Cover Story
Downturn Solidifies Need for VMI
Market Data
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Fujitsu Unit Enters EMS Business
Printing Industry Supplier Offering EMS
Able Absorbs Kitting Operation
With today's focus on improving financial performance in a downturn-limited environment, providers are pulling all the levers at their disposal to turn their inventories faster, thus tieing up less working capital. One of those levers, and an important one, is vendor-managed inventory (VMI), also known as supplier-managed inventory (SMI), as applied to inbound material. Popularized by Dell Computer, VMI allows EMS providers to postpone ownership of material until just prior to use. Suppliers typically promise to make parts available within 24 or 48 hours from inventory buffers that suppliers own and maintain often within or close to the manufacturing site.
In the quest for higher inventory turns, EMS companies are ratcheting up their VMI programs. Celestica is aiming to have more than two-thirds of its materials spend on VMI within the next 12 months. Flextronics expects to increase the VMI portion of its materials from the current level of about 22% on a dollar basis to 35% by the end of its fiscal year. And Solectron is by no means satisfied with a VMI spend estimated at or above 25 to 30%.
Suppliers can be more receptive to VMI now because inventory liabilities have been clarified. The downturn saw to that. Negotiations that ensued between providers and suppliers over excess inventory have now been incorporated in VMI agreements.
But one can also argue that supplier resistance to VMI is futile. The largest EMS providers can exert too much leverage now. "They're getting more and more of the purchasing control. It [VMI] is something that we have to support," said Carla Labay, global EMSI sales director for Motorola Semiconductor Products Sector.
As VMI spreads to cover more parts and suppliers, it is also evolving. With the classic Dell model, a factory receives parts on a VMI basis from a nearby warehouse. In the EMS industry, such warehouses, or hubs, are typically managed by a third-party logistics provider (3PL). This model dates back at least four years in the EMS industry (April '99, p. 1-2). Providers have also set aside space in their own facilities for VMI - a second model to ponder. These traditional models have been joined by two other approaches that are gaining ground.
The first alternative is the centralized supplier hub. The proliferation of VMI hubs attached to OEM and EMS facilities has led some suppliers to this scheme. Rather than support a hub for every facility on VMI, these suppliers have created their own centralized hubs that can feed multiple facilities in a given region.
Take Motorola Semiconductor Products Sector (SPS). This semiconductor supplier has adopted a regional hub strategy called MegaJIT, which puts a large just-in-time operation in place to serve VMI customers in a particular region. For example, Motorola SPS has one MegaJIT location to supply VMI customers in North America.
With regional hubs, suppliers can optimize freight costs and reduce inventory buildup associated with multiple VMI hubs. "When you start having VMI programs with multiple OEMs and multiple EMS companies, you may be carrying the same inventory in an OEM hub and one or two EMS hubs for the same OEM customer. So instead of optimizing your inventory, you've actually multiplied the amount of inventory that you have," said Motorola's Labay.
Motorola SPS's long history in VMI has left it with a large number of individual VMI programs and locations to support. So Motorola decided "we need a strategy to make sure that our costs and this whole process don't spin rapidly out of control," said Labay. The MegaJIT strategy provides Motorola with a means to reduce the number of VMI programs and locations that it supports.
Motorola originally started its VMI activities in the mid-1980s with a focus on OEMs, but the outsourcing world of today means that Motorola must also support EMS providers. At present, Motorola is supplying about 100 VMI-type programs across 57 global locations, including both OEMs and EMS providers.
These numbers represent about a 25% decrease from where Motorola was about two years ago when it began the reduction effort. "The plan is to get significantly lower, probably a 50% reduction within the next two years," said Labay. Some individual programs will remain based on the nature of the customer relationship.
Still, Motorola will handle any new VMI programs through its MegaJIT strategy.
Many providers lack the purchasing power to qualify for direct VMI support from a parts supplier. For them, the fourth VMI model - distributor-based VMI - comes into play. Look at Mack Technologies. "For us, component inventory is a really big issue," said Ron Jellison, president of Mack Technologies. So for about a year now, the mid-tier provider has been engaged in VMI through distribution.
Distributors have become "more creative around pipeline strategies. They're holding and managing the pipeline for components," he said. In the case of Mack, distributor employees on site schedule parts for the provider. The distributor is now told to release component orders the day before kits go on the production floor. Prior to VMI, Mack was bringing in components at least two weeks before putting kits on the floor.
Distributor-based VMI is no longer limited to local or even regional solutions. Avnet Electronics Marketing, a component distribution group within Avnet Inc., has introduced a global VMI solution. This VMI service is offered through Avnet EM's new Supply Network Services unit.
According to Avnet EM, this service differs from what a 3PL would offer. "If all people are looking for is the ability to move a box from point A to point B, clearly a 3PL can provide that service. And we use those services as well. But this combines that [logistics capability] with the ability to plan by region and on a global scale what the material requirements are going to be," said Tom Brunell, VP of Supply Network Services.
Avnet EM is making its VMI service available to the supply-chain community - OEMs, EMS providers and component suppliers. The service is attracting initial customers from among the component manufacturers. "The contract manufacturer says to the component manufacturer, 'Provide this service.' So who we're signing up are the component manufacturers," said Brunell. Avnet EM is also working directly with some OEMs.
The Avnet service is geared to component suppliers who are being asked to follow manufacturing as it moves nomadically from place to place. "Used to be, they could provide a service on a regional scale and pretty much satisfy everybody," said Brunell. "Now that manufacturing has gone into this nomadic mode...it's less simple for them to do that."
Suppliers must now be prepared to go into new regions such as Eastern Europe or China. But bringing VMI to these regions requires additional IT and infrastructure - a cost to the supplier. Avnet EM has designed its VMI offering to provide suppliers with an expanded service that does not add to their IT or infrastructure costs.
Rather than invest in VMI hubs near various plants around the world, Avnet EM has set up relationships with logistics providers that can provide such warehousing.
To position this service, Avnet EM's president, Andy Bryant, has coined the term distributor-managed inventory (DMI). The idea behind DMI is that it brings not only the traditional benefits of VMI, but also the advantages of a distributor. Because a distributor has a large number of customers, a distributor can shift material from places where it's not needed to customers that do need it.
Within the EMS industry, the top tier contains perhaps the most visible practitioners of VMI. Take Celestica. "We look for the suppliers to physically locate the inventory in a hub either within or in proximity to our factories," said Paul Blom, VP of Supply Chain at Celestica. The provider uses some 15 VMI hubs for supplying all of its larger facilities worldwide. A couple of hubs feed more than one factory.
These hubs are mainly provided by 3PLs. "Our strategy is not to own the warehouse, but to have the 3PL own the warehouse - and not to be the only tenant in that warehouse," said Blom. With shared-use warehousing, fixed costs are spread across multiple tenants. Celestica uses three 3PLs: Exel Logistics; KN VIA, a division of Kuehne & Nagel; and NAVL (North American Van Lines).
The 3PLs provide aging data on hub inventory and the necessary systems for integrating with Celestica's global supply chain systems platform. This integration "is important for me in that it gives us good visibility into the inventory. It allows us to see if consumption rates go up, whether or not the suppliers are keeping up in terms of days of supply of inventory in the hub. And if the consumption rates are dropping, it allows me to see if any of the suppliers are putting too much inventory in the hub in fairly real time," said Blom.
Celestica's strategy is to put higher-dollar parts into VMI. Lower-dollar, high-part-count items go into EDI whereby Celestica pulls directly from the supplier. By focusing VMI on higher-priced parts, Celestica can delay the ownership of inventory with greater value. As a result, the effect on inventory turns is larger. Also with lower-dollar parts, the cost of VMI becomes more appreciable when compared to component cost.
For the higher-dollar parts that go into Celestica's VMI program, Blom said the most relevant VMI models are a 3PL hub and an on-site inventory buffer owned by the supplier. "The reason they work is that I don't have transportation cycle times and variability because of the weather and other things...," he added.
Solectron uses those two models plus the regional supplier hub for VMI. The provider offers suppliers the three options "depending on what they have in a particular area," said Steve Gedman, Solectron director of replenishment programs. Solectron gives suppliers the flexibility to determine "what works best with their structure because obviously we don't want to drive additional cost into the supply chain if we don't have to," he said.
VMI models are in place at about 20 Solectron sites worldwide. These sites represent roughly 90% of the provider's total spend on materials.
Solectron relies on 3PLs in geographies that present logistical challenges - that is, parts of Asia, Mexico and to some extent in Central Europe. Like Celestica, Solectron uses shared warehousing.
Not only is VMI rolled out at 20 sites, it is automated there as well. Solectron and others make it clear that automation is a must for VMI execution. According to Solectron's Gedman, customers and suppliers have come to the provider with bad experiences from VMI execution problems. Solectron has taken care to avoid such problems. "We ensure that the system setup is done up front so that we can execute this consistently no matter what the volume turns out to be at that site," he said.
Focusing VMI on high-dollar items is one of the approaches that Solectron takes in managing its supply chain.
While focusing on high-dollar parts produces the greatest effect on inventory velocity, Avnet's Brunell has also seen other people targeting low-dollar parts where transaction costs are higher. "The other people are saying if I take the transaction costs out, I have a bigger impact on my short-term costs," said Brunell.
With respect to VMI, Flextronics holds what may be a unique position within the EMS industry. The company is both an EMS user of VMI services and a 3PL provider of those services. The latter role as a 3PL stems from the company's logistics unit - Flextronics Logistics.
Although this article is focusing on material inbound to EMS facilities, VMI, of course, is also used at the next level with material arriving at OEM sites. Flextronics Logistics manages VMI hubs for OEMs including Dell, HP and Nortel.
In general, EMS providers want their suppliers to absorb the costs of VMI. When a 3PL is involved, someone has to pay for transportation, carrying costs, inventory management and warehousing. With Celestica, for example, suppliers pay "the vast majority of the time," said Paul Blom. Still, Motorola's Carla Labay reported, "It's very negotiable."
Within the supply-chain community, there is a question of whether the VMI costs to a supplier can be offset by the benefits of VMI. "We have a lot of suppliers who have come back to us and have agreed with us there is not an incremental cost," said Solectron's Steve Gedman. He added, "If they take advantage of the automation and the information we're providing them, then it should be a wash in terms of overall cost." Gedman cited two offsetting benefits of VMI. First, through automation VMI lowers the cost of interaction. Second, suppliers can take information from VMI systems and apply it to their backend planning.
"There may not be a direct cost offset," said Labay. "To take advantage of any potential offset, there must be a strong collaborative relationship of sharing information between the two companies."
If there is a downside to VMI on the EMS side, it is that providers are obligated to take parts if they sit too long in the hub. This dwell time, or freshness period, typically ranges from 60 to 90 days. So providers need some way of keeping track of parts as they age in the hub and managing any liabilities. For this purpose, Solectron uses a liability and freshness tool that allows the company to calculate what its liabilities are and when it must take parts. Because this internally developed tool is automated and proven, Solectron considers it a differentiator among VMI programs.
During the component shortages of the bubble years, VMI programs languished. It's difficult to build a VMI program when you can't get components in the first place. The downturn has brought renewed emphasis on VMI, which enables providers to achieve higher inventory velocity and better inventory visibility.
Top-tier providers through their purchasing leverage became early beneficiaries of VMI. That leverage continues to sway suppliers to join expanding VMI programs in that group. But other providers - mid-tier and smaller players - can also benefit from VMI. And it is likely that more and more of them will pursue it.
For providers that cannot justify direct support from suppliers, distributor-based VMI will become the operative model. Indeed, this form of VMI should give distributors a growing EMS niche at the local and regional levels. Can a distributor can become a global provider of VMI services? The answer lies in how well Avnet does with its new service.
The gray area in VMI adoption consists of those providers who buy direct from suppliers yet do not receive VMI support from them. It's probably a safe bet that these providers will be asking for VMI. And their chances of getting it are greater than a few years ago. For one thing, suppliers can add a customer today at lower cost through a supplier hub than through the traditional 3PL model. For another, information exchange capabilities are improving within the EMS industry. Motorola SPS reports that the lack of data exchange capability is usually the number-one reason for denying VMI support to a customer.
The combination of EMS providers and ODMs captured 20% of the total available market (TAM) for outsourcing in 2001, according to a new study by IDC (Framingham, MA). This penetration rate is based on a 2001 TAM of $560 billion.
"The fact that only 20% of the TAM has been outsourced underlines the tremendous opportunity for future growth within the contract manufacturing industry. We expect that contract manufacturing [EMS providers and ODMs] will capture 27% of the TAM by 2006," stated Kevin Kane, program manager for IDC's Contract Manufacturing Services.
IDC believes that the year-over-year recovery of the EMS industry began in the third quarter of this year.
According to IDC, the ODM industry grew to $4.4 billion in the second quarter. The firm attributed an accelerated growth rate to stronger than expected notebook production as well as continued strength in some major consumer product programs. Quanta and Compal are the two largest players in the ODM segment with 21.8% and 18.5% market share respectively.
Like EMS providers, Taiwanese ODMs are taking advantage of low-cost manufacturing in China (see also Aug., p. 2). Kane reported, "High-end products remain in Taiwan as much of the lower-end production moves to China."
IDC's "The Worldwide CMS CY 2Q02 Forecast and Analysis Update, 2001-2006" analyzes both the EMS and ODM markets on an annual and quarterly basis. Contact jnagle@idc.com
Although the telecom industry as a whole has embraced outsourcing, Fujitsu Network Communications (Richardson, TX), a division of Japan's Fujitsu, is one telecom OEM that is not buying this strategy. Not only is Fujitsu Network Communications (FNC) retaining its manufacturing, it has begun to sell its manufacturing capabilities to other companies.
"We've made a strategic decision here to offer our services - being very high-quality, very flexible, really world-class processes and manufacturing capability - to other people to see if we can diversify into additional revenue streams outside of the telecom industry," said Rodney Boehm, senior VP of manufacturing at FNC.
FNC is now offering the end-to-end capabilities of its 133,000-ft2 telecom facility in Richardson, TX, to companies outside of telecom. The downturn left FNC with excess capacity and a manufacturing infrastructure that could be utilized to find new business for the facility. Boehm admitted that had the telecom industry continued to grow at predownturn levels, FNC probably would not have made this move into contract manufacturing.
The Richardson operation has signed up its first EMS customer, albeit a sister company. Through a competitive bidding process, Fujitsu Transaction Solutions has chosen FNC to build ATMs (automated teller machines). In addition, FNC reported that it is in negotiations with two or three prospects.
FNC's services range from SMT and through-hole PCBA to burn-in to card cage, rack and cabinet assembly to system integration followed by field installation. This offering also extends to FNC's repair and call center activities. Customers can select services piecemeal if necessary. FNC's capabilities are geared to building high-mix telecom products so the unit is looking for high-mix customers with moderate to high volumes.
How can FNC compete in bidding for EMS business? For one thing, FNC can draw on the purchasing power of its parent Fujitsu, which buys $20 billion worth of materials a year. "We know that we can get at least as competitive prices on any of the raw material when you compare our purchasing power even with the revenue streams of some of the tier-one EMS suppliers," said Boehm. "The other thing is that Fujitsu is fairly well vertically integrated." So FNC can source inside Fujitsu optical and other components that Fujitsu sells to the rest of the world.
This announcement is bad news to those who expect major outsourcing from a Japanese OEM like Fujitsu. "We believe manufacturing is a core competency inside Fujitsu. So you don't see Fujitsu, in total, outsourcing our manufacturing," said Boehm.
Moreover, Fujitsu is not the only Japanese OEM to offer manufacturing services (Nov. '01, p. 3). "Instead of outsourcing by divesting to major EMS players, Japanese OEMs can get a better return - sometimes in the short term and definitely over the long term - by taking on additional work from OEMs. We feel they will look at putting together EMS divisions internally before looking to outsource to another player," said Mark Zetter, president of Venture Outsource Group (San Jose, CA). Zetter's firm has worked with Japanese OEMs that are setting up EMS divisions or outsourcing. He pointed out that Japanese OEMs are attracted to the Japanese market's untapped EMS potential estimated at $200 billion for 2001.
To engage in EMS, however, Japanese OEMs may need to revise their cost accounting. "An average EMS business has a range of anywhere from 150 to 250 cost buckets. Our experience has been that the Japanese have about 10% of that to manage a relatively comparable business revenue model," said Zetter.
Still, OEMs in general do not have a track record of staying with a contract manufacturing business. Look at Philips selling EMS and manufacturing operations to Jabil (see p. 6) or Siemens putting its EMC operations on the block (Aug., p. 6). Will FNC be any different? "There's no trend nor reason for us to essentially walk back away from offering manufacturing services to our own customers with our own products or back away from contract manufacturing as well," Boehm responded.
"I believe that when you have a core competency that is as well developed and honed as we have here, it would be a tremendous mistake to outsource that to someone else. You simply lose too much in terms of quality and efficiency of operations," he said.
Quad/Tech (Sussex, WI), a supplier of equipment to the printing industry, is now marketing its design and manufacturing capabilities to companies needing to outsource the building of machinery or electronics. Also known as QTI, Quad/Tech is a subsidiary of Quad/Graphics, a large printing company.
After starting these services at the beginning of the year, Quad/Tech already reports success in the medical, plastics, food and beverage, automotive and paper industries. "Now that we have some clientele, we decided to go full bore and bring a lot more business into Quad/Tech," said Ingermar d'Agrella, VP of QTI operations and GM of commercial operations.
Quad/Tech is offering services out of its Sussex, WI facility with 240,000 ft2 including electronics assembly, machinery production and a machine shop. The facility focuses on high mix, short runs, low volumes and prototypes. It has through-hole capability for PCBA and will add SMT if business demands it. Besides circuit cards, Quad/Tech's electronics expertise includes vision systems, controls, PLCs and operator displays. Quad/Tech can build and test complete systems for customers.
For low-volume customers, Quad/Tech is positioning itself as an alternative to contract manufacturers who want to build a year's worth of cards or more in advance. For such customers, "we try to produce in that same volume as their production demand," said d'Agrella.
Quad/Tech, which supplies printing equipment to both its parent company and outside customers, also asserts it is more diversified than typical contract manufacturers. "We're more stabile than a company that just depends on contract manufacturing alone," he said. What's more, through this printing industry business Quad/Tech already has the ability to service national and international accounts.
A shift to lean manufacturing freed up resources that Quad/Tech can apply to contract manufacturing.
Palm has chosen Celestica (Toronto, Canada) to handle Palm's repair work and reverse logistics worldwide. This is the first after-sales win that Celestica has made public.
Under the contract, Celestica will perform warranty and non-warranty repairs and manage all logistics in the Americas, Europe, Middle East/Africa and Asia for Palm handhelds. Celestica also will assume responsibility for parts, software and repair processes through end-of-life for each product. The parts network alone "is a major part of the business," according to Tom Kent, VP of business development for Celestica's Repair Services unit. For example, Celestica will supply local repair shops with replacement parts.
Celestica will take over after-sales activities that have been outsourced to other service providers. Palm has used four companies primarily for postmanufacturing support: Celestica, DecisionOne, Flextronics and UPS Logistics.
Kent confirmed that this contract was highly contested.
Although this is the first public win for Repair Services, Celestica has focused on its repair business for at least four years, Kent reported. As evidence of this history, he pointed out that "half the business is customers that we currently don't have EMS relationships with." Indeed, Palm is such a customer.
Another after-sales program...A global computer and retail equipment OEM has selected ExpressPoint Technology Services (Minneapolis, MN), a provider of lifecycle support services, to furnish after-market services for the OEM's global maintenance service programs. Valued at over $40 million, the agreement broadens and extends by two years ExpressPoint's current relationship with the OEM and will include full lifecycle support services for certain product sets. These services include service parts logistics, inventory management, advance exchange, refurbishment and end-of-life services. Primarily covering the retail environment, this contract will entail close collaboration between ExpressPoint and at least two Taiwanese contract manufacturers.
New EMS programs...Sanmina-SCI (San Jose, CA) has begun shipping home cholesterol monitors for Lifestream Technologies (Post Falls, ID)....In Tallinn, Estonia, and Dongguan, China, Elcoteq (Espoo, Finland) has started production of base station products for Sweden's LGP Telecom AB....LG Innotek, a subsidiary of South Korea's LG Group, will begin manufacturing products in Seoul, South Korea, for Novatel Wireless (San Diego, CA), which will source a majority of its wireless data modem components from LG Innotek....Under a new multiyear contract, KeyTronicEMS, the trade name for Key Tronic Corp. (Spokane, WA), will manufacture complex PCB assemblies for gaming products of International Game Technology. Production will take place in Juarez, Mexico.
Able Electronics (Hayward, CA) has assumed the business of Integrated Manufacturing Solutions, a kitting company that operated in Silicon Valley.
In exchange for taking on six IMS employees, Able picked up about four customers, one of which is significant. "We added 7 to 10% revenue enhancement to our business. It wasn't anything trivial by any stretch of the imagination," said Peter Dennis, Able's president and COO.
"We're really excited to get the expertise of IMS we've brought within Able," said Dennis. "A year ago, something like this would never be considered."
According to Dennis, IMS had the option of growing into an EMS provider or being absorbed by one. While Able has taken over IMS's business, IMS as an entity is being wound down.
Keith Wheaton, former GM of IMS, has joined Able as director of business development.
Deals done...Jabil Circuit (St. Petersburg, FL) has closed major portions of its agreement with Royal Philips Electronics and acquired six Philips plants (Sept., p. 4-5). The provider expects to take control of the remaining three sites by the end of January 2003 and to finish the transfer of other business from Philips by August 2003. The cost of this deal is about $210 million....Endicott Interconnect Technologies, a new company, has completed the purchase of IBM's campus in Endicott, NY (July, p. 3-4). The acquisition included an EMS business....The name of the South African software company recently acquired by Flextronics is Azisa. This acquisition sans name was reported earlier (June, p. 4; Oct., p. 3). Last month, Flextronics said it has over 500 people involved in all levels of software....Iomega Corp. (San Diego, CA) has sold its manufacturing subsidiary in Penang, Malaysia, to Venture (Singapore) for $10.2 million in cash (Oct., p. 3). This amount, which is subject to a post-closing audit, is higher than previously estimated due to changes in working capital components of the deal....LaBarge (St. Louis, MO) has sold the railroad industry portion of its remote equipment monitoring business, ScadaNET Network, to GE Transportion Systems Global Signaling, LLC (Grain Valley, MO) for about $6.8 million including liabilities. LaBarge will produce ScadaNET hardware for the purchaser under a new manufacturing agreement.
The downturn has claimed another victim, as XeTel (Austin, TX) last month filed for relief under Chapter 11 of the US Bankruptcy Code. This action follows an earlier statement from the company's auditor who expressed doubt about XeTel's ability to continue as a going concern (July, p. 7).
In connection with this filing, XeTel is seeking Bankruptcy Court approval to sell a portion of its assets to a Celestica entity, Celestica Acquisition Corp., for about $2.25 million. The proposed sale involves the transfer of certain customer contracts, inventory and fixed assets; the assumption of certain liabilities; and the hiring of employees. In addition to court approval, the sale is also subject to customer approvals. The Bankruptcy Court for the Western District of Texas has scheduled a final hearing to approve the sale on Nov. 25.
According to court documents, the sale appears to be necessary in order to realize the highest value from XeTel's business and to prevent further erosion of that value.
For the fiscal Q1 ended June 29, XeTel's sales amounted to $19.8 million, down 50% from $39.4 million in the year-earlier period. The publicly held provider reported a net loss of $4.4 million in fiscal Q1 versus net income of $81,000 for the prior Q1. According to XeTel's 10Q filing for Q1 fiscal 2003, the sales drop reflected reduced customer demand in its primary telecom and networking markets.
Founded in 1984, XeTel was an early practitioner of SMT within the contract manufacturing industry. During the 1990s while a number of competitors were expanding outside the US, XeTel's operations never grew beyond Texas. The company maintained facilities at its Austin home base and in Irving, next to Dallas.
Celestica is not taking over XeTel facilities. Assets purchased from XeTel will be moved to Celestica's Austin site. A Celestica spokesperson said the company will gain some new customers and key employees in the deal. The spokesperson did not say how many XeTel employees would be hired. As of June 29, XeTel had about 288 full-time employees.
Another Chapter 11 filing...Trend Technologies (Chino, CA), an enclosure supplier, has also filed under Chapter 11 of the US Bankruptcy Code. Through this filing, a group led by Earl Payton, Trend's former CEO, has entered into an agreement to buy virtually all of the operating assets of the company for about $70 million. Trend's foreign subsidiaries are not part of the filing. The sale is subject to Bankruptcy Court approval among other conditions.
"Daily operations will continue without interruption, and adequate funding will exist for supplier deliveries going forward. Our customers should notice no difference in our operations as a result of this filing," stated Thomas Linnen, Trend's CFO.
According to Plastics News, Trend's sales totaled $523.9 million for 2001. In 2000, the company was purchased for an aggregate price of $317.5 million.
Key Tronic Corp. (Spokane, WA), a provider doing business as KeyTronicEMS, has reached a settlement in a lawsuit alleging that the company improperly disclosed trade secrets. Key Tronic has agreed to pay the plaintiff company, F&G Scrolling Mouse LLC, a total of $7.0 million, consisting of an initial payment of $2.5 million and quarterly payments of $200,000 or 50% of Key Tronic's operating income, whichever is greater. If the total is not paid by Dec. 15, 2005, the settlement amount increases at that time and in succeeding years until it is paid off.
In December 2001, a jury awarded damages of $16.5 million to F&G and two principals. The plaintiffs alleged that Key Tronic improperly released secret information owned by them to Microsoft, a former defendant in the suit. The judgment was later increased to $19.2 million to include prejudgment interest. Key Tronic appealed the verdict.
"Even though we believe that our appeal of the judgment in this litigation would be successful, we made the pragmatic decision to settle this matter because of the uncertainty of the outcome and limiting effect it has had on our business," stated Jack Oehlke, president and CEO of Key Tronic.
Other financial news...Sanmina-SCI plans to take additional restructuring charges of about $225 to $250 million over four to five quarters. The company cited continued weakness in its end markets....NASDAQ has notified SMTC (Toronto, Canada) that its common stock has failed to maintain a minimum bid price of $1.00 per share over 30 consecutive trading days, as required by exchange rules. To regain compliance, SMTC's stock must achieve a minimum closing bid price of $1.00 for ten consecutive trading days. SMTC has until Feb. 3, 2003 to regain compliance or be delisted from trading on The NASDAQ National Market, subject to appeal....IEC Electronics (Newark, NY) has decided not to continue to appeal the prospective delisting of its stock by NASDAQ and is taking steps to have its shares traded on the Over-the-Counter Bulletin Board Market (Oct., p. 7). Meanwhile, IEC has accepted term sheets for a $4.7-million credit facility and a $2.3-million term loan to repay existing revolver and term debt and to provide working capital....Nam Tai Electronics (Hong Kong) has agreed to buy about $5 million worth of convertible bond notes being issued by TCL International (Hong Kong), a TV manufacturer touted as having the best selling brand in China. This is Nam Tai's third investment in TCL Group, and TCL Mobile is a customer.
It has already been reported here that PEMSTAR (Rochester, MN) has been working on reference designs for the ODM market (April, p. 3). And MMI has used PEMSTAR as one example of EMS/ODM convergence (Aug., p. 1). Now PEMSTAR has revealed that it has come up with an ODM development platform for mobile computing.
At this month's Electronica show in Munich, Germany, PEMSTAR demonstrated a production-ready platform for handheld products, compact operating consoles and wearable devices. Applications for the platform include smart phone solutions, industrial PDAs, medical displays, and point-of-sale and portable data terminals.
Naturally, PEMSTAR's offering includes manufacturing products based on the platform. According to PEMSTAR, it can have prototypes available within four weeks.