MMI May 1998

OEMs Pick Up the Pace of Divesting

HP, IBM and Nokia Are Selling Five Operations
Jabil, Manufacturers' Services, SCI and Solectron Are Buying

In the span of less than a month, three large OEMs have stated they are selling a total of five manufacturing operations. This total represents nearly five months' worth of OEM divestitures at the 1997 rate (Feb. '98, p. 3). Four different EMS providers are making asset purchases, and each one is significant in its own right.
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#On the IBM site in Charlotte, NC, IBM has agreed to sell its Electronic Card Assembly and Test (ECAT) operations to Solectron and its fulfillment and integration facility to Manufacturers' Services Ltd. Although both facilities fall under the IBM Microelectronics organization, IBM attaches no significance to the fact that the two purchases were announced within five days of each other. A spokesman points out that each facility is involved in a different business. Still, when these deals go through, the Charlotte site will no longer act as an IBM-operated center for manufacturing. That's because the site is undergoing a transition to focus more on services and solutions as opposed to manufacturing activities.

Selling the ECAT facility also means that IBM Charlotte is leaving the contract manufacturing business. For the last two years, the ECAT facility's EMS business has made the MMI Top 50.

For Solectron, the ECAT acquisition brings technology and an important piece for optimizing Solectron's supply chain on the East Coast of the U.S. Manufacturers' Services gains the box build and distribution capabilities of the other Charlotte plant as well as a supply site on the East Coast.

· Jabil Circuit intends to acquire the assets of a manufacturing organization associated with Hewlett-Packard's LaserJet business. The EMS provider, which had sat on the sidelines as competitors made deals, has now entered the acquisition game. Not only does the deal give Jabil two sites in different parts of the world, but it also will result in HP becoming Jabil's largest customer in fiscal 1999.

· Two different organizations within Nokia are each selling production assets to SCI Systems. These agreements show that Ericsson is not the only European OEM to divest itself of multiple facilities. SCI, for its part, gains greater penetration within Nokia and global outsourcing agreements.

While no two deals are the same, these acquisitions do share at least two traits. In each case, the buyer is a global EMS company among the ten largest in the world. So large OEMs continue to show a preference for putting their manufacturing assets and people in the hands of large EMS providers. Second, each of the four EMS providers had a prior relationship with the OEM from which it is acquiring assets. In such deals, it helps if the OEM already knows what to expect from the EMS provider.

Solectron To Buy IBM ECAT Plant

Solectron (Milpitas, CA) has signed agreements with IBM to acquire IBM's Electronic Card Assembly and Test (ECAT) facility on its Charlotte, NC, campus, where Solectron already operates a plant. Financial terms were not disclosed. The companies plan on closing the deal after receiving government approvals and anticipate completion within 60 days.

This purchase includes the ECAT facility's three buildings with 425,000 ft2 of total capacity, 50 acres of land, and 15 SMT lines. Solectron also gains access to 115 IBM patents and 51 disclosures, which Solectron says will enhance its high-end PCB assembly capabilities. As part of the deal, Solectron will hire some 700 IBM employees.

In addition, Solectron will supply PCB assembly services to IBM in North America for the next three years. This work includes primarily logic and networking adapter cards for a number of IBM's high-end, midrange and personal computing products.

Solectron has reported that this operation will contribute more revenue than comes from its Bordeaux, France, facility. That facility generates revenue in the range of about $400 million.

Not all the ECAT business stems from IBM work. Since 1993, the ECAT facility has offered contract manufacturing services, and from 1995 through 1997 listed its EMS revenue at more than $100 million. IBM has never broken out the facility's EMS revenue, and MMI was unable to get an accurate fix on where that business stands today. Word from IBM is that internal part of the ECAT business is much larger than the external portion.

The sale of the ECAT plant may well end up being the final chapter in IBM's adventure in contract manufacturing. Several IBM facilities entered the EMS market in the early '90s when IBM was dividing itself up into independent businesses. Although MMI cannot account for all IBM sites, the Charlotte plant appears to be the last one in North America with a discernible EMS business.

IBM Charlotte outlasted other sites, with the exception the former IBM Toronto site that is now Celestica, because IBM Microelectronics used the ECAT plant to sell customers on having boards built with IBM's merchant silicon. But IBM says that its successful merchant chip business now stands on its own, attracting customers through chip technology. As a result, the importance of ECAT as a means for selling merchant silicon has diminished over time.

So it comes as no surprise that IBM Microelectronics does not consider ECAT a core business for the division. In addition, the plant's load is not as high as it once was. As IBM has put more and more functions on a chip, fewer and fewer cards needed to be built. One can see evidence of this trend in the plant's employment. In March 1997, MMI listed the facility's work force at a 2000, well above the current number that Solectron is hiring. As part of Solectron, the ECAT plant will be in a position to take on more work.

Indeed, the Charlotte plant forms an integral part of Solectron's strategy for the East Coast of the U.S. That strategy also includes the South Carolina and Georgia facilities just acquired from NCR (see News, p. 8). "Our long-term strategy is to combine the strengths of our four facilities on the eastern seaboard of the United States so that we can create a highly integrated and fully optimized supply chain solution for our customers," states Walt Wilson, president of Solectron Americas.

Solectron's North Carolina operations will form the supply chain hub for high-volume PCB assembly. To make that happen, Solectron will integrate the ECAT plant with its existing Charlotte facilities that total 245,000 ft2 and employ more than 1350 people. North Carolina will not only supply its own customers, but also South Carolina, which will act as the hub for systems design and low-volume, complex systems build, and Georgia, which will become the center for high-volume assembly of build-to-order and configure-to-order systems. Solectron's Massachusetts facility will focus on small-volume and complex PCBA and prototype services.

Heading up North Carolina operations as site president will be IBM veteran Bob Bradshaw, who will also become a Solectron VP. He serves as IBM senior location manager in Charlotte. Bradshaw spearheaded IBM's entry into the EMS market in 1993 and grew that business significantly, according to Solectron.

"Solectron will significantly enhance our high-end PCBA technical capabilities through our access to IBM's intellectual property and patents for certain PCBA manufacturing processes in the area of electrical test," states Dr. Saeed Zohouri, Solectron's senior VP and chief technology officer. Patents and disclosures cover bare die bonding and encapsulation; flip chip attachments; testing of the IC; and manufacturing processes including interconnection metallurgy, assembly equipment design and systems, test fixturing and boundary scan methods. Solectron will also add expertise in electronic packaging such as high-pincount column grid arrays. The company says the deal will enhance its capabilities in both failure analysis and SMT assembly.

Manufacturers' Services To Add IBM Operation

Manufacturers' Services Ltd. (Concord, MA) has signed an agreement to acquire IBM's fulfillment and integration operation in Charlotte, NC. The EMS provider will lease a 250,000-ft2 box-build facility on IBM's Charlotte campus, where Manufacturers' Services will become a neighbor of Solectron. Financial terms were not disclosed, and the deal is due to close this month.

Also, the EMS provider has a long-term, renewable agreement with IBM to supply IBM and IBM OEM customers from the facility. It currently manufacturers products primarily for point-of-sale, industrial computer and finance industry applications.

"We're pleased to operate our first site on the East Coast," says Mac Blythe, director of marketing at Manufacturers' Services. While the box plant will enable the EMS company to supply customers from the East Coast of the U.S., the company already operates customer-dedicated Product Completion Centers in Bridgewater, NJ, and Richmond, VA, as well as San Jose, CA.

The Charlotte plant will provide advanced materials management, final assembly, customized configuration, documentation and worldwide order fulfillment.

"We are very pleased with the strategic fit this operation offers our customers, as they continue to outsource their build-to-order requirements," states Kevin Melia, president and CEO of Manufacturers' Services. "The Charlotte operation's skilled teams and established distribution channels complement our offerings and strengthen our global systems integration and logistics expertise."

"It complements very well what we do in Europe at the Valencia [Spain] facility," Blythe points out. What's more, Valencia already serves as a fulfillment and distribution center in Europe for a certain IBM division. Acquiring the Charlotte operation will allow Manufacturers' Services to expand its service agreement with that division.

Is Manufacturers' Services too dependent on IBM? "IBM is a very important customer to us, but we have a number of large customers. We've done a good job of diversifying our customer base over the last several years," Blythe responds.

All of the nearly 200 IBM employees affected will join Manufacturers' Services. Also coming over as a company VP is Herb Watkins, former senior location manager for IBM Charlotte and current director of IBM supplier relations and procurement training.

IBM's relationship with Manufacturers' Services began with its acquisition of IBM's design, manufacturing and logistics operation in Valencia in 1995. IBM says this relationship allows IBM to concentrate on providing its customers with complete solutions.

The Charlotte deal is Manufacturers' Services' sixth acquisition since its founding in 1994.

SCI Takes Over Nokia Plants

Nokia (Helsinki, Finland) recently signed global outsourcing agreements with SCI Systems (Huntsville, AL), which will take over production at two Nokia facilities in Scandinavia -- Motala, Sweden, and Johdinkuja, Oulu, Finland. These agreements are expected to become effective this month.

SCI already builds digital set-top boxes for Nokia, based on a contract announced last year (Oct.'97, p. 2). Expanding on that relationship with SCI, Nokia will outsource its remaining multimedia network terminal production in Motala. As a result, SCI will purchase production assets for a facility that, according to Nokia, has an annual volume of one million units. Some 450 plant employees will join SCI, which will lease about 22,000 m2 (237,000 ft2) within the Motala facility. It has served as a pilot production plant for new digital satellite TV receivers as well as manufacturing analog satellite receivers.

Nokia Multimedia Network Terminals will focus its resources on product design and distribution concepts, including satellite, fixed cable and terrestrial broadcasting, application software development and marketing.

In Finland, Nokia Telecommunications has contracted SCI to build network access products for fixed telecom networks as well as transmission cards for base station units in mobile networks. SCI will take over production at Nokia's 7400-m2 (80,000-ft2) Oulu factory, which currently manufacturers these products. Leasing this space, SCI will acquire plant employees, which number about 300, and related assets. Nokia Telecommunications will be able to use not only the Oulu site's capacity but that of other SCI locations worldwide.

"The target is to have strong products and strong contract manufacturing," says Tapio Karjalainen, VP of operations for Fixed Access Systems at Nokia Telecommunications. "By doing this, we have more flexibility and opportunities for growth." He reports that 20 to 40% of production for Nokia Telecommunications is outsourced and that this portion is increasing. The Nokia unit sources contract manufacturing both locally and globally and considers SCI a global partner

Jabil To Acquire HP LaserJet Unit

Under a newly-signed a memorandum of understanding, Jabil Circuit (St. Petersburg, FL) intends to buy the manufacturing assets of Hewlett-Packard's LaserJet Solutions Group Formatter Manufacturing Organization (FMO). Jabil plans to acquire the board assembly assets of the FMO operations in Boise, ID, and Bergamo, Italy, and offer employment to the 600 employees of those operations. The deal is due to close by August 31.

When acquired by Jabil, these operations will continue to supply PCB assemblies to six HP final integration sites around the world. Jabil will lease about 70,000 ft2 in Boise and about 40,000 ft2 in Bergamo and then construct new facilities to be finished in calendar 1999. The new facilities will be consistent with typical Jabil facilities, which range from 110,000 to 150,000 ft2.

"We have studied many OEM factory acquisition opportunities offered over the last several years and feel that HP's FMO operations are a remarkable fit for us," states Thomas Sansone, president of Jabil Circuit. "With the acquisition of these operations, we will gain an experienced and talented manufacturing team that we believe is uniquely compatible with our culture and values. We gain participation in the printer market as a strategic supplier to the market leader, and we establish new manufacturing geographies in both the Western United States and in Continental Europe." He adds that Jabil will also acquire technology, notably specialized automation and process-development capabilities.

"This opportunity represents our first significant acquisition," says Scott Brown, Jabil's VP of corporate development. "With the help of the talented and professional team at HP, we intend to achieve a new standard of seamless transition for this kind of manufacturing strategy conversion."

With this transaction, Jabil expects HP to be a 25% customer in fiscal 1999. Jabil did have a prior relationship with HP.

HP says the new relationship will allow HP to implement a more efficient business model.

Build To Order

Part Three of a Continuing Series

Cisco Pushes Outsourcing Beyond Box Build

The second part of MMI's series on build to order showed why BTO is an up-and-coming trend in the EMS industry (see December '97). Cisco Systems is a case in point. The well-known networking company believes that build to order applies not only to its internal operations but also to its manufacturing partners. And when Cisco outsources a BTO program, the company expects its partner to fulfill orders to Cisco customers.

"Half of our units shipped will never enter a Cisco factory by the end of this year," says Pete Rukavina, Cisco's director of global supply management.

For Cisco, the key valued-added steps in direct order fulfillment are adding interface cards, downloading software, performing a system quality test of some sort, boxing up the product, putting in the right accessories kit, and shipping. Sounds straightforward, but how does Cisco ensure that its EMS providers are all using the right tests?

Taking a page from its own technology book, Cisco has developed a proprietary testing system that is network based. As a result, Cisco can plug all of its contractors into Cisco's testing environment. "So our test is residing at their place," explains Rukavina. Not only can Cisco download tests over the network, it can also get quality data back.

The fulfillment site must also have access to Cisco's production control system. That means exposure to the company's ERP network.

Increasingly, OEMs that outsource order fulfillment actually put order administration terminals at contractor sites. "That is exactly what we do," confirms Rukavina. This practice allows the contractor to have electronic access to the OEM's orders while avoiding software compatibility issues.

But there is a potential drawback when OEMs bring their fulfillment systems to the EMS provider's site. Different OEMs tend to use different fulfillment systems. So the EMS provider may be faced with installing multiple systems. Can order fulfillment systems be standardized some how? For that to occur, says Rukavina, you need standard products. "PCs are about the only thing standard enough," he adds.

Cisco outsources order fulfillment basically for two reasons. "First, we can pull cost out. Bringing everything into the Cisco facility is more expensive than having it done at the subcontractor. Second, this is a more scaleable way to get more global coverage. We don't have to put a factory in Europe, for example, to keep short lead times."

Since Cisco doesn't do a lot of building products to stock, order fulfillment and build to order go hand in hand. But it's no cinch to build products to order when you can't get a head start by doing some prebuild. "We want to control costs. We're not going to initiate any prebuild activity," Rukavina points out. Adding to this challenge are short lead times. "Most products are under a week lead time," he notes. As a result, Cisco must have short cycle times, a very flexible supply chain, and crisp planning to assure the right assemblies are delivered at the right time. These attributes apply whether manufacturing takes place at Cisco or is outsourced.

But when order fulfillment is outsourced, the EMS provider avoids the inaccuracies of building boards to a forecast. "They have access to actual orders instead of a forecast stream. Their board builds can be synchronized to customer orders as opposed to building boards by forecast," says Rukavina.

First Customer for BTO Program

A major computer OEM is on its way to becoming EFTC's first customer for build-to-order services. The OEM has signed a letter of intent for EFTC Services group to provide the OEM with BTO assembly services later this year. EFTC (Denver, CO) said earlier that it had partnered with a carrier to offer BTO services (Feb. '98, p. 8). This BTO project will take place at EFTC Services' Memphis location, near the primary sort hub of Federal Express.

"This letter of intent puts us ahead of schedule in rolling out our build to order program," states Allen Braswell, president of EFTC Services. "It demonstrates that computer companies are committed to revamping their traditional methods of manufacturing and distribution, and our integrated hub services model provides them with an attractive alternative." He says his group is developing a unique approach to serving BTO customers.

EFTC does not expect to generate significant revenue from the project until late 1998 or early 1999. The company has renovated 30,000 ft2 for BTO assembly in Memphis. Although full BTO assembly is not yet underway, EFTC has started preliminary work for this unnamed customer.

Analysis

Three Suppliers Move Up the Value Chain...
But Say They're Not Going All the Way

EMS companies are not the only pursuers of outsourcing business. Some large materials suppliers also want a piece of the action, but you don't see them competing head-to-head with the big names in the EMS industry. These suppliers go after value-added opportunities that often do not fit the classical definition of contract manufacturing.

This month, MMI presents three examples -- two connector companies and an enclosure supplier -- that have developed niche strategies for their businesses that cater to outsourcing. And these strategies all have some things in common:

#Board assembly services are avoided or offered only in a limited way.

#Low or low-to-medium volume is the focus.

#These companies provide sub-assemblies of various kinds, but do not engage in finished product manufacturing.

#These suppliers do not consider themselves in competition with the likes of SCI Systems or Solectron.

#But these suppliers are expanding their value-added businesses that depend on outsourcing.

How can a materials supplier move up the value-added chain with-out offering volume board assembly or full box build? For the answer, let's start with two connector companies, AMP and Berg Electronics.

AMP is putting resources behind a growing business in value-added assembly. The company is opening an assembly plant in Hayward, CA, and plans to start up another one in Shanghai, China, later this year. Known as AMP Packaging Systems (APS), this assembly business operates a 200,000-ft2 plant in Round Rock, TX, and another facility in Dublin, Ireland.

The types of products APS goes after are "generally speaking backplane, card cage oriented products as opposed to motherboard, daughter card, single-box solutions and products," explains Brian Patterson, AMP marketing director for Engineered Systems Products. APS would not consider laptops, desktops, peripheral cards or printers, for example. Nor does APS offer daughter card assembly. About a third of APS's business is backplanes; about a third is card-cage level assembly; and roughly a third is completed interconnect systems without daughter boards.

"We started out in this business basically as a backplane manufacturer. Being a connector company, it was a logical thing to do," notes Patterson. Five to six years ago, APS started moving into card cage work, and then in the last year or so began to manufacture on the rack level. APS also brings to the party its ability to mix copper and fiberoptics.

APS is the manufacturing arm of the AMP CIR-PAC Group. The group also offers design services through its other organization, AMP Circuits and Design. Design services can be supplied alone or in concert with manufacturing.

Berg is expanding its assembly business too. But Berg's value-added strategy has taken it in a different direction. The company assemblies Application Specific Modules (ASMs) in its Fremont, CA, plant, which has been expanded from about 37,000 ft2 to 50,000 ft2. ASMs consist of small, odd form factor subassemblies that are rich in connectors that Berg likes to supply.

"We are not a contract manufacturer in the traditional sense of the word," says Sohail Umar, director of marketing for Berg's ASM Division. "But we do a lot of contract assembly." Berg describes the division as a turnkey provider of specialized interconnect systems. "We're optimized for small form factor PCBs. We're also optimized for high mix, low volume. Because we're high mix, low volume, we don't directly compete with traditional contract manufacturers," says Umar. The division also provides design services including circuit design and layout and mechanical design of the interconnect solution.

A typical product manufactured by the ASM Division is a paddleboard used in telecom switching systems. For this device, connectors are mounted on both ends of a PCB with active and passive components in the middle. The division does work for companies such as Lucent Technologies, Alcatel, Hewlett-Packard, Honeywell and Cypress Semiconductor.

Value-added assembly is also part of the strategy followed by the Technical Environments and Enclosures segment of Applied Power (Milwaukee, WI). But the Applied Power unit approaches outsourcing from the vantage point of an enclosure supplier. Board assembly is not the focus. "We have some capability in boards. It's more of an adjunct than a core strategy, more to demonstrate technical competence. Our real strategy is around enclosures," says Phil Burkhart, president of Technical Environments and Enclosures. "We're looking at it from the systems packaging end. What do we incorporate into the package?"

Along with an enclosure, the Applied Power unit will supply such items as connectors, cables, backplane, power supply and cooling. Boards may also be included to serve ancillary roles such as thermal control. But Applied Power draws the line at supplying finished products. Building a complete box "is not our strategy," Burkhart points out. Rather, customers perform final integration and testing in house.

Having made or announced nine acquisitions in less than two years, Applied Power has put its enclosure business on the fast track. The company recently announced three deals. It plans to purchase Premier Industries (Hudson, NH), a supplier of enclosures and integration services, and Product Technology Inc. (Irvine, CA), a provider of cable assembly and integration services. Applied Power has also entered into a merger agreement with ZERO Corp., whose expertise in thermal management is a valuable commodity for Applied Power. The company expects its total enclosure business will reach $500 million in fiscal 1999 starting in September.

This Supplier Wants To Be a Full CM

TMCI Electronics (San Jose, CA), whose subsidiaries supply enclosures, cables and harnesses and related services among other things, tells MMI that it's long-term goal is to be a full-service contract manufacturer.

The company recently moved a step closer to that end with its proposed acquisition of SMA Microsystems and SMA Telecom, two Raleigh, NC-based systems integrators for the communication and computer industries.

"If an OEM comes to us and wants us to build a product and ship it directly to the [OEM's] customer, we're not able to do that right now," explains Chuck Shaw, TMCI's CFO. He adds, "We intend to be able to do that."

At present, TMCI does not have the ability to assemble boards. But Shaw says board assembly "is the next logical step."

The company intends to pursue its contract manufacturing goal through acquisition.

World Markets

European CMs Showing Up on MMI Radar

As the outsourcing world knows, multinational CMs from North America have established a major presence in Europe. So it's easy to loose sight of Europe's home-grown CMs. But they do exist, and four of them were large enough to make the MMI Top 50 for 1997 (see March '98). Still others are appearing on the EMS radar screen. Two such contractors have made recent moves worthy of note.

Kyrel Oy, a CM based in Kyroskoski, Finland, plans to expand its EMS business in France through a subsidiary called Kytronic. According to Jacques Marouani of Electronique International, Kyrel Oy is investing 50 million francs (about $8 million) for contract manufacturing in its Luneville site in Eastern France. Marouani reports that Kyrel Oy is expecting to generate EMS sales of 450 million francs (about $75 million) from the French subsidiary this year.

Employment at the French site is expected to increase from 120 people at present to 200 by summer. Marouani says the operation has a capacity of 25 million components per week. He reports that the French operation is already building business telephone boxes for Alcatel.

Kytronic was set up in 1995 to pursue EMS, but along the way started manufacturing other products such as fiberoptic panels. Today, these panels are produced in Finland by a Kyrel Oy subsidiary. Kytronic can now put more effort into EMS.

For 11 months in 1997, Kyrel Oy's sales amounted to $75 million, which was not enough to qualify for the MMI Top 50 on an annual basis. The company did make the list in 1996 with $180 million in sales. But Kyrel Oy says it will return to the growth track this year and plans to triple its sales for 1998. The new EMS business in France is obviously part of that plan.

Another European CM, PartnerTech, went public last year with a listing on the Stockholm Stock Exchange. Based in Atvidaberg, Sweden, PartnerTech generated 1997 sales of SEK 542.0 million (about $69 million), up 11% from the previous year. For 1997, net profit after appropriations and income taxes came to SEK 8.3 million (about $1.0 million).

Averaging 537 employees last year, PartnerTech operates a plant with 387,000 ft2 of production space and three SMT lines. About 10% of sales come from product development services, and the company employs about 50 engineers.

PartnerTech focus on four markets, of which communication and information represents the largest at 53% of 1997 sales. Recent contracts in this segment include radio base station products for Ericsson Radio Systems AB, a fax machine for ITO Communication, and lottery terminals for EssNet AB. Within the medical area, PartnerTech manufactures products such as allergy test instruments for Pharmacia & Upjohn AB, a heart monitoring system for Ortivus AB and mammography modules for Siemens-Elema AB. Payment systems and security are the other markets in PartnerTech's strategy. For example, PartnerTech builds credit card terminals for a subsidiary of ICL. The CM sees potential for further growth primarily in communications, IT and medical technology.

PartnerTech estimates that EMS revenues in the Swedish market totaled about SEK 7.6 billion (about $960 million).

The company started its contract manufacturing business in 1989 when it operated as Facit Partner. Since then, the contractor changed hands several times before going public.

News

Solectron Growing in Brazil and Expanding into Central Europe

Closes NCR Deal

Solectron's move to Brazil last year appears to be paying off, while the EMS provider plans to open up in a new region, Central Europe.

The company has started construction of a 300,000-ft2 facility in Sao Jose dos Campos, Brazil, in anticipation of rapid growth there. Currently at 461 employees, the Solectron work force in Brazil is expected exceed 1500 within two years.

In addition, Solectron will build a campus in Timisoara, Romania, and expects it be on line in the next 18 months. The new campus has the potential to grow to 25,000 m2 (266,800 ft2) of capacity and employ more than 1500 people. Operations there will begin this summer in a leased facility.

"With the addition of Romania, we will be able to offer our customers a low-cost, high-volume outsourcing solution in Europe," states Dr. Ko Nishimura, Solectron's chairman, president and CEO. "We have recently added this capability in Mexico to serve our Americas region and Suzhou, China, for our Asia/Pacific region. With three low-cost, high-volume manufacturing centers, Solectron will be able to offer our multinational customers more options to get their high-volume products to market at an accelerated pace through an optimize supply chain."

The company says it will not transfer work to Romania from other European sites, but will start new high-volumes programs there for European customers.

"We looked at several different locations in Central Europe before choosing Romania," states David Kynaston, president of Solectron Europe. "Romania offered us a well-educated and abundant work force, a sound city infrastructure, and proximity to our Germany operation. Our strategy is to utilize the Romania facility for high-volume production and leverage our German and other European operations for pre- and postmanufacturing services."

Market researcher Michael Hannon can understand Solectron's choice. "One of the dangers of locating in one of Eastern Europe's fastest growing production bases, such as Hungary, is wage inflation," says Hannon. "Being located in Romania near the Hungarian border can get around this wage inflation, and with labor costs just over 50% of Hungarian labor costs, the initial costs are much lower anyway."

He adds, "I know there has been a lot of pressure on the global CEMs to locate in Hungary -- near certain large, well-known OEMs. But when the factories are built and the OEM can choose between high-cost Budapest and a few kilometers over the Hungarian border into Romania, it may very well be a different thing, for certain products." Hannon's company, MHM (Ayr, Scotland), has published a report called East European EMS Manufacturing Facility Partner and Greenfield Site Opportunities.

In Brazil, Solectron says expected growth will stem from multinational customers seeking local manufacturing and distribution for Latin America. The company has taken on several new projects in Brazil in addition to supplying Ericsson. One of those is an inkjet printer program (see next article). Solectron came to Brazil in 1997 when it acquired Ericsson's 60,000-ft2 board assembly operation in Sao Jose dos Campos, near Sao Paulo. That original leased facility has since been expanded to 124,000 ft2 with an SMT capacity of four lines. The operation has also added system build capabilities.

Meanwhile, Solectron said last month that it closed its acquisition of NCR manufacturing assets in Dublin, Ireland; Columbia, SC; and Atlanta, GA (see Jan. '98 and April '98, p. 4). At 116,000 ft2, the Atlanta operation will initially employ 500 people and become Solectron's build-to-order (BTO) center for the East Coast of the U.S. Starting with 400 employees, the Columbia facility will utilize 155,000 ft2 and offer customized systems design and complex systems assembly services. Solectron plans to harness the capabilities of these two facilities plus its Massachusetts plant, its existing Charlotte, NC, facility and the IBM ECAT facility that Solectron intends to buy in Charlotte. The strategy is to create an optimized supply chain on the East Coast of the U.S. (see article on p. 2).

Taking up 120,000 ft2, the Irish facility will begin with 300 employees and provide BTO, configure-to-order and complex systems assembly for Europe. The NCR assets were valued at about $100 million.

HP To Use SCI and Solectron in Brazil

Hewlett-Packard has said it will use contract manufacturing to begin production of inkjet printers in Brazil this month. Both SCI Systems, which operates a facility in Campinas, Brazil, and Solectron, whose Brazilian site is in Sao Jose dos Campos, will provide manufacturing services for production of the HP DeskJet 692C inkjet printer. HP says the Brazilian production contracted from the two EMS companies will initially serve the Brazilian market.

This move is part of a regional hub manufacturing strategy followed by HP's Consumer Products Group and already in place in Europe and Asia. The hub strategy says that each of the group's worldwide regions should be self-sufficient in the supply of products. In Latin America, that has not been the case. Products for Latin America have come primarily from Asia, and to a lesser degree from North America. An HP spokesman says that supplying products from Asia is not the right way to go long term because the supply chain is too long for products of this type.

According to the spokesman, using contract manufacturers in Brazil is a small initial step toward implementing the hub strategy in the Americas. Earlier this year, HP announced it would reduce both production and work force at its inkjet printer site in Vancouver, WA (March '98, p. 5). The company is not prepared to say how it will serve North America and the balance of Latin America. But the spokesman did say that the bulk of production in North America will be contracted. The Consumer Products Group's strategy is to develop and stabilize new product platforms in Vancouver, and then move them out to contract manufacturers.

The work force reduction in Vancouver is slated to take place during the fiscal year ending Oct. 31. HP says it will need to ramp up with contract manufacturers as it dials down internal production in North America.

Another OEM divesting assets in Finland (see article on p. 3)...If all went as planned last month, Elcoteq Network Corp. (Lohja, Finland) acquired a board assembly and module manufacturing operation in Vaasa, Finland, from the Relay and Network Control Division of ABB Transmit Oy. The operation has annual sales of about FIM 70 million. But Elcoteq has done some divesting of its own. Earlier this year, the EMS company agreed to sell its PCB fabrication unit, Printeq-Piirilevyt Oy, which operated at a loss in 1997. Elcoteq says this divestiture supports its strategy of focusing on EMS.

Siemens outsources PCs...Don't overlook Taiwanese companies that specialize in motherboards and PCs. They can be major players in the outsourcing game. Take Acer. The Taiwan-based company will take over a motherboard and systems plant in Augsburg, Germany, from Siemens Nixdorf. This plant can produce 1.4 million PCs a year. Acer will manufacture desktop and portable PCs and servers for Siemens, which will keep its PC marketing and distribution operations. The Augsburg operation will retain about 2000 of its 2450 employees.

More expansions...Varian Associates' Tempe Electronics Center in Tempe, AZ, has added 80,000 ft2, bringing total space at the facility to 190,000 ft2. The center, which produces up to 1800 different products each month, now ships 80% of its output to customers outside of Varian. Plans are to increase the work force from 600 at present to 1100 over three years. The expansion includes an 1,800-ft2 clean room, which will house TAB (tape automated bonding) equipment to be used in the manufacture of Varian's digital x-ray imagers. ...Pemstar, a fast-growing CM based in Rochester, MN, just broke ground on an 87,500-ft2 addition to one of its buildings there. When this work is finished, the CM expects to have a total of about 230,000 ft2 in Rochester. The CM also operates in Guadalajara, Mexico, has a joint venture in Thailand and another one proposed for Singapore, expects to start production in China in July, and is performing due diligence for sites in Ireland and Hungary. For Pemstar's fiscal 1998 ended in March, sales jumped to $164.7 million from $32 million the previous year. The CM was started in 1994 by former managers from an IBM disk drive operation that was once located in Rochester.... GET Manufacturing (Mountain View, CA, and Hong Kong) has taken an additional 50,000 ft2 in Tijuana, Mexico, and expects to have the space on line by the end of July.

Sidus Putting Plant in Mothballs

To Exit Distribution Business

Sidus Systems (Toronto, Canada), a CM and systems integrator, has decided to pull the plug on its distribution business and mothball its Austin, TX, plant. The company is reducing its North American work force by over 20%.

"Clearly, the one reason for us to mothball the facility is our orders and production became out of sync with the infrastructure we had in place," says Michael Smith, CFO of Sidus. He confirms that the plant was involved in a CompUSA program announced last year and that the program had something to do with mothballing the plant. Under that program, Sidus was contracted to build PCs to order for CompUSA (Dec. '97, p. 2). Smith points out that Sidus and CompUSA remain engaged in a supplier relationship.

According to Smith, Sidus has enough capacity in its Canadian operation to satisfy any orders it has at this time from the U.S.

It would be wrong to assume from this decision that Sidus "is backing out of the contract manufacturing business in the U.S.," says Smith. "In fact, we're looking at going in the opposite direction."

"We're looking to expand North American contract manufacturing," he declares. Indeed, the reason Sidus is getting out of distribution is to focus more on that business, reports Smith.

Out of Sidus' fiscal 1997 sales of $219.6 million Cdn from continuing operations, distribution accounted for $83 million Cdn . "We found it very difficult to make any money in it," says Smith.

For fiscal Q1 ended Feb. 28, Sidus posted a loss of $8.7 million Cdn before discontinued operations and a net loss of $15.0 million Cdn. Sales from continuing operations were $30.3 million Cdn.

On the plus side, Sidus has signed a contract with a major U.S. direct marketing company for the manufacture and sale of PCs and related components. This contract is expected to generate over $60 million Cdn in revenue for the current fiscal year, ending Nov. 30.

Last month, Howard Cohen was named president and CEO of Sidus. Most recently, he served as president and COO of Peak Technologies Group. Al Muzar, co-founder of Sidus, who had been chairman, CEO and acting president, announced his retirement, but will continue as a director. John Albright, a director, has been appointed chairman.

Laughlin-Wilt Acquires Quick-Turn House

Laughlin-Wilt Group (LWG of Beaverton, OR), a regional CM in the Northwestern U.S., has acquired Quick Turn Assembly (QTA), a CM in Irvine, CA. Terms were not disclosed.

This move follows the earlier news that LWG will open a 32,000-ft2 facility in Orange County to serve Southern California (March '98, p. 7). In June, QTA's operations will be consolidated into the new LWG facility in Lake Forest, CA.

"With the addition of QTA to our Orange County expansion plans, we have an immediate solid base from which to grow the business. We will continue to serve all the current QTA customers, and we will be in a position to offer expanded services to them and to new customers," states Joe Laughlin, president and CEO of LWG.

QTA has 50 employees and revenue of $2 million a year. The ISO 9002-certified operation provides customers in Orange County with quick-turn and production services. QTA's former owners, Al Maxinoski and Laura O'Neill, will join LWG as managers.

For the new Orange County plant, LWG will invest $2 million in equipment and will add about 40 more employees during 1998. The total investment will amount to $6 million over three years.

Asian crisis delivers a hit...PAGG (Milford, MA) has seen a dramatic slowdown from Eaton, a major customer whose semiconductor equipment business has suffered from the Asian flu. "Definitely, the Far East is having an effect on a player like PAGG. We just followed a prudent business path to cut back on people who were dedicated to that program," says Mike McGrail, PAGG's VP of business development. But McGrail is optimistic about new business, which includes SigmaData (New London, NH), a PC peripheral upgrade firm.

Start-Up Hits Ground Running

Qualcon, an EMS start-up in Flowery Branch, GA, has been fully operational only since January, and yet it is already producing a rather wide variety of products. These include PC motherboards, cable modems, RF devices, an electronic brake controller, a medical device, two telecom controllers, a military device and point-of-sale equipment. "Our proforma called for 1998 sales of $5 million, and we have a realistic chance of exceeding $15 million," says Bob Bilbrough, Qualcon's founder and president.

The company is promoting its exclusive use of continuous flow manufacturing. Cycle times average about 32 minutes. Relying on Siemens placement machines, Qualcon reports it can change lines over from product to product in about five minutes. Equipment includes two SMT lines, through-hole machines and in-circuit test equipment. The CM employs 32 people in its 21,000-ft2 facility.

Qualcon estimates the total available market (cost of goods sold) in the Southeastern U.S. at $23.55 billion in 1997, of which about $2.52 billion was outsourced. The company further estimates that the 1997 TAM in Georgia amounted to about $3.11 billion, with $344 million contracted out. According to Qualcon, Georgia CMs captured about $58 million of that outsourcing. The company says it is well-positioned to retrieve a big piece of the EMS business that left Georgia last year.

Celestica Files for IPO

Completes Mexico Purchase

Celestica Inc. (Toronto, Canada) has filed with U.S. and Canadian authorities for an initial public offering of subordinate voting shares with an estimated gross value of $350 million. The proceeds will be used to prepay debt, while remaining funds, if any, will be earmarked for general proposes.

Lead underwriters for the IPO are Morgan Stanley Dean Witter and RBC Dominion Securities.

Meanwhile, Celestica has closed the deal to buy Lucent Technologies' facility in Monterrey, Mexico (March '98, p. 6). The facility becomes Celestica's first one in Mexico. The company says this move is in response to growing customer demand for a Celestica presence in Mexico.

Concurrent with the IPO, the Celestica parent company, Celestica International Holdings, has changed its name to Celestica Inc., while the operating company formerly known as Celestica Inc. has been renamed Celestica North America. Prior to completion of the offering, Celestica Holdings will merge with its wholly-owned subsidiary, Celestica International, and the merged firm will continue to operate as Celestica Inc.

More financial news...Jabil Circuit's (St. Petersburg, FL) stock has begun trading on the New York Stock Exchange under the symbol JBL. The company joins its competitors, SCI Systems and Solectron, on the Big Board....DII Group (Niwot, CO) took an after-tax restructuring charge of $38.9 million in Q1 ended Mar. 29 for its Orbit Semiconductor unit, which reported an operating loss for the quarter in addition to this charge. Orbit expects to be marginally profitable in each of the next three quarters. Excluding this charge, DII earned net income of $6.8 million (see table). DII's contract manufacturing unit, Dovatron International, grew Q1 sales by 77% over a year earlier to $150.4 million. This growth reflects momentum from new customers including Siemens Medical Systems, Mylex and Pace Micro Technology. Also, Dovatron has ramped production for Matrox Graphics (Montreal), a large customer that supplies graphics accelerator cards, and has won a contract from ASCOM Business Systems, a Swiss telecom company. This win stems from DII's linked marketing strategy. Dovatron's Q2 is expected to be flat to down slightly versus Q1 due to some product changeovers....Flextronics International (San Jose, CA) says the rapid growth of its March quarter primarily resulted from new programs with customers such as Ericsson, Cisco Systems, Bay Networks, WebTV, and Alcatel. In addition, during the quarter Flextronics began its first program with Motorola in Asia and has increased its relationship with Hewlett-Packard, this time in Europe. Flextronics ended its fiscal year in March with sales of $1.113 billion, while net income was $19.9 million after one-time charges.

EMS results from three distributors...Q1 sales at Bell Microproducts' Quadrus Manufacturing Division (San Jose, CA) declined sequentially to $12.6 million, which resulted in a pretax loss of $2.7 million for the division. The company's goal is to make Quadrus profitable by Q3....For Kent Electronics' fiscal year ended March 28, con-tract manufacturing sales were up 36% over fiscal 1997 and represented 37% of $659.4 million in company sales. The Houston-based company says revenues from several new and substantial customers cannot yet offset the decline in business from certain computer and semiconductor capital equipment customers (see March '98, p. 8)....Q1 sales of Reptron Electronics' K-Byte Manufacturing Division (Tampa, FL) increased 6% from a year earlier to $30.5 million.

AVEX Names New CEO

Other Changes in the Offing

After a two-year search, AVEX Electronics' board has appointed Robert McIntyre as president and CEO to replace Jack Kirker who is retiring. McIntyre had served as COO.

The EMS provider is making other changes as well including geographic moves. AVEX has opened a second design center, located in Dallas, TX, and plans to add centers in San Jose, CA, and Atlanta, GA, by the end of Q3. What's more, the company expects to have a presence in Brazil and Central Europe by the end of the year and has studied two sites in China. AVEX is evaluating partnerships in Brazil and says it will probably be in Brazil before reaching Central Europe. The company has narrowed its choices in Central Europe to the Czech Republic or Hungary.

What's more, AVEX is now entertaining the possibility of an IPO. Privately-held J.M. Huber Corp., AVEX's parent company, recently established an AVEX Operating Board with outside board members. One of the Operating Board's first duties is to steer AVEX on a path to a potential IPO in the next several years if conditions warrant. Jack Kirker will serve in the newly created position of vice chairman of the Operating Board.

Kirker and McIntyre first met while at General Electric in Pennsylvania and then worked together for GTE in Phoenix, AZ. Kirker again sought McIntyre's help when he started his own succession planning. At the time, McIntyre was president of the Subscriber Business at Scientific-Atlanta. He joined AVEX in September 1997 as COO, a position that was created to facilitate a smooth leadership transition. That position is no longer needed.

More changes in senior management...GET Manufacturing has named Roger Nordby as president and CEO. He was formerly vice chairman of Packard Bell/NEC, where he orchestrated the relocation of production from Southern California to Sacramento, creating one of the largest facilities in the PC industry. Before Packard Bell, Nordby was senior VP of operations for Maxtor, a disk drive maker....Thomas Frederick has joined Altron (Wilmington, MA) as senior VP and GM of its value-added operations. He will take charge of sales, marketing and manufacturing of Altron's backplane, board assembly and systems products. Frederick's experience includes IBM and Digital Equipment; at the latter, he was a division VP and GM....Bell Microproducts has appointed Steve Petracca executive VP of Bell Microproducts' Quadrus Manufacturing Division. Petracca was most recently a senior VP of Radius and before that served as president and CEO of Reply Corp., a company he founded....Pierrette Kelly, who had been executive VP of sales and marketing at Manufacturers' Services Ltd., has left the company to pursue other interests. ...Ronald Guire has succeeded Kozo Sato as chairman of the board of XeTel (Austin, TX). Guire, who has served as a director since 1986, is executive VP and CFO of Exar Corp., a semiconductor house. Sato remains on the XeTel board.

Software selections for EMS... Solectron has licensed a suite of enterprise relationship management applications from BroadVision. This software will allow Solectron, its suppliers and customers to track orders directly on its extranet and resolve issues such as partial order fulfillment or alternative part/service options. BroadVision will integrate its services with Baan's ERP systems at Solectron....Celestica's Toronto, Canada, site will be using software from MatrixOne to manage the flow of product information from the time it is received from the customer until it reaches the shop floor and material planning systems. Matrix software is already running at Celestica's Exeter, NH, and Fort Collins, CO, sites. This software will tie in with Celestica's component information system (Aspect), ERP system (BPCS), and other downstream systems....IMS (San Jose, CA) has selected SAP to provide an ERP system. The EMS provider hopes to have the system fully implemented within six to nine months....EOG (Hunt Valley, MD) has converted to ManFact II ERP software from DataWorks. Hardware was also upgraded to a client-server, network-based system.

Other EMS providers in the news...Tanon Manufacturing, a CM based in West Long Branch, NJ, and WKK International, which offers contract manufacturing in China, have struck a joint marketing agreement. Through WKK, Tanon can offer a low-cost source in China for labor-intensive products. The agreement also gives WKK access to volume manufacturing, product start-up services and customer support in the U.S. In other news, Tanon's parent company, EA Industries, recently acquired Service Assembly Inc. (Wareham, MA), which became the first Tanon EXPRESS center for quick-turn prototype services.... Nextek (Madison, AL) says it is installing an advanced flip-chip bonding system that is the only one of its type in U.S. contract assembly.

Last Word From John Tuck

BTO: Promising, But Problematic

With one PC company after another jumping on the build-to-order (BTO) bandwagon, one might conclude that BTO is a 1990s kind of concept. It's not. But the PC industry has given BTO a new twist and has shown that BTO is no longer reserved for the OEM world.

Talk to Benchmark Electronics' president Don Nigbor, and you'll discover that BTO dates back to the mainframe days of the 1960s. Back in those days and continuing into the minicomputer era, computer companies configured their machines to the needs of IS professionals. But the PC industry developed differently. Until a few years ago, the PC industry had little need for BTO because first-time buyers lacked the experience to specify their own PCs.

Today is a different story. "Now these people are buying their second and third computer, and they have turned into being just as sophisticated as the full-time data processing people have been historically," says Nigbor. "They [repeat buyers] have a much better understanding of their needs and what they like to see in their computer. And that's where build to order has really started to penetrate that market as well."

As build to order spreads through the PC industry, it has departed from the practices of 1960s and 1970s. The modern version of BTO is no longer confined to OEM facilities. Channel assemblers as well as contract manufacturers can participate (see Oct. and Dec. '97). Secondly, the BTO concept has expanded from building low volumes of customized products to producing configurable products in large quantities.

Build to order "is a very difficult thing to set up. It's a very simple thing to operate," observes Olin King, CEO and chairman of SCI Systems. The company has been doing BTO work for over ten years and still finds customers asking for new wrinkles.

When BTO is outsourced, its problems are as well. For instance, if an OEM is in a BTO mode, volumes may surge at the end of the month, at end of the quarter, or during certain seasons of the year. These surges are passed on the assembly provider. Other questions emerge for the provider. How do you ensure that each sales order generates the right configuration with the latest ECNs? How do you handle documentation and traceability? How do you ensure that there is enough material on hand for each configuration, but not too much? How do you know that it was tested properly? For Cisco Systems' answer to the testing issue, see the first BTO article on page 4. Sure, software may be a large part of the answer, but often it's proprietary.

One way to address these problems is to acquire an OEM operation with BTO capabilities. These capabilities appear front and center in both Solectron's acquisition of NCR facilities (p. 2 and 8) and Manufacturers' Services' intention to take over an IBM plant in Charlotte, NC (p. 3).

Despite the hurdles of BTO, MMI believes that as more box build is outsourced, an increasing portion of it will be done on a build-to-order basis. As in the past, the PC industry will serve as a harbinger of outsourcing to come.

MMI April 1998

MMI June 1998

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