEMs, weekly staffing time and placement time averaged 101 and45 hours respectively.
People on the move...KimballInternational (Jasper, IN) has appointed Don Charron to the newly createdposition of president for Kimball Electronics Group and executive VP forKimball International. Before joining Kimball, Charron served as GM of RockwellAutomation -- Allen Bradley Electronic Operator Interface. His backgroundincludes time at SCI. John Habig, the senior executive VP who led the developmentof KEG, is retiring. Also, Spiro Vamvakas has been named VP of design engineeringfor KEG. Hired last year, he is a veteran of GE....ACT Manufacturing (Hudson,MA) has promoted Gary Barnier to VP of operations and David Harrington toVP of worldwide materials management....Manufac-turers' Services Ltd. (Concord,MA) has promoted John Walshe, formerly VP of information technology, tothe newly created post of VP of program management....Plexus (Neenah, WI)has announced the following promotions: Dean Foate to executive VP, RobertKronser to VP of sales and marketing, Paul Ehlers to president of PlexusElectronic Assembly, Dave Clark to VP of materials for Plexus ElectronicAssembly, and Matt Knight to VP of customer development for the ElectronicAssembly unit. Foate will also retain his current position as presidentof Plexus Technology Group....Elizabeth Foreman has moved up from VP offinance at Sanmina (San Jose, CA) to CFO. She replaced Bern Whitney, whoresigned to join a technology start-up....Steve Fogolini has joined theDii Group as its VP of business development.
