Cover Story
CMs Face Array of Choices for Supply-Chain Connections
Some Different Ways to Connect a CM to an Electronics Supply Chain (table)
Tech Trends
Flip Chip and Lead-Free Inspire Initiatives
Market Trends
Industry Continues To Attract New Players
Seiko Epson Site Enters EMS Business
Siemens Communications Doubles As CM
CMs Keep Building Front-End Strength
News
Lucent Puts Outsourcing in High Gear
Flextronics To Pick Up Israeli CM
Viasystems To Acquire Top Line Electronics
The Internet is supposed to make things easier. But in outsourcing, the choices for connecting a virtual supply chain are multiplying. Based on a web survey over just a few days, MMI counted 17 different organizations offering to connect supply-chain partners via the Internet or planning to do so (see table below). A goodly number of these didn't even exist last year. And there are probably others to be added to the list.
Not only that, a contract manufacturer must also decide whether to participate in a public Internet marketplace along with competitors, set up private supply-chain connections, or do both. That choice now looms large because of an open Internet exchange announced by 12 companies comprised of three computer OEMs -- Compaq, Gateway and Hewlett-Packard, two CMs -- SCI Systems and Solectron, and seven suppliers.
Expected to begin operations within 90 days, this exchange will initially offer auctions, catalog management, marketplace administration and such services as a news ticker. Future offerings in supply-chain management include demand forecasting, inventory visibility, capacity utilization, on-line supply commitments and reverse logistics. Among other services planned is collaborative product development.
This exchange is expected to lower manufacturing and purchasing transaction costs, reduce inventory throughout the chain, enable faster and more predictable delivery of products, and provide expertise on supply-chain best practices.
Left unstated is another likely motive for starting this exchange. Transaction and consulting fees will go to the exchange, in which the 12 founders have equal ownership, rather than allowing a private third party to profit from such transactions.
Members have the option to work with other exchanges. "There could be other exchanges in the future where we would join them," says Bob Bradshaw, SCI's COO. But nothing is in the works.
He says SCI is committed to the concept of open exchanges, where everyone can participate and benefit.
Will this exchange provide for the full range of communications that must take place between a CM and its customers? "For me to suppose we have all the answers with this exchange would be a little shortsighted," replies Bradshaw.
One reason that more B-to-B organizations are showing up is the size of the opportunity. Forrester Research estimates that $600 billion in online B-to-B sales of high-tech components and parts will take place over the next few years. That number makes high tech the world's largest opportunity for e-marketplaces.
But supply-chain communications over the Internet are already taking off, as predicted (Jan., p. 2-3). For example, one B-to-B service, ECnet, now handles over 125,000 transaction sets a month worth more than $600 million a month. About seven out of its 59 customers are CMs. Customers act as hubs, while suppliers, which number over 1100, become spokes. NatSteel Electronics and Solectron are among the trading partners using the ECnet platform, which originated in Asia.
Meanwhile, Internet-based connections between supply-chain partners are showing up in different activities required between a CM and its supply-chain partners (table).
# Take design. Celestica has agreed to purchase Alventive's Online Design Community. According to Celestica, this community will facilitate collaboration during the early phases of a product's life cycle and improve design-to-order capabilities for Celestica and its customers. In addition, Cadence Design Systems, HP, and Flextronics International have formed a company called SpinCircuit. They say they have created the only Internet gateway that directly connects engineers' design desktops to the electronics supply chain.
# Collaborative planning is another area ripe for Internet communications (see also Jan., p. 4). And a CM need not be a tier-one player to set up an e-supply chain for this purpose. Electronics Manufacturing Group, a CM based in Calgary, Canada, has joined with webPLAN, a supplier of collaborative planning software, and Ericsson Canada to form an e-chain. Acting as a hub between customers and suppliers, EMG says it will manage supply and demand in real time. The CM will create its own secure, private exchange. Note that SCI and SMTC are also webPLAN customers.
# Essential to a fully functional e-chain is the ability to transmit product information between a CM and its OEM customers. Agile Software recently announced EMSdirect, which allows any OEM, whether or not it uses Agile products, to send product information directly into a CM's Agile Anywhere e-Hub. The e-Hub then allows the CM to review a product information package and accept it or return it if additional work is needed. Pemstar, for one, is planning to use the new service. This development shows how proprietary software can be used for open communications with supply-chain partners.
Will a CM's e-chain communications end up being routed through different hubs and exchanges, depending on the type of activity? Or will a single exchange, such as the new open exchange, ultimately do the job? This question is obviously crucial to a company like Agile. And Bryan Stolle, Agile's chairman and CEO, has spent the last three to four months talking to executives of CMs, OEMs and their suppliers. From these discussions, he concludes that the OEM-CM relationship "is far too complex to ever take to a marketplace or exchange to execute." While some parts of this relationship would lend themselves to a single exchange, he adds, "many, many other parts of it do not."
Indeed, Stolle sees OEMs, CMs and their suppliers using all forms of e-marketplaces. He classifies them as private exchanges; semi-public exchanges, formed by a group of companies to share certain capabilities; coalition exchanges, such as that founded by the HP-Compaq group; independently owned exchanges; and boutique exchanges. "The bottom line is: people are going to use a lot of different avenues to improve their business, to try to be more efficient operations," says Stolle.
If so, CMs have their work cut out for them.
Editor's note: The list of organizations in the above table is not intended to be complete list of all choices that a CM would have for making supply-chain connections. For example, we did not list sites where goods or services are presented in catalog form. In describing types of connections, we used the term marketplace where buyers of goods or services are directly connected with sellers. The term hub applied to cases where supply-chain partners are connected for the purpose of exchanging information, rather than goods or services. Sites that interposed themselves between buyers and sellers were considered hubs for this listing. These definitions may or may not agree with those used by B-to-B companies. back to TOC
Some technologies wait so long for adoption that they become threatened by newer approaches. Flip chip technology, by which unpackaged chips can be attached directly to a board, is a classic example. Pioneered by IBM and used in its mainframe computers, flip chip has been a technology-in-waiting since the 1980s. Still, there were good technical reasons for not using it, including the development of higher-density SMT packages, particularly ball grid arrays.
Another technology about which much has been discussed but little produced is lead-free soldering. Indeed, the very first issue of this newsletter (May 1991) included an article about the increased regulation of lead by the EPA. Unlike flip chip, however, the development of lead-free soldering, or lack thereof, has been more of environmental issue than an engineering problem. Without environmental pressure, the electronics industry has little or no incentive to replace tin-lead solder, a material it has relied on from its very beginnings.
Will these technologies ever see wholesale adoption? Any adoption must now include the EMS industry, on which OEMs now largely depend for PCB assembly. At least one top-tier CM, Flextronics International, is preparing for both.
"We believe flip chip currently is starting to gain significant momentum driven primarily by the handheld wireless applications," says Nicholas Brathwaite, senior VP and chief technology officer at Flextronics. The company has undertaken a major initiative in flip chip. "In fact, we expect to be building product in volume production using flip chip technology before the end of this year," he adds.
A lot of this activity results from Flextronics' acquisition of The Dii Group. Dii had started a big flip chip program that Flextronics will continue to push. Brathwaite says, "Dii...had gone out on a limb and made a significant investment in the development of this technology, which I think was a gutsy move, but is going to turn out to be a visionary move by the end of this year."
Brathwaite and flip chip go back a long way. He started working with the technology in 1986 as part of a team to develop the first flip chip process within Intel. Since then, the technology has failed to make good on predictions that it would take off. Still, Brathwaite views flip chip as more promising than a year ago. He looks at the prospect of Flextronics using direct chip attach in production for least one or two products by year end and sees the tip of a trend emerging.
For some years now, chip scale packages (CSPs), which are slightly larger than a bare die, have drawn attention away from flip chip, often described as the ultimate package. Does this renewed interest in flip chip mean that OEMs will pass CSPs and go directly to flip chip? "I don't think one can say we're just going to avoid CSP and go straight to flip chip," answers Brathwaite. "The truth is that even on a board that has flip chip, it will probably have CSPs on there as well."
Flip chip is one of several big PCBA initiatives that Flextronics is working on. Another program combines some of the advanced wafer-level packaging technologies with the smallest package size for a discrete device -- 0201. Flextronics is in the process of qualifying all of its factories for these packaging technologies. "Although we have not seen any products designed with 0201s, we do have a lot of customers telling us that it's on their road map," reports Brathwaite.
Yet another initiative focuses on lead-free soldering, which is not a new process for Flextronics. The provider has performed lead-free soldering since 1997 and uses the process for three programs in China. Together, these lead-free programs are up to about 150,000 units per month.
"Obviously, in 1997 the choices of materials were more limited than they are today. So we chose the best material that existed at the time," says Brathwaite. Also, the boards being processed are small. "Some of the issues that you have with larger boards you don't have with these smaller boards," he points out. "So this material works great. But now that we're starting to get inquiries for larger boards using lead-free solders, we believe we need a different material." This initiative is to qualify alternative lead-free pastes and processes for medium and larger sized boards.
According to Brathwaite, some customer road maps include next-generation products that are to be completely lead-free by the end of this year. "Understand that there is extreme pressure, with the pressure especially [caused] by the Japanese, who have implemented this on a lot of consumer products," he says. back to TOC
The conventional view of contract manufacturing is that it's an industry growing in sales but shrinking in numbers. At the macro level, that view does appear to be accurate. But it fails to convey the full complexity of an industry as dynamic as EMS is. Despite increasing consolidation, new EMS businesses continue to sprout.
Lately, several new EMS businesses have started from existing manufacturing operations. As seen in the next two cases, new businesses have originated from OEM operations seeking to participate in the growth of the EMS market. Despite the rise of outsourcing, the market continues to attract a small group of OEM activities that retain PCBA and box build as a core competency (see also Oct. '98, p. 1). Selling excess capacity provides a way to share overhead and increase the return on manufacturing assets. Over the years, this strategy has produced mixed results. A number of OEMs that started contract manufacturing either sold their EMS businesses or spun them off.
Selling capacity can also appeal to a military contractor for the same reasons. Although this strategy was more prominent during the downsizing of the defense budget, a new EMS player has emerged from the military side. See how this strategy plays out in the third example that follows.
The supply chain can also be an incubator for new players. Our final example shows how a new player can arise by combining different parts of the supply chain.
Epson Portland Inc. (EPI) of Portland, OR, the U.S.-based manufacturing subsidiary of Japan's Seiko Epson Corp., has just entered the contract manufacturing business. EPI, which produces ink cartridges and color inkjet printers for Seiko Epson, is also selling a full range of manufacturing services to the OEM world. The Portland site can draw upon its 14+ years in manufacturing as well as the excess capacity within its assembly area of about 130,000 ft2.
Although this move bucks the trend in OEM outsourcing and divestitures, it's not without precedent. Not long ago, a U.S. factory of another Japanese company, Hitachi, announced its entry into the EMS business (Dec. '99, p. 2). And in the printer market, Lexmark International engages in contract manufacturing through its Lexmark Electronics unit.
Like these OEM operations and some others in past, EPI is attracted to the robust growth of the contract manufacturing market. The company plans to take advantage of this growth while continuing its computer peripheral manufacturing business.
EPI's contract manufacturing business is primarily focusing on box build work, supported by two SMT lines, two class 10,000 clean rooms, a plastic injection molding department, and an automated warehouse. The Portland facility has an SMT capacity of about 200,000 panels a month and currently is operating at about 50% capacity. Injection molding, a 24 X 7 operation, can utilize a total of 27 presses, of which ten are in a clean room environment. EPI has targeted mid volume and mid mix as its EMS niche.
When an OEM starts in contract manufacturing, two questions inevitably arise. Is the OEM in it for the long term? And what happens to EMS customers if demand increases for the OEM's branded products? According to EPI, the contract manufacturing effort is backed not only by EPI, but also by Seiko Epson executives in Japan. "Both groups endorsed the business plan to take us into contract manufacturing," says Gerry Snell, EPI's director of new business development.
Despite the requirements of EPI's cartridge and printer businesses, the company is not concerned about capacity for contract manufacturing. "Even with those two businesses," says Snell, "we have plenty of capacity now and into the future as far as I can see. I don't expect to see any change in that. We will be able to support the contract manufacturing business continuously and into the future."
This excess capacity results in part from EPI's drive to become more and more efficient as a manufacturer of consumer products. Also, the printer business model is changing. Very low-cost, high-volume printers "are more efficiently made overseas," says Snell. So EPI handles higher level printers as well as manufacturing variances that cannot be supported offshore. This model, says Snell, gives EPI enough capacity for contract manufacturing.
"We have much more capacity on the box-build side than on the circuit board [side]," reports Snell. If EPI runs out of capacity for board assembly, the company intends to subcontract that activity or have the customer subcontract it.
EPI sees contract manufacturing as a way to increase asset utilization and share overhead costs. "We do cheaper contract manufacturing and cheaper ink cartridges and printers if we have more volume going through here," says Snell.
Could this move also be viewed as a way to avoid being divested? No, says Snell. "I've never heard any talk of being divested. We're looking to enhance the value of the organization," he responds.
"By this time next year, our goal is to have 20% of our business to be contract manufacturing business," says Snell.
According to EPI, Seiko Epson has recognized EPI as its most productive manufacturing plant.
Another OEM operation with a contract manufacturing business is Siemens Communications Ltd. (Nottingham, UK), which is part of Siemens Information and Communication Networks Group. In February, Siemens Communications formally launched its EMS business called Siemens Manufacturing Services.
The Siemens unit is offering a full range of manufacturing services through system build and distribution. Contract manufacturing takes place in Siemens Communications' Nottingham, UK facility, which houses 7,000-m2 of manufacturing space and employs 200 production personnel. SMT capacity stands at four lines, with a fifth line planned for later this year.
But this is not the first Siemens activity to start contract manufacturing. For a number of years, Siemens' Electronics Manufacturing Center has done EMS work in Johnson City, TN, as part of Siemens Energy & Automation. Yet Siemens just outsourced GSM phone manufacturing from a business it is acquiring (April, p. 3). And Siemens Information and Communication Networks farms out certain parts of its production volume (see News, p. 10). So within a company as large as Siemens, manufacturing strategy may vary depending on the activity.
Although Siemens Manufacturing Services was christened in February, the UK operation has been involved in contract manufacturing for about 18 months. As a result, the operation serves a range of product markets from the leisure industry to satellite communications. "Our expertise is in telecom. But we don't just specialize in that area," says Bernadette Downes, marketing manager for Siemens Manufacturing Services. She adds that the EMS unit has "a diverse range of customers."
The Siemens unit is heading for a 50/50 mix of internal production done for Siemens Communications versus external contract manufacturing. "We're very close to 50/50 now," Downes points out.
For the UK operation, this entry into contract manufacturing made good business sense. "We saw it as a good business opportunity to make the most of our current investment [at the time]," Downes explains. "Since then, we have invested more."
The UK facility was a winner in the Management Today Best Factory Awards.
KDI Precision Products of Cincinnati, OH, also wants to shine a spotlight on its entry into contract manufacturing. A long-time manufacturer of military "safe-and-arm" and fuse systems, KDI is looking to fill the excess capacity of its 236,000-ft2 facility with commercial EMS work.
"We presently have a 90/10 ratio of military to commercial work and are working to move that ratio dramatically," says Joe Utasi, a program manager in the Commercial Products Division at KDI. "Our capabilities tend more toward the high end or premium type of product with reasonably high volumes -- runs in excess of $500,000 sales value."
According to Utasi, KDI's engineering staff and facilities have expertise in areas such as RF, proximity sensing, video and radar. As an indication of the company's capabilities in RF design and test, KDI uses a screen room that Utasi says is "the size of some small companies."
On the commercial side, KDI makes a radar detector for the consumer market as well as a new glove-mounted radar gun for measuring ball speed in sports.
Like EPI's contract manufacturing business, the commercial division of KDI is sharing overhead with the rest of the company. "Our charge is to operate our division essentially as a profit center for KDI to help absorb some of the overhead that the military side of the operation incurs," says Utasi.
A new name, IntegraTECH Solutions (Reading, MA), has made its debut in New England. Earlier this year, the Danis Group merged four companies to create a one-stop shopping source under the Integra-TECH banner. These combined operations, now divisions of Integra-TECH, can supply sheet metal fabrication and mechanical assembly, injection molded plastics, electronics hardware and contract manufacturing, all in an integrated offering.
Lately, some CMs, including a number of large players, have extended their capabilities into the realm of enclosure manufacturing. But IntegraTECH has proven that the reverse is also true. That is, a supplier can also migrate from the plastics and metal end of the supply chain to provide vertically integrated system build.
IntegraTECH divisions have a long history in the metal and plastics side of the electronics supply chain. The Metals Division, formerly Damco of Reading, MA, was founded in 1968 by IntegraTECH's CEO, George Danis. In 1975, Danis launched Fastener Supply, a distributor of fasteners and electronic supplies. That company now serves as the Distribution Division. Then in 1982, he started Plastic Molding Manufacturing, which became the Plastics Division, now located in North Attleboro, MA.
Contract manufacturing did not enter the picture until 1997, when the Danis Group purchased Micro Electronic Technologies, a CM in Hopkinton, MA (Dec. '97, p. 7). That operation, now the Circuits Division, was moved last summer to a larger facility of 35,000 ft2 in Medway, MA. This division gives IntegraTECH the ability to perform PCB assembly, electromechanical assembly and full system build.
With the launch of IntegraTECH, the Danis Group expects to capitalize on the recent trend in supply base reduction by OEMs. "We are assisting our customers in their supply-line consolidation from four [suppliers] to one," says CEO George Danis.
The idea is to give customers a single point of contact. Acting as a single source, IntegraTECH can provide metal boxes, cabinets, plastic housings, hardware, and board assemblies all in-house and then build complete systems. The company offers integrated manufacturing, engineering and purchasing support from design and prototyping to product delivery.
IntegraTECH's four divisions encompass more than 300,000 ft2 of manufacturing and assembly space. The company recently hired 60 professionals and expects its work force to reach about 450 after more hiring. Last year, sales of the four divisions were in "the high 40s," says Danis. This year, he expects sales in the $70- to $80-million range. About 30% of sales come from integrated system build.
Customers of IntegraTECH include big names such as Motorola, IBM, Siemens, and Lucent. Take Motorola. Since 1998, the former Danis companies have combined forces to manufacture a data communications unit for Motorola. This product was originally manufactured in Taiwan, but production was moved to the Danis Group in the U.S., where the customer saved money on transportation and rework. Interestingly, the Danis Group participated in the original development of this product.
Other customers are not so well known. Filtronic Comtek, a new customer of the Circuits Division, needs the division to deliver 180 box-build units a day for telecom towers. This telecom company sells high-frequency wireless systems. The Circuits Division also performs PCB assembly for companies including Sierracom, Bose, Brown & Sharpe, Dynisco and Horton Controls. IntegraTECH predicts this division will triple sales and production this year. According to the company, "millions have been invested in new equipment."
What's more, customers are asking IntegraTECH to expand beyond New England. So the company is looking on the East Coast from New Jersey to the Carolinas, in the Midwestern area of Chicago and Ohio, in Texas, and on the West Coast.
If a CM can participate in product development, the provider has an inside advantage when it comes time to manufacture in volume. This strategy has been around for a long time, but time has not made it any less effective. If anything, this idea is pushing CMs to do more on the front end. Customers want their providers close by, if at all possible, during product development. And increasingly, OEMs are asking providers to do more than DFM and board layout. As result, more and more CMs are finding they need to be in more locations and have more front-end capability available for customers' product development.
How does one get there? Below are three examples. They show a CM can acquire capability from an OEM, buy or partner with a company that specializes in front-end work, expand an existing operation, or set up a new one.
Nokia has agreed to transfer its Multimedia Development Group in Motala, Sweden, to SCI Systems (Huntsville, AL). SCI is also taking this opportunity to call attention to its engineering services.
The Nokia group of 46 people will give SCI a complete team in multimedia development engineering. According to SCI, this group handles most of the product development work for Nokia's multimedia business. The group will be part of a new, worldwide commercial engineering structure headed by Vincent Paragone.
SCI already provides Nokia with contract manufacturing in Motala through a 1998 acquisition of an operation for satellite TV receiver manufacturing.
"This is particularly important to us in that it affirms our relationship with Nokia as well as more market confirmation of our industry-leading engineering and technology capability," said Gene Sapp, president and CEO of SCI, during a call with analysts. "This company has, we believe, the strongest engineering team worldwide of anybody in this industry sector."
These added capabilities will complement engineering services offered by groups in Singapore; Grenoble, France; Stockholm, Sweden; and Huntsville, AL. Sapp said SCI will continue to expand its engineering capabilities, which it considers a major asset, when the right opportunity comes along.
According to Nokia, the agreement with SCI is a natural step as both companies continue to focus on their respective core competencies.
PartnerTech, a Swedish CM based in Stockholm, has purchased Temo Finmekaniska Verkstad AB, a manufacturer of prototypes and short production runs located in Jarfalla, outside Stockholm.
The deal will strengthen PartnerTech primarily in prototype manufacture and as a product development partner. With annual sales of SEK 60 million and more than 30 people, the prototype house obtains a majority of its business from quick-turn processing for the telecom market.
PartnerTech, which is listed on the Stockholm Stock Exchange, says the deal will immediately increase annual EPS "to a significant degree."
In another move to strengthen product development capabilities, the Swedish CM is now collaborating with Sigma, an IT consulting company. This alliance is aimed at reducing the time from concept to launch for customers' new products and services, primarily in telecom and medical technology.
Use of NPI (new product introduction) centers has become a popular strategy these days, as two more CMs have announced NPI-type centers. Plexus (Neenah, WI) plans a series of centers, while MCMS (Nampa, ID) is setting up an NPI facility on the West Coast.
Adding a twist to the NPI name, Plexus plans to roll out what it calls NPI Plus centers during this quarter. These centers will provide customers with quick turnaround testing and prototyping solutions as well as a fast ramp to volume production. Plexus' Agility acquisition in New England will become one of the first centers. Plans call for other initial centers in Neenah, WI; Silicon Valley; Seattle, WA; and Minneapolis, MN. Other than Agility, these are existing Plexus locations. The company has targeted Southern California and Texas for future NPI Plus centers.
MCMS has leased a 15,600-ft2 facility in Silicon Valley to serve as an engineering and prototype operation. The company says this operation will help customers launch new products more rapidly and support seamless global transition to volume production. back to TOC
As Ericsson and Nortel have done, Lucent Technologies (Murray Hill, NJ) is embarking on a multiplant outsourcing effort. Lucent has decided to expand its relationship with contract manufacturers and focus its manufacturing operations on systems integration, high-end process manufacturing such as done in its microelectronics and fiber optic plants, and new product introduction.
In a conference call, Lucent said it does about 80% of its "assembly, wire and test" business in house. The company described assembly, wire and test as systems and boards versus components and fiber. Lucent said it expects the business going to CMs in the assembly, wire and test space to probably triple. Using simple math, one could then conclude that outsourced business will potentially increase from about 20% in this space to about 60%. The company said it expects to work with a number of contract manufactures and described them as "the usual suspects."
Lucent is focusing its outsourcing effort on commodity-type manufacturing, and PCB assembly is a major commodity. But it's not the only area is being considered. "Box build is another area we're looking at," says Lucent spokesperson Mary Ward.
In Lucent's original statement, the company referred to a total of 17 U.S. manufacturing locations, of which five facilities in high-end process work would be retained. So that left 12 plants as a maximum number that could have been affected by this effort. Two weeks later, Lucent said it is seeking a buyer for its Power Systems business, including a one million-ft2 power supply facility in Mesquite, TX. So now there are up to 11 U.S. sites being evaluated by Lucent.
These locations are Charlotte, NC; Columbus, OH; Little Rock, AR; Merriam, KS (near Kansas City); Mount Olive, NJ; North Andover, MA; Oklahoma City, OK; Omaha, NE; Phoenix, AZ; Shreveport, LA; and Westminster, CO (outside Denver). Total capacity here is huge. The North Andover facility alone contains a little under two million ft2.
All sites but the Mount Olive facility are unionized. Two unions are involved: the International Brotherhood of Electrical Workers and the Communication Workers of America.
"We are actively working with our unions and the nation's leading contract manufacturers. We intend to transition our people and facilities in a way that maximizes opportunities for employees, minimizes the impact on our communities and meets Lucent's needs for more flexible manufacturing capabilities," states Richard McGinn, chairman and CEO of Lucent.
The number of facilities to be divested remains unknown. "Almost certainly, at least some of these facilities will have systems integration houses," say Ward. According to Lucent's statement, it "will establish several facilities as systems integration houses" that will assemble and integrate products from contract manufacturers with offerings from Lucent's software and network design centers. The number and locations of these systems integration houses have yet to be decided.
In its statement, Lucent says it is "looking at a range of approaches, including the possibility of having a contract manufacturer and/or an employee group assume a facility and the people and have Lucent contract with them to produce the product." During the conference call, the company talked about selling facilities to contract manufacturers.
Lucent estimates that most of the transition will be completed in the next 18 to 24 months. "We expect to have a plan in place sometime this summer for each facility," says spokesperson Ward.
Repeating what many OEMs have stated before, Lucent says this move will allow it to focus on core competencies where it adds the most value. The company also mentioned a familiar financial motive. Greater use of CMs will also have a positive impact on return on assets and cash flow. "We estimate that we can improve cash flow from operations significantly over the next few years mainly through reductions in inventory and reduced capital expenditures," McGinn stated. This effort will free up capital for use in other areas.
Lucent reports having more than 30,000 employees in manufacturing at 17 locations in the U.S. About 12,000 work in the five facilities being retained. That leaves about 18,000 in 12 U.S. sites, which includes the 2200-employee Mesquite operation being sold separately. After subtracting the Mesquite number, one obtains about 15,800 employees involved in manufacturing at the 11 locations that could be affected. The company has not yet determined how many employees it will need for the systems integration houses.
During the conference call, Lucent estimated that in facilities sold to contract manufacturers as many as 70% or more of employees would stay with the facilities.
Another divestiture...NTS (Vancouver, Canada), a maker of notebook computers with embedded educational software, intends to divest its plant in Ireland through either a sale or possible closure of the plant. This move is part of a restructuring plan to return NTS to profitable operations. The company plans to outsource all manufacturing in the future. Some product lines have been contracted out.
Flextronics International (Singapore and San Jose, CA) has inked a definitive agreement to acquire Uniskor Ltd., the largest CM in Israel. Worth about $20-million, this agreement will give Flextronics an 8000-m2 facility in Migdal Haemek, Northern Israel, and a work force of 500.
Previously, MMI had reported that Uniskor had 1999 sales of about $40 million (Mar., p. 6). The Israeli CM specializes in telecom, networking and wireless communications. According to the consulting firm Technology Forecasters Inc. (Alameda, CA), Uniskor is one of only two indigenous providers that do turnkey work in Israel. TFI says Uniskor is 80% turnkey.
Flextronics says the deal "dramatically increases its presence in Israel." The company obtained semiconductor design capabilities in Israel through the recent acquisition of The Dii Group (April, p. 7).
"We are expanding our presence in Israel because it is one of the world's most active areas for the development of high technology products," states Michael Marks, chairman and CEO of Flextronics. "By adding the manufacturing capabilities of Uniskor, we are complementing the skills of the Flextronics Semiconductor design teams in Elait and Tel Aviv. We are excited that soon we will be able to offer this 'Silicon to System Integration' design capability to our customers."
This deal follows SCI's acquisition of an ECI Telecom plant in Israel (Jan., p. 9). Flextronics will become the second tier-one CM with manufacturing in Israel.
Contract manufacturing in Israel is largely consignment-based. That fact alone offers a potential growth opportunity for turnkey providers that come into the Israeli market. Of the estimated $750 million in outsourced cost of goods for 1999, Israeli CMs only generated sales of about $170 to $190 million (Mar., p. 6).
Viasystems Group (St. Louis, MO), a newly public company positioning itself as a global EMS provider, has agreed to acquire Top Line Electronics, a turnkey CM in San Jose, CA. Terms were not disclosed. The deal is expected to close by the end of Q2.
"The acquisition of Top Line Electronics Corporation strengthens Viasystems' geographic footprint on the West Coast of the United States," says James Mills, chairman and CEO of Viasystems. "Top Line's customer base in the high-growth market segments of telecommunications and networking complements the strategic sales focus of Viasystems."
Founded in 1989, Top Line operates a 66,000-ft2 facility with ten high-speed Fuji SMT lines and more than 400 employees. With a competency in complex, high-mix PCB assembly, Top Line can meet requirements for DFM and DFT on the front end as well as box build, packaging and order fulfillment on the back end.
Viasystems intends add backplane assembly capabilities to Top Line's facility.
Meanwhile, Viasystems has completed its acquisition of Marconi Communications' Network Components & Services operations in Europe and China (Feb., p. 9-10). These enclosure-related operations were originally part of RELTEC, which was acquired last year by Marconi. In 1999, NC&S brought in sales of about $150 million. The purchase price was reported earlier as $115 million in cash.
Viasystems says this deal strengthens and expands its relationship with Marconi and offers additional customer relationships. The acquisition also enhances Viasystems' global reach.
Totaling 540,000 ft2, NC&S' five facilities are in Coventry, England; Ballynahinch, Northern Ireland; Terni, Italy; and Beijing and Shanghai, China. Through a joint venture, NC&S also operates facilities in Denmark and South Carolina for heat management systems.
NC&S manufactures enclosures, electromechanical assemblies and subassemblies for the telecom market. Customers include Nokia, Italtel, Siemens and Lucent.
More deals done...Solectron (Milpitas, CA) has completed its acquisition of AMERICOM Wireless Services, a private company specializing in wireless handset repair and refurbishment and outsourced technical support (March, p. 9). Also, Solectron has bought the manufacturing division of the former Premisys Communications, now a subsidiary of a new networking company, Zhone Technologies (Oakland, CA). This deal, announced earlier, marks the beginning of Solectron's role as Zhone's virtual supply-chain partner (Jan., p. 11)....Plexus (Neenah, WI) has concluded its acquisition of Agility (Ayer, MA), a CM that Plexus believes will add $30 to $35 million in annual revenue (Mar., p. 9).
Benchmark selling...Benchmark Electronics (Angleton, TX) has entered into a letter of intent to sell the assets of its Katrineholm, Sweden operation, which it gained with the acquisition of Avex Electronics. Avex originally acquired the operation from Ericsson. The sale is expected to close with two months, subject to typical conditions.
New alliances...Sparton Medical Solutions (SMS), a business unit of EMS provider Sparton Corp. (Jackson, MI), has formed an alliance with Axiom (Charlotte, NC), an industrial design firm. Axiom is contributing its industrial design capabilities to the alliance with SMS, whose strategy is to provide complete product development and manufacturing services to the medical devices industry. SMS has also opened an office in Research Triangle Park, NC....Circatech, a CM in Hereford, UK, and another CM, Tri-M Technologies of Singapore, have entered into an alliance to develop European business, reports Circuit Review, a new magazine from the UK trade association PCIF. The UK company will serve as an entry point for Tri-M customers in Europe, with volume production slated for Tri-M facilities in Asia. Circatech picked up De La Rue Cash Systems as a customer through the Tri-M relationship.
New programs...SCI Systems (Huntsville, AL) has landed a contract to produce desktop PCs for IBM on a build-to-order basis. Initially, the work will be done in Huntsville and is expected to start in the next month or two....Microsoft has selected Flextronics as an EMS partner to assist in the development and manufacturing of a Microsoft game console, code named X-Box. It is due to ship in the fall of 2001. Flextronics currently manufacturers for Microsoft's Hardware and WebTV groups. In addition, Flextronics will assemble and test major subassemblies for Sonosite's (Bothell, WA) ultrasound products....Siemens Information and Communication Networks Group has chosen Manufacturers' Services Ltd. (Concord, MA) as an EMS provider to manufacture a range of modules for Siemens' telecom switching equipment. "As part of our strategy to reduce our own manufacturing complexity, we subcontract certain parts of our production volume and consequently further strengthen the Siemens position in the telecom market and simultaneously safeguard employment in our factories," states Mr. Fahlbusch, president of Siemens Information and Communication Networks Manufacturing....Benchmark Electronics has received a commitment for new business, estimated at more than $150 million a year, from an existing multinational OEM customer in the instrumentation market. Included are multiple programs from a number of customer sites for PCB assembly, configuration and test....Equipe Communications (Acton, MA), a start-up, has selected Plexus to provide electronics design and test development services, materials management, prototyping, PCB assembly, and box build for Equipe's new line of telecom equipment. Equipe's products provide an Optical On-Ramp to the rapidly growing optical network core. Equipe is one of seven new communications customers that Plexus won during its March quarter. The company is sole source for all seven, many of which, says Plexus, are in optical networking. Plexus also added four new medical customers during the quarter and three others....According to Reuters, Venture Manufacturing (Singapore) has received a contract from Cisco Systems.
More new programs...MAYAN Networks (Sunnyvale, CA) has agreed to outsource manufacturing of its optical access platform to Solectron....C-MAC Industries (Montreal, Canada) will perform volume manufacturing for Telaxis (South Deerfield, MA), a provider of broadband wireless access equipment. The company reports demand is exceeding its internal manufacturing capacity....Under a five-year agreement, Honeywell will contract manufacture certain land mobile radio subassemblies for RELM Wireless. RELM has sold its 144,000-ft2 facility in West Melbourne, FL, to Honeywell, which will employ 69 of RELM's direct labor people. RELM's operations will be relocated to a smaller leased facility....LaBarge (St. Louis, MO) was recently awarded a $2.1-million contract from Boeing's Commercial Airplane Group (Long Beach, CA) to build electrical power center units for use in Boeing's MD-10 freighter conversion program. Furthermore, LaBarge has landed a contract, also valued at $2.1 million, to produce PCB assemblies for a missile defense radar system....PartnerTech (Stockholm, Sweden) will ship products for C- Technology from PartnerTech's new plant in Atlanta, GA. The CM is also handling distribution and logistics.
SCI continues to add capacity in order to keep up with customer demand. The company has finished or is in the process of completing four expansion projects and has announced two more.
In Rapid City, SD, SCI is in the process of completing an expansion of about 67,000 ft2, which brings that facility to 235,000 ft2. The company is also finishing up an expansion of its Pointe-Claire, Canada plant, which will increase by about 103,000 ft2 to about 195,000 ft2. In Tatabanya, Hungary, SCI is nearing completion of an expansion of about 106,000 ft2, which gives the facility a total of about 200,000 ft2. In the Netherlands, the provider has almost completely moved into a new 252,000-ft2 plant, primarily for building Hewlett-Packard PCs for the European market.
Mexico continues to sizzle. Only a year or so after opening two new plants in Mexico, SCI has already announced a second expansion of each facility. These expansions will add some 103,000 ft2 to the new Guadalajara plant, which will go to about 327,000 ft2, and will increase the Monterrey facility by about 65,000 ft2 to about 337,000 ft2.
Growth in Mexico's high-tech centers has placed increasing demands on the supply of workers, especially those who are skilled. "Although the [labor] market is tight, we have not seen an impact on [SCI's] growth going forward or interest in the region," says Bob Bradshaw, SCI's COO.
Then there's Israel. Gene Sapp, SCI's president and CEO, recently told analysts that SCI bought some land in Israel and has "some near-term plans to build a new facility in Israel as a home site there." He added, "This is on the heels of the acquisition we made from ECI. And it's also somewhat related to another acquisition we contemplate in that market." When SCI announced the ECI deal, Sapp said it would not be unreasonable to expect SCI to open a plant in northern Israel, where costs are lower (Jan., p. 9).
Other facility projects...Kimball Electronics Group has opened a new high-mix/low-volume facility in Jasper, IN. Materials management for prototype builds, pilot runs and low-volume production will be done through an MRP process that minimizes duplication of documentation during new product introduction. Programs can migrate from this facility to a high-volume plant on the same campus....Artesyn Solutions (Lincoln, CA), a repair services provider that also does contract assembly, has expanded its operations east of the Mississippi with a new 50,000-ft2 facility in La Vergne, near Nashville, TN. La Vergne is also the location of HP manufacturing, distribution and returns activities that are expanding....MJM Solutions, which specializes in quick-turn EMS, has announced a new 11,000-ft2 manufacturing facility on Ingot Street in Fremont, CA. The company is retaining its headquarters on Hotchkiss Street in Fremont, where it will continue engineering and prototyping activities....LeeMAH Electronics (San Francisco, CA) recently completed a renovation project in its Pacific #1 plant to enable the transfer of automatic through-hole processes from Agilent Technologies.
Pemstar (Rochester, MN) has filed with the SEC for a proposed initial public offering of up to $115 million in common stock.
The company follows Saturn Electronics & Engineering (Auburn Hills, MI) and SMTC Corp. (Toronto, Canada) as the third CM in the last two months to file in preparation for an IPO (April, p. 7).
Excluding over-allotments, Pemstar estimates net proceeds of about $92.3 million, of which its intends to use about $63.9 million to repay indebtedness and about $28.4 million for general purposes, including working capital, capital expenditures and internal expansion. Some money may also be used for acquisitions.
For the fiscal year ended Mar. 31, Pemstar earned net income of $2.7 million on sales of $393.8 million. Sales and net income increased by 110% and 59% respectively from a year earlier.
The provider's two largest customers in fiscal 2000 were IBM and Motorola, which represented about 37% and 15% of sales respectively. Other customers include 3M, Efficient Networks, Electronics for Imaging, Fluke, Fujitsu, HP, Honeywell, Pinnacle, RSA, Seagate and Sony. Pemstar also serves emerging OEMs in wireless and optical systems. They include Ancor Communications, Interwave, Optical Networks, Optical Solutions, Repeater Technologies and Western Multiplex.
Indeed, Pemstar sees its communications focus and wireless and optical expertise as a competitive strength. Communications sales increased to about 34% of total revenue in fiscal 2000 from 16% in fiscal 1999. Other strengths include engineering capabilities and a staff of over 400 engineering professionals. Compare that number with a total of 2715 full-time employees as of Mar. 31.
With a broad service menu, Pemstar offers board and flex circuit assembly, precision electromechanical assembly, plastic injection molding, build-to-order systems assembly, worldwide distribution and aftermarket services. The company operates facilities in two U.S. locations, Mexico, the Netherlands, Thailand, China and Singapore.
Pemstar was founded in 1994 by a group of eight senior IBM managers who had overseen the storage product operations at IBM's Rochester, MN facility. Allen Berning has served as CEO and chairman since the company's founding.
Some financial news...Solectron has sold 20-year Liquid Yield Option Notes that will result in gross proceeds of about $2.0 billion (excluding over-allotments, if any). This amount is about $500 million above what Solectron originally intended to raise. The provider plans to use the net proceeds to fund further expansion of its business, including strategic acquisitions, additional working capital and capital expenditures, and for general purposes. Included in the acquisition funding is about $900 million to pay for the pending acquisition of certain Nortel assets (April, p. 1). These notes were offered under Solectron's $5-billion shelf registration....Plexus is projecting that sales for fiscal 2001 before any additional acquisitions should approach $1 billion....Although Manufacturers' Services Ltd. has not yet commenced its IPO, the company has filed for 11 million common shares, not counting over-allotments, at a price range of $17 to $19 a share....ACT Manufacturing (Hudson, MA) completed a $90-million convertible debt offering to finance its GSS/Array acquisition (Mar., p. 7). ...XeTel (Austin, TX) has closed on a $35-million revolving loan facility with The CIT Group/Business Credit Inc. and Chase Bank....For the quarter ended Mar. 31, Varian Inc. (Palo Alto, CA) reported that the electronics manufacturing portion of its sales climbed 62% to $40.5 million from a year earlier....For the same quarter, Reptron Electronics (Tampa, FL) grew the EMS side of its business by 35% year over year to $51.2 million in sales.
Some company news...Solectron will transfer cell phone production volume from its Suwanee, GA plant to its facility in Guadalajara, Mexico, due to changing market conditions. The company says most of its competitors and customer have already moved cell-phone manufacturing to regions of lower labor cost....EFTC Corp. (Denver, CO) has agreed to settle two class-action securities lawsuits filed against it in 1998. Under the proposed settlement, EFTC will contribute $6 million in cash and 1.3 million shares of stock to a settlement fund....C-MAC Industries has chosen Agile Buyer from Agile Software (San Jose, CA) as C-MAC's global solution for Internet-based sourcing and procurement....National Manufacturing Technologies (Carlsbad, CA) has purchased an additional Mydata TP-11 surface mounting line capable of flip chip placement. In addition, NMT has bought two Fuji CP-IV SMT lines as part of a transaction with Lucent.
Correction: The MMI Top 50 List published in the March issue gave the wrong headquarters location for C-MAC Industries. The correct location is Montreal, Canada.
