Cover story
Flood Gates Opening for Telecom Outsourcing
Feature articles
Declining Margins May Speed Consolidation
More Alliances in Different Flavors
Forecast for Five PC Supply Chain Models
News
Pemstar Strikes Deals with Bell Micro + Fluke
Solectron To Gain RF Assets from Glenayre
Lexmark Electronics Takes Czech Route
Nortel Networks has dropped the other foot. After announcing a three-year restructuring plan in January, the company has now released details of its global operations strategy (Jan., p. 10). As part of this strategy Nortel will divest to CMs all but its most complex PCB assembly, most of its electromechanical subsystems manufacturing, and a significant part of its repair business. Operations in 10 locations have been identified for divestiture, and an 11th activity is being studied for divestiture or outsourcing (see table below).
The Nortel plan affirms what analysts and others have been saying ever since Ericsson embarked on its global outsourcing program. They have seen a largely untapped reservoir of outsourcing potential among vertically integrated telecom companies. Sooner or later, they have predicted, this telecom group will be compelled to start opening the flood gates and begin large-scale outsourcing. Indeed, some of this activity is already taking place, but in private. Yet the Nortel announcement leaves little doubt regarding the future of outsourcing in the telecom sector.
Over the next two to three years, outsourcing from the telecom sector could produce as much as $10 to $15 billion in new business for the top tier of the EMS industry, according to Jim Savage, senior EMS analyst in the New York City office of Thomas Weisel Partners. Savage recently presented his take on telecom outsourcing at the Electronic Manufacturing Services and Components Conference held by Thomas Weisel Partners last month in New York, NY. TWP, a research-driven merchant bank, was formed in January of this year.
"We believe virtually the entire segment made the strategic decision that they don't want to be vertical anymore," said Savage.
For six telecom companies -- Alcatel, Ericsson, Lucent Technologies, Motorola, Nokia and Nortel -- Savage estimated total cost of goods at about $80 billion in 1998, of which some $6 billion was outsourced. He expects telecom divesting to be "meaningful" and EMS penetration of the telecom market to rise from about 8% in 1998 to about 20% in three years. As a result, TWP predicts that the six telecom companies will contract out in excess of $20 billion worth of work in 2001.
"Within five years, there will be continuing penetration beyond that so that eventually we think as much as 30 to 50% overall of telco COGS will be outsourced. We can see this within a five-year period being a $50-billion market for EMS," adds Savage.
He says the increase in telecom outsourcing alone will result in somewhere between 15 and 20% compound annual growth for the top tier over the next three years. With the addition of new business from other major OEMs, "we think there will be compound growth for the top tier well in excess of 30%," declares Savage. Based on such rapid growth over the next three years, Savage believes "there will be a scarcity of resources in this industry."
The Nortel announcement is expected to involve about 4000 out of about 8000 employees that the company originally said would be affected by its restructuring plan. Of the 4000 employees, about 3000 work in operations slated for divestiture. Of those, most are expected to join CMs that take part in the divestitures. Since this move only covers about half of the employees to be affected ultimately, it can be seen as a first step in Nortel's outsourcing program. Nortel projects savings of $250-$300 million a year when restructuring is completed within 18 to 36 months from its January start date. The company says this step covers its 1999 decisions.
Analyst Jim Savage estimates that this first phase will probably create "somewhere around" $1.25 billion in revenue for CMs. Of that amount, he reckons probably $300 to $500 million in electromechanical work, between $600 and $800 million in board assembly, and maybe $100 million in repair.
"We think in excess of two billion dollars will be outsourced primarily through divestitures but also program wins over 18 to 36 months," he adds.
Nortel says use of contract manufacturing will allow it to put internal resources into specialized manufacturing skills that offer competitive advantage and are not easily found on the outside.
In the shift from vertically integrated manufacturing to a virtually integrated supply chain, Nortel will rely on seven systems houses to link with contract manufacturers and other parts of its supply chain. Those houses are located in St. Laurent and Calgary, Canada; Raleigh, NC; Billerica, MA; Monkstown, Northern Ireland; Galway, Ireland; and Chateaudun, France.
Among major telecom companies, Ericsson was first to begin a large-scale outsourcing program that included plant divestitures. Although others are now engaged in outsourcing efforts of their own, Ericsson continues to maintain a high profile. The company has announced two more plants being sold.
As briefly reported here last month, Ericsson intends to sell its Visby, Sweden, operation to Flextronics International. Focused on mobile systems infrastructure, the Visby plant primarily manufactures radiobase stations. Flextronics will acquire the entire facility and has agreed to offer jobs to all 900 plant employees. The transfer of assets is slated for July 1.
Ericsson says high-volume manufacturing and other activities that cannot be regarded as core competencies have been subject to outsourcing for some years.
"This is an important step in the process of change and the reduction of personnel that was announced earlier this year. Our employees will be well served to join Flextronics, an excellent employer and a top quality performer, which was previously proven when Flextronics acquired our Karlskrona, Sweden, operation and 800 employees in 1997," states Bjorn Bostrom, senior VP for Ericsson's Supply and IT.
"The addition of Ericsson's Visby plant to our operations will strengthen our ability to service telecommunications clients," states Ronny Nilsson, president of Flextronics' Western European Operations. "We have a track record from previous deals with Ericsson, and this acquisition is further proof of our commitment to expand in this industry and to remain the leading supplier of telecom products to customers."
Bear, Stearns & Co. (New York, NY) estimates the Visby facility will generate annual revenue of $250 to $300 million for Flextronics.
The Visby acquisition will further expand Flextronics' Scandanavian presence. With Visby, the provider will have a total of 1.2 million ft2 among six locations in the region.
Ericsson is also divesting itself of a facility in Kindberg, Austria. According to a new memorandum of understanding, the Dovatron International subsidiary of The Dii Group will buy the Austrian facility, which employs about 300 people. This Ericsson facility handles production and distribution of products including PBX equipment and small multiplexers. As part of this deal, Dovatron will obtain a long-term supply agreement including board assembly, box build and associated logistics and distribution. The deal expected to produce revenues of about $100 million a year for the Dii Group. Other terms were not disclosed.
"We're delighted that this acquisition will allow us to begin our relationship with Ericsson in such a meaningful way. We plan to use this acquisition as a springboard for expansion and strengthening of our relationship with Ericsson around the globe," states Michael Corkery, president of the Dii Group Europe.
He describes the Austria plant as "a strategically important production facility, centrally located between Eastern and Western Europe." Dovatron also operates European facilities in Ireland and the Czech Republic.
Ericsson and Nortel may be the most visible telecom companies making divestitures, but they are not alone. Last year Alcatel sold a plant in Australia to Bluegum Group, which started in the EMS business with the 1997 purchase of an IBM plant in Wangaretta, Australia. Alcatel has also divested itself of at least three other plants. One in Belgium went to MCMS, and two in Italy were sold to an up-and-coming CM in that country (see news item on Telital Manufacturing).
Still others are engaged in major outsourcing programs. Flextronics has now revealed to analysts the name of the major telecom customer that was not identified previously. The customer is Lucent, and Flextronics has been manufacturing for six of Lucent's divisions over the past six months, reports Bear, Stearns. The firm also reveals that over the past 90 days Flextronics has won three new programs from Motorola, a customer Flextronics believes has $1-billion potential in three years.
Who will benefit from the Nortel program? Aside from the usual suspects in the top tier, there is group of contract manufacturers that may well be considered for Nortel's divestitures on the electromechanical side. These are large electromechanical CMs that have recently emerged in the electronics enclosures business, which is undergoing consolidation. Look for more on the electromechanical side of outsourcing in next month's issue.
While consolidation has yet to cause major shrinkage of the EMS industry, life for small and medium-size players isn't getting any easier. "Our view is, yes, there is room for niche players. But the reality in the marketplace is declining gross margins," says Robert McNamara, a managing director at Broadview Int'l. LLC (Fort Lee, NJ). The global IT investment bank recently studied margins of public companies in two size categories.
For public companies under $500 million today, Broadview found that average gross margins have decreased from the 14% range to 10-11% for the period roughly from the fiscal year ended December 1996 to the fiscal year ended December 1998.
Not only that, SGA is taking a relatively bigger bite out of revenue for smaller companies. "Big companies are getting away with lower SGA as a percentage of revenues than smaller companies," says McNamara. Broadview found that public companies above $500 million in sales averaged 5.8%, 6.0% and 5.5% SGA for 1996, 1997 and 1998 respectively. In contrast, a group of public companies below $500 million required SGA of 8.2%, 8.3% and 8.7% for the same three years.
Needs such as an IT infrastructure, new technologies, innovative services and geographic breadth "weigh heavily on the income statement at the same time that gross margins are coming down," adds McNamara. "Smaller companies that have the customers to stay on can remain as long as they're serving their customers well. But they will work hard to maintain net margins."
McNamara suggests an alternative to this struggle. "But if they can partner today at a higher value than five years or ten years from now, maybe they should do so."
What's more, small, well-run CMs have something that larger companies often need more of -- experienced management. "A partnership makes a lot of sense right now. They're looking for operating guys," comments Greg Sefanov, an analyst at Broadview.
"For quality companies, it's a sellers' market right now. A number of guys like Sanmina would love to own these businesses," McNamara remarks. His company acted as advisor in Sanmina's recent acquisition of Manu-Tronics (April, p. 3). McNamara adds that even if a small CM doesn't have the right customer base or geographic presence, the company might still be attractive to buyers that want scale.
Scale can be a barrier to those who want to take part in OEM divestitures. "If you want to play in that market, you need to be a certain size," says McNamara. "Companies in the $200- to $300-million range or less are going to find out they don't have a shot at these deals or have to give away the shop to get them."
McNamara offers two scenarios for mergers and acquisitions in the EMS industry. One is to be acquired by a top-tier player. The other is to "partner with companies in the second tier that are trying to become first-tier players," he asserts. "The toughest thing in this kind of merger is working out management issues."
"I firmly believe you're going to see this. As soon as somebody starts doing it, there will be others trying the same thing," declares McNamara. [Editor's note: This interview was conducted before the merger of ACT Manufacturing and CMC Industries was announced. See first news article.]
Meanwhile, he says lots of companies are having second thoughts about being independent.
While mergers and acquisitions have been the most popular method for combining forces in the EMS industry, alliances offer another way to team up. Though not widespread in this industry, alliances are starting to show up more. And they're taking several forms.
Alliances can be driven by geography where one party covers a regional market or territory that the other wants. Perhaps the most visible exponent of this strategy is Sparton Corp. (Jackson, MI), which has two alliances under its belt. Its current partners are Contract Assembly, Inc. (CAI of Lawrence, MA) and Simclar International (Dunfermline, Scotland). Recently, Sparton announced it is kicking its Alliance Program into high gear. Seeking added market coverage in North America, the company is looking for alliance partners in Texas, the Middle Atlantic States, Research Triangle, the Twin Cities of Minnesota, and Ottawa, Ontario, Canada.
Through the Sparton program, small CMs wanting their independence can still tap the resources of a larger company. Sparton is seeking alliance partners that are private, below $50 million in sales, customer service oriented, technically sound, beyond the start-up phase, and reputable. For Sparton, this is a way expanding its reach without spending for acquisitions.
"Our experience thus far with CAI and Simclar is outstanding," reports Dave Hockenbrocht, Sparton's president. He points to the two alliances as examples of how the program works. "We are sharing customers and internal corporate resources, and both alliances can buy materials from our suppliers as though they were another Sparton-owned facility,"
Partners can also join all or portions of Sparton's business information network and be listed on its website and in its literature. Sparton can provide partners with consulting services in such areas as equipment specification, product and process engineering, management and manufacturing.
"We treat our alliances as though they were a subcontractor for us when their services are necessary to meet a customer's specific needs in an area. The customer does not suffer any higher costs in this arrangement," notes Hockenbrocht.
Alliances can also involve an EMS player with a company in a related field. The idea here is that the two companies with complementary businesses can market their services to a common set of customers. Perhaps most notable example of this type resulted from the alliance of Solectron and wholesale distributor Ingram Micro (see also next article). But there is another, more recent case.
In March, Flextronics International (San Jose, CA) announced a partnership with Corio (Redwood City, CA), an IT infrastructure provider. Under this alliance, Corio will offer remotely hosted and managed ERP applications to Flextronics customers that also outsource their ERP systems. In addition, Corio will engineer proprietary software that will integrate Flextronics' manufacturing applications with PeopleSoft financials. The two companies say this is the first partnership of its kind.
Vertical Networks, a developer of integrated voice and data solutions, signed up as the first Flextronics customer for these services.
Corio remotely hosts enterprise applications for a flat monthly fee. Customers gain access to them through the Internet without investing in IT infrastructure. According to this agreement, applications will reside at Flextronics' data centers.
The proprietary software that will result from the alliance will reportedly allow seamless transfer of new customer orders to the factory floor. OEMs will also have access to factory information that is normally unavailable through disparate, message-linked ERP systems.
This partnership is billed as offering customers one stop for manufacturing and IT outsourcing. The two companies will participate in joint sales and marketing activities.
Alliances can also be based on exchanging technologies in manufacturing. Lytton Electronics (Dayton, OH), a CEM and subsidiary of Techdyne (Hialeah, FL), has just entered into a strategic alliance with Appalachian Regional Manufacturing (ARM) of Jackson, KY. More of an electromechanical CM, ARM's services include sub- and final assembly components, wire harnesses, ultrasonic welding, functional testing, packaging and distribution. ARM is based in Eastern Kentucky, an area of high unemployment and favorable labor rates. Lytton and ARM plan to combine their skills along with those of Techdyne, which provides wire harnesses and cables. "If you put all that together with an less expensive place to manufacture from, you're pretty dynamic," says Barry Pardon, president of Techdyne.
Lytton operates a 78,000-ft2 facility with 210 people, while ARM's 63,000-ft2 facility employs about 70 people. The ARM work force may soon increase by some 15 to 20 jobs because of work being done through this alliance.
It's rare, but potential competitors in the same region can get together. QCI, a CM in Allentown, PA, has formed an alliance with IFCO Technologies, a division of IFCO Enterprises (Malvern, PA) known for its Invisible Fence pet containment devices. Under this alliance, the two firms will offer card assembly services with a focus on medium volumes in lot sizes between 50 and 500 pieces. The alliance will combine QCI's market penetration, customer contacts, segment niche and sales expertise with IFCO's manufacturing capacities, equipment and personnel in Malvern.
QCI specializes in life-critical products, primarily in avionics, medical equipment and telecom. Customers of QCI include B.F. Goodrich Aerospace and Honeywell. Founded in 1985, QCI was bought by T. Christopher Ciesielka, its president and CEO, last year.
In the highly competitive EMS industry, alliances among industry players will likely remain the exception. But an argument can be made for alliances based on geographic fit. And Sparton won't be the last to pursue this strategy. Still, in the past some alliances of this kind were announced, only to drop from sight later on. Plus geographic alliances don't appeal to large players that typically build or buy a presence in a new region.
Alliances with companies in related fields, on the other hand, have the potential to attract a wider range of EMS providers. These partnerships offer a way to broaden service offerings and add customers. EMS companies have found allies in design services (Plexus-Cadence) and logistics (EFTC-Federal Express) as well as in IT distribution and IT services. Other areas may be ripe for alliances too. One possibility lies in postmanufacturing services such as repair and warranty work.
Despite recent attention given to channel assembly of name-brand PCs, it will play second fiddle to OEM build to order (BTO) and contract manufacturing in the PC supply chain over the next five years, according to Dataquest (San Jose, CA), a unit of GartnerGroup. What's more, Dataquest projects OEM BTO and contract manufacturing will account for nearly two thirds of PC supply chain volumes in 2002.
In a series of three Perspectives, Dataquest defines and predicts the growth of five supply chain models by region. These models are: vendor (OEM) BTO, vendor build to stock, brand channel assembly, no-name (white box) channel assembly and contract manufacturing. In the U.S., vendor BTO unit volumes will increase from 22.8% of the PC supply chain in 1998 to 32.8% in 2002, Dataquest predicts. Likewise, the contract manufacturing share of PC units in the U.S. will grow from 20.6% in 1998 to 32.2% in 2002 (see table). Over this period, no-name channel assembly will keep its share of the U.S. chain, while brand channel assembly will remain the least popular option. Not surprisingly, vendor build to stock will end up with a sharply reduced share of the chain.
"Channel assembly is not cost effective for the majority of customer orders," states Charles Smulders, senior industry analyst for Dataquest's Distribution Channels Worldwide program. "Operating a channel assembly [system] requires the vendor to have multiple inventory sets with multiple third parties over which it does not have immediate control. Worse still, the inventory is owned by the vendor who has to pay for the loss of value on that inventory as it sits in the channel. It creates a logistical nightmare for the vendor. The extra cost of paying for the inventory depreciation is passed on the customer, making the vendor less competitive.
"Vendor build to order has the advantage that the vendor has control over inventory and logistics. By maximizing supply chain efficiency, the vendor can minimize inventory value erosion and therefore deliver maximum price/performance to the customer.
"Contract manufacturing is efficient in the sense that the vendor theoretically only owns the goods for a very short time, as they are built and sold by third parties. By doing so, the vendor maximizes margin. Contract manufacturing normally plays best in the sub $1,000 market."
Dataquest projects supply chain evolution for the U.S., Western Europe and Asia-Pacific markets in a series of Perspectives entitled "PC Supply Chain Model Forecast 1997-2002."
Where does the Solectron-Ingram Micro alliance fit within these five models? According to analyst Smulders, "channel assembly by definition is done by a channel player, not a contract manufacturer." Yet Solectron is acting as Ingram's manufacturing partner to custom build computer products for customers in the channel. Both parties are offering BTO services to the channel. To count this BTO work as channel assembly when it's done by Ingram but not when performed by Solectron is perhaps an arbitrary distinction. Maybe Solectron's literature is right. Maybe this alliance, as well as what Celestica is doing in the channel, should be viewed as a new model.
Meanwhile, Solectron's Newark, CA, facility has become its first site to start BTO production of branded and unbranded systems under the alliance with Ingram. The facility has installed a customized line for Ingram Micro. What's more, Solectron's Mexico facility is expected to come online soon, followed late this summer by Brazil. As demand requires, Solectron facilities in Ireland, China, Malaysia and Georgia will also join in. In addition, the two partners continue to discuss the best approach for manufacturing in Japan and Canada, two coun-tries not covered by alliance facilities.
Ingram reports its Memphis, TN, integration center will soon be "beyond capacity." The company says it engaged Solectron in anticipation of the need for more capacity.
Orders from reseller customers go to Ingram Micro, which sends them on electronically either to its Memphis center or to Solectron's Newark facility. The two companies have linked their information management systems through middleware and their ERP systems through a virtual private network.
The Ingram Micro-Solectron alliance was announced last year and finalized in October (June '98, p. 8, Aug. '98, p. 1, and Oct. '98, p. 7).
Through a merger agreement signed earlier this month, ACT Manufacturing (Hudson, MA) will effectively acquire CMC Industries (Santa Clara, CA) in a stock transaction. ACT will exchange 0.5 share of its common stock for each share of CMC stock. Based on 7.68 million CMC shares outstanding on Feb. 28 and an ACT share price of $15 3/8 on the May 10 announcement date, this stock deal was worth $59.1 million when announced.
The deal marks a new stage in the consolidation of the EMS industry. Acquisitions among contract manufacturers usually involve a larger player absorbing a smaller one. This time it's different. ACT and CMC operate EMS businesses of comparable size. Indeed, ACT and CMC ranked 23rd and 24th respectively on the MMI Top 50 for 1998. Some industry observers have been waiting for EMS companies of like size to combine forces, achieving much-needed scale (see article on p. 3). Together ACT and CMC would have placed 12th on the 1998 Top 50.
Revenue for the combined companies over the last 12 months would have totalled about $582 million. Together, they will offer nearly one million ft2 of capacity.
Each company offered key locations that the other lacked. "CMC brings a West Coast presence with its Santa Clara, California, facility and provides low-cost manufacturing alternatives in both its Corinth, Mississippi, and Hermosillo, Mexico, operations. We have no overlapping customers with CMC so the immediate diversification of our customer bases will be significant. The combined company, which is double the scale of each individually, creates several opportunities to leverage business development with existing customers," states John Pino, chairman and CEO of ACT.
Matthew Landa, president and CEO of CMC, comments, "ACT is an ideal merger partner for CMC. ACT's focus on programs requiring high levels of engineering expertise is consistent with CMC's long-term strategic vision to develop the most flexible engineering-driven operations in the most important OEM technology centers in America." So CMC's operations can tie in with ACT's front-end production centers in Hudson, MA, and Atlanta, GA. Also, ACT's Dublin, Ireland, facility will provide CMC's customer base with an European solution.
Missing, however, in this global scheme is an Asian presence. ACT has told Wall St. that both the West Coast and the Far East are objectives for expansion. Having attained the West Coast goal, the company will entertain the Far East objective "over time," according to Douglass Greenlaw, ACT's VP of strategic development.
At the heart of this deal lies a single imperative -- growth. "It's a great opportunity for the new combined company to participate in the growth rates of the industry," says Greenlaw. It is well known that growth rates often favor large EMS companies with the size to qualify for divestitures and big contracts from major OEMs.
It also turns out that both companies use the same manufacturing equipment and systems platform. ACT says this fact should allow them to integrate operations efficiently and quickly.
For the fiscal Q3 ended April 30, CMC expects to report revenue of between $57 million and $60 million and a net loss per share between $0.06 and $0.08. The lower than expected revenue was caused primarily by delays in the start-up of certain new programs during the quarter. For the first half of fiscal 1999, CMC's sales of $148.3 million were down by 17% from the same period of fiscal 1998, reflecting the loss of a major customer in that year.
As the surviving entity, ACT will keep its name, and the CMC name will disappear. There is no word yet on who will make up the CMC man-agement team. "It's one of the things that will be worked out in the next couple of months," says Greenlaw.
The transaction is subject to shareholder and regulatory approvals as well as other closing conditions. It is expected that the deal will be accretive in calendar year 2000.
Although the two businesses are comparable in size, CMC operates with more floor space and employees. As of year end 1998, CMC's plant space of 657,000 ft2 was double ACT's 325,000 ft2, and CMC employed 1600 people versus ACT's 980.
Pemstar, a privately owned CM with headquarters in Rochester, MN, has bought itself a location in Europe and is about to do the same on the West Coast.
In California, Bell Microproducts (San Jose, CA), a distributor of components and computer products, has agreed to sell its San Jose-based Quadrus contract manufacturing division to Pemstar. The sale of Quadrus will allow Bell Micro to focus exclusively on its core value-added distribution business, says the company.
On the Continent, Pemstar has acquired Fluke's European manufacturing and engineering operations in Almelo, the Netherlands. This deal gives Pemstar its first facility in Europe. Under a supply agreement, Pemstar will assume production of Fluke's handheld electronic test tools at the Almelo facility. The 120,000-ft2 facility employs about 250 people, of which 75 make up an engineering and design staff. Pemstar intends to replicate its Rochester, MN, design center in Almelo.
The CM will provide both engineering and manufacturing services to Fluke (Everett, WA). The Almelo engineering staff will continue to develop Fluke products including future ScopeMeter test tools.
Yet Pemstar, like almost any CM acquiring an OEM facility, wants more customers for the facility. "We will be increasing work over there as a contract manufacturer. We do have a couple of contracts already there," says Gary Lingbeck, Pemstar's executive VP of sales.
The news of Bell Micro selling its Quadrus contract manufacturing division may rekindle the debate over the proper role for distribution in the EMS industry. Several years ago, the largest distributors could have acquired EMS capabilities, but passed on the opportunity to focus on providing valued-added services to CMs and their customers. But some other distributors -- including Jaco Electronics, Kent Electronics, Nu Horizons Electronics and Reptron -- continue to operate contract manufacturing businesses.
The price for this cash deal is expected to exceed Quadrus' $30-million book value. Both parties are aiming for a June closing subject to conditions such as regulatory approvals and the completion of due diligence.
Lingbeck says the Quadrus deal "basically puts us in a market we had not been penetrating. It's very difficult to get California customers to go to Minnesota plants." He had been looking at West Coast operations for the past couple of years, but had not found the right culture and quality focus until now.
Pemstar also plans to use the Quadrus operation as a launch site for its Mexico and Far East operations. They consist of facilities in Guadalajara, Mexico; Bangkok, Thailand; Tainjin, China; and Singapore. Operations in Thailand and Singapore are joint ventures.
In 1998, Quadrus incurred an operating loss on sales of $86 million. Q1 1999 sales were $27 million, compared with $26.2 million in Q4 1998 and $12.6 million in Q1 1998. The division operates one facility, a 141,000-ft2 plant in San Jose. Quadrus reported running seven SMT lines and employing 509 people at the end of 1998. As of March, its 24 customers included Cisco Systems, Lucent Technologies, Electronics for Imaging, Avid-Digidesign and Cabletron-Flowpoint.
Pemstar's services include electronic and electromechanical assemblies, including box-build with product fulfillment, and plastic injection molding as well as product conceptual design and other engineering services. Sales for fiscal 1999 ended in March were $188 million.
Needham & Co. acted as financial advisor to Bell Microproducts.
Based on a newly signed letter of intent, Solectron (Milpitas, CA) plans to acquire Glenayre Technologies' RF (radio frequency) design and manufacturing assets in Quincy, IL, and to take over manufacturing of all of Glenayre's one- and two-way paging infrastructure equipment. This deal is subject to negotiation and completion of a definitive agreement.
Under the proposed agreement, Solectron will provide a full range of services across the entire product life cycle for five years. Solectron intends to offer jobs to about 350 manufacturing, RF engineering and support employees working at the Quincy location. The provider will also acquire assets including design, manufacturing and test equipment and inventory and will begin operations in a 160,000-ft2 building on Glenayre's Quincy campus.
"This acquisition will enable Solectron to strengthen its rapidly growing RF design and manufacturing services portfolio," states Dr. Ko Nishimura, Solectron's chairman, president and CEO. This is Solectron's second RF move in recent weeks as it follows the company's announcement to acquire RF capabilities from Trimble (April, p. 4). Solectron sees both a continually growing demand for RF technology and a move toward outsourcing on the part of various telecom companies (see also article on p. 1).
According to Nishimura, "This acquisition is also significant since it will enable Solectron to expand our North American footprint by establishing a manufacturing presence in the Midwest where we have several customers in need of local support."
"This is part of Glenayre's ongoing strategy to reduce manufacturing costs and to obtain a more flexible operating structure," states Stan Ciepcielinski, Glenayre's COO.
Financial details were not disclosed.
Manufacturers' Services Ltd. (Concord, MA) has acquired Electronic System Packaging (ESP), a PCB design shop in Westford, MA. The acquisition is a major step in the expansion of Manufacturers' Services' engineering and design services in the Northeastern U.S.
With about 15 employees, ESP specializes in PCB design for high-speed products. ESP expands the front-end capabilities of Manufacturers' Services because in the past it offered design services in the Northeast through a third-party relationship.
The company had another reason for acquiring ESP. "They also have been working in the greater Westford area, a hotbed of networking and telecommunications, which is the market we're growing in and penetrating heavily," explains Rodolfo Archbold, chief technology officer at Manufacturers' Services.
According to Archbold, the ESP deal "expands relationships with existing customers and introduces ourselves to new prospects in the market we continue to play in."
Founded in 1992, ESP serves some 30 customers including Ascend, Nortel, Sycamore Networks and Xerox. ESP is also a value-added reseller of VeriBest software for electronic design automation.
ESP cofounders Bill Winter and Wallace Aponowich will become managing directors of ESP, an MSL Engineering and Design company. Manufacturers' Services has set up MSL Engineering and Design as a separate business unit dedicated to product development services.
"We will continue to invest and expand in that area," says Archbold.
Other deals done...SCI Systems (Huntsville, AL) has closed the previously announced deal to buy Hewlett-Packard's Verifone manufacturing facility in Kunshan, Jiangsu Province, China (Jan., p. 11). The factory is located about 50 km west of the Shanghai airport....Celestica (Toronto, Canada) has completed its acquisition of Gossen-Metrawatt's manufacturing operation in the Czech Republic. This deal was reported earlier (April, p. 2-3)....Astron, a Flextronics International subsidiary and a PCB fabricator, has acquired Advanced Component Labs HK Ltd. of Hong Kong, another PCB fabricator. Astron intends to consolidate operations from its two Hong Kong plants into the new facility with 60,000 ft2 of manufacturing space....The Dii Group (Niwot, CO) has sold its stencil subsidiary, IRI International, to Cookson Electronics and has signed a letter of intent to sell its Cencorp subsidiary, which makes depaneling equipment. This is the last of Dii's noncore units to be divested (Mar., p. 8).
New programs...SCI will build inkjet printers for Hewlett-Packard in Tatabanya, Hungary. Production is slated to begin in June. The Hungarian plant will be expanded to accommodate this and other new business recently acquired. SCI will perform finished product assembly and test. The company is also building inkjet printers for HP in Guadalajara, Mexico, under a similar agreement. In addition, HP has selected SCI as the outsourcing partner for the DDS2 digital audio tape drive. Plus SCI has begun production for the DISHPlayer satellite receiver, which EchoStar Communications (Littleton, CO), an existing SCI customer, developed with Microsoft WebTV Network. DISHPlayer combines digital satellite TV and Internet access....In Changping, China, Celestica has begun assembly of flash memory for SanDisk (Sunnyvale, CA)....Flextron-ics International (San Jose, CA) and Palm Computing, a 3Com company, are expanding their relationship. The EMS provider will use its industrial park in Guadalajara, Mexico, to supply a portion of Palm's North American requirements for its line of organizers. Flextronics is sole source for the Palm line outside of 3Com....Rockwell Automation has selected Manufacturers' Services Ltd. to provide a range of manufacturing services to Rockwell's Engineered Systems & Services Group, the company's industrial drive products business unit based in Mequon, WI. Services include high-mix, complex PCB assembly to be performed at the Arden Hills, MN, facility of Manufacturers' Services. The company expects to roll out an expanded program to worldwide sites by the year 2000. Manufacturers' Services considers industrial automation an important segment for its business....Dovatron China has been awarded a $30-million contract to provide board assemblies for a Nasdaq-listed company....Nam Tai Electronics (Vancouver, Canada) has started shipping graphic calculators to Texas Instruments. Nam Tai performs contract manufacturing in China. ...EFTC (Denver, CO) has landed a contract from a major provider of video switch technology, and the estimated value is $3 million to $5 million annually at full production. ...LaBarge (St. Louis, MO) has been selected by United Defense (San Jose, CA) to produce eight different box-level assemblies and 19 different wiring harness assemblies for the M113 family of amored tracked vehicles. The contract value is about $5 million....PG Design Electronics (Chesterfield, MI), a subsidiary of Heartland Technology, has begun production on an initial $4.5-million order for the assembly of an automotive LCD unit....KYREL EMS France S.A. (Lunéville France), a subsidiary of KYREL EMS Oyj (Kyröskoski, Finland), expects to start "a big new project" in August for Alcatel, a current customer.
Outsourcing plans...SSE Telecom (Fremont, CA), a maker of satellite earth station components and systems, says it plans to outsource its manufacturing, reports Bloomberg News. The company's 1998 sales were $36.7 million....On the other hand, Data I/O (Redmond, WA), a supplier of device programming and handling equipment, says its outsourcing process will be delayed as a result of internal readiness and outsourcing vendor issues. The company's original plan was to outsource manufacturing operations by the second half of 1999. Data I/O is reassessing the extent of its outsourcing and manufacturing restructure changes.
Although Hungary has attracted a number of EMS providers seeking Central European sites, the Czech Republic is starting to build a following. Providers opting for a Czech location include Dovatron International, Celestica as mentioned earlier on p. 8, and now Lexmark Electronics. As the EMS business unit of Lexmark International, Lexmark Electronics (Lexington, KY) is assembling boards at its new facility in Brno, the Czech Republic's second largest city. Production started in March.
The Czech operation has started out supplying Lexmark International's laser printer assembly operation in Slovakia. But says Rick Jeremiah, Lexmark Electronics marketing manager, "The intent is clearly to have an operation to support external customer requirements." He reports that Lexmark Electronics is bidding on several projects for the facility, which is located in the Czech Technology Park adjacent to Brno's Technical University.
JIT Holdings Ltd., a Singapore-based CM, has two new facilities nearly ready to go online with a total of 480,000 ft2 of floor space. The company's 200,000-ft2 plant in Pudong, China, is scheduled to be operational in the current quarter. What's more, JIT expects a manufacturing and logistics center with 280,000 ft2 in Singapore to be in service this month.
The CM is also undertaking global expansion into North America and Europe. JIT plans to start production in Hungary in the second half of the year and in Mexico during Q1 2000.
Counting some additional leased space in Singapore, JIT reports capacity has more than doubled to above 1 million ft2. The CM also operates in Malaysia and Indonesia.
HP is by far JIT's largest customer, accounting for an estimated 68 to 70% of fiscal 1999 sales, while Motorola represents about 15 to 20%.
More facility projects...In Central Europe, Flextronics has officially opened an industrial park in Zalaegerszeg, Hungary, its second in that country. On about 80 acres, the park includes a 215,300-ft2 manufacturing facility, which is larger than first reported (Mar., p. 5). The facility will produce motherboards for PCs, CD rewritables, inkjet printers, laser printers and DECT (cordless) phones. Up to 1000 new jobs are expected. ...KYREL EMS is adding 6000 m2 (64,600 ft2) of production space to its plant in Kyröskoski, Finland. The addition goes into service this month. The KYREL group, for which EMS represents 99.6% of sales, is projecting an increase in revenue of about 30% for 1999. So this year's target is 1600 million FIM....DDL Electronics, a CM in Northern Ireland and a subsidiary of SMTEK International (Thousand Oaks, CA), plans to invest nearly $9 million to expand manufacturing facilities and international marketing operations. Backed by the Industrial Development Board for Northern Ireland (Chicago, IL), the investment includes $5.8 million in planned capital expenditure over the next two years or so. DDL employs 179 people in its plant in Lurgan, Northern Ireland, and the investment is expected to create nearly 150 new jobs....Dovatron (Longmont, CO), a subsidiary of The Dii Group, has identified a parcel of land in Guadalajara, Mexico, for consolidation and expansion of its operations. The CM is planning to build a first-stage facility of probably 250,000 ft2 or so, which will supplant about 150,000 ft2 of leased space. Completion is expected in Q4 1999 or Q1 2000. Dii is also looking to add new product introduction centers. Some targeted sites include Hong Kong and Japan....In Juarez, Mexico, work continues on Elamex's new 200,000-ft2 facility, designed to consolidate several of the company's electronics production facilities early next year....Plexus (Neenah, WI) has opened a larger DesignCenter in Raleigh, NC. The new center occupies 15,000 ft2 within a new 120,000-ft2 facility on the campus of North Carolina State University. The provider first located in the Raleigh area two years ago, but has since outgrown its original DesignCenter.
Celestica (Toronto, Canada) has introduced a program called SupplyFlex, designed to provide customers with a consistently available supply of standard components from Celestica's preferred suppliers. About 60 suppliers have signed up representing about 5000 part numbers.
The program has been set up to supply standard components to customers even when they deviate from forecasted volumes as long as they don't make changes within a certain time window. "Two weeks from the customer delivery point they can make changes," explains Andrew Gort, Celestica's senior VP of supply chain management.
To make this program work, Celestica typically sends 20-week forecasts to component suppliers. These forecasts are updated weekly. Suppliers agree to give Celestica flexibility in order volumes beyond the first one or two weeks of the forecast.
Also, Celestica has purchased Aspect Development's Component and Supplier Management solution, which will allow customer design teams to gain web access to Celestica-preferred part numbers under SupplyFlex. This feature is expected to be ready before year end.
Name change planned...Telital Manufacturing (Ronchi dei Legionari, Italy), the manufacturing subsidiary of cell phone supplier Telital Inc., expects to change its name soon. This change is part of a strategy to position Telital Manufacturing as an EMS provider. In case you hadn't noticed, the Telital unit has made a rapid move into the contract manufacturing business. Since starting up less than two years ago, Telital Manufacturing has made nine acquisitions in the European EMS market. All but one of these involved operations in Italy. There Telital acquired two Alcatel plants, a Texas Instruments plant once part of TI's former contract manufacturing unit, and five CMs ranging from small to medium size including one that Olivetti had an interest in. In addition, Telital picked up a plant in Berlin, Germany, from Hagenuk. Not only that, Telital has completed a new plant at its home base and established an operation in Nova Gradiska, Croatia.
Taiwan-based Orient Semiconductor Electronics (OSE), which provides EMS and IC packaging services, has taken a major stake in a new EMS company called Sparqtron Corp. in Silicon Valley. OSE (Kaosiung, Taiwan) plans to use this start-up to gain a foothold for R&D and pro-duction in the North American market.
Scheduled to begin production this month, Sparqtron is expected to start out with two SMT lines, which will be expanded to four to six within a year. Major services include PCB assembly, system integration and testing.
"OSE chooses to set up Sparqtron Corporation in the USA to further serve global and American customers, strengthen the sales and service network aiming to generate business opportunities, upgrade quality of service, and offer timely response to customers," states Edward Duh, VP of OSE's Finished Products Group.
The company approved a $4-million investment plan for setting up Sparqtron. Other investors in the start-up include strategic partners and its management team.
The Finished Products Group comprises OSE's contract manufacturing business, which stood at $92 million in EMS sales for 1998. The group's 1997 EMS sales of $150 million qualified OSE for the 1997 MMI Top 50. OSE describes its Finished Products Group as Taiwan's second largest EMS provider.
Meanwhile, OSE has entered into an NT$2 billion agreement with 12 banks led by ABN AMRO.
Other company news...A. Eugene Sapp, who will soon become SCI's CEO, recently told Thomas Weisel Partners' EMS conference in New York City that SCI will be more aggressive regarding acquisitions. He said last year the company "was focused on increasing capacity. We were not aggressive as far as acquisitions. I think that's one of the things you're going to see change." Sapp reported that Olin King, who will step down as CEO, will remain active within the company in two main areas: facilities and acquisitions. King will be giving up his financial relations and CFO responsibilities so SCI is looking for a CFO. Also, the company redeemed $287.5 million in convertible notes, all of which were converted to stock, reports Bloomberg News. ...Sparton Corp. (Jackson, MI) has renamed its medical division Sparton Medical Solutions. The division provides product development and manufacturing services to medical equipment companies....EPIC Technologies (Norwalk, OH) has achieved QS-9000 registration, while the Colfontaine, Belgium, facility of MCMS (Nampa, ID) has earned ISO 9001 certification.
Some financial news...Sanmina (San Jose, CA) is offering subordinated notes worth $300 million in principal. The offering is being made to institutional investors....Celestica has completed a new $225-million global revolving credit facility....For the fiscal Q4 ended Mar. 27, XeTel (Austin, TX) took a $6.9-million charge to write down certain nonperforming assets and to write off impaired assets (see table). Some of this charge resulted from a default on payments by a customer. A 10% reduction in labor also occurred during the quarter. For fiscal 1999, XeTel showed a net loss of $1.1 million before special charges on sales of $135.7 million. Sales were up 20% for the year....Medical CM SeaMED (Redmond, WA), which has agreed to merge with Plexus (Mar. p. 8), reported sales of $15.8 million for the quarter ended Mar. 31, down from $18.3 million a year earlier. Net income was at about breakeven....For the quarter ended Mar. 31, K-Byte Manufacturing, the EMS subsidiary of distributor Reptron Electronics (Tampa, FL), earned gross profit of $3.5 million on sales of $37.9 million. Sales were up 24% from the year-earlier period....For the first nine months of Key Tronic's (Spokane, WA) fiscal 1999, non-keyboard contract manufacturing accounted for 17% of sales, or $23 million, up from 12% in fiscal 1998....Bloomberg News reports that Ionics Circuits of the Philippines will spin off its EMS division through a public offering on the Stock Exchange of Singapore.
Some bad news... Agena Technologies, a CM in Monterey, CA, has been named in a petition for liquidation under Chapter 7 of the U.S. Bankruptcy Code....Michael Carr Enterprises, which operated a CM in Salem, OR, has been dissolved. The company could no longer meet financial obligations and has no tangible assets.
People on the move...Flextronics has promoted Ash Bhardwaj to president of the Asia-Pacific region. Formerly VP for the China region, Bhardwaj succeeds S.L. Tsui, who is leaving the company in June. Tsui will remain on Flextronics' board of directors....Dennis Rockow has moved up to VP of North American operations at MCMS. He joined the company in March at the director level after serving as VP and GM at AVEX Electronics (Huntsville, AL). At one time, Rockow served as director and division manager at Solectron. MCMS has also appointed Karen Meyer as director of business development for the Western region of the U.S. She comes from Flextronics, where she was business development director focused on system assembly business. Meyer has also held management positions at several other EMS companies....EFTC has hired Walt Cotton as VP and GM of its new Southwest Commercial Operation being established in Phoenix, AZ. He joins EFTC after being head of a Honeywell operation....Phoenix International (Fargo, ND) has appointed Kamyab Tabriz as director of international sales. He had previously worked at Phoenix.
New consultant on the block... Contract Manufacturing Consultants, Inc. (Bellevue, WA) recently started up to help OEMs through the outsourcing process. CMC can assist clients with activities such as determining the feasibility of outsourcing, identifying contract manufacturers, developing an RFQ strategy, analyzing incoming proposals, and finalizing a contract. The firm has developed a model to estimate a contract manufacturer's costs, pricing, profit and return on investment. It can also answer what-if questions such as how costs might shift as volume and mix change. Robert Freid, president of CMC, founded the firm after serving as manager of new business development at Solectron Washington. He has over 20 years of experience including a stint at McKinsey & Co. as a general management consultant.
IPC market data...IPC (Northbrook, IL), the trade association for electronic interconnection, estimates the EMS market in the U.S. increased 25% to $22.5 billion in 1998. IPC's market study appears in The 1998 Market for Electronics Manufacturing Services Providers/Contract Assembly Companies. The study contains results from 69 companies with combined revenue of $8.9 billion. They indicated that 60.8% of their sales came from existing business, 23.9% came from new business and 15.3% from new customers.
