Cover Story
Up-and-Comers Reach $100-Million Milestone
Table: Companies Gone from 1999 MMI Top 50
Table: Some Contract Manufacturers Expected To Reach $100 Million in 2000
News
Sony To Divest Two Plants To Solectron
Distributor Parts With Contract Mfg. Division
Ericsson To Transfer Operation To SCI
MSL Buys 3Com Facility After NEL Withdraws
Viasystems To Acquire Laughlin-Wilt
Alcatel Sells Polish Operation to Kimball
Plexus To Add Design Services Firm
Flextronics Makes Optical Deal
The EMS industry is awash in outsourcing business, and that's good for the industry. But this climate does not always serve a customer's best interests. With so much business coming in, contract manufacturers can be choosy about whom they do business with. In general, the smaller the customer, the harder it is to find a willing CM. Not only that, consolidation is taking its toll on the number of CMs, particularly in the mid tier. This year, at least seven mid-tier players will disappear from the MMI Top 50 (see first table), and that number doesn't include two other CMs, Bull Electronics and Essex, that were also swallowed up. So OEMs looking for more than a mom-and-pop shop ostensibly face a double-barreled dilemma - fewer suppliers and a tendency on their part to be more selective.
So there is a growing need to find new EMS sources. Fortunately, EMS industry growth is lifting a number of smaller boats too. This month, MMI identifies seven CMs that are expected to reach or cross the $100-million revenue line in 2000 (see table below). While $100 million is somewhat of an artificial threshold, the Top 50 sales minimum in past years has been at or near that line.
One can argue that these $100-million players are entering the mid tier. Certainly, they have moved well beyond the status of local provider. None of them is confined to doing business in a single locale. And they all manufacture in at least two locations through their own plants or, as in one case, through an alliance. Besides revenue, their employee totals and facility space also exceed what one would normally find in a strictly local CM.
Where do these emerging players come from? Three are based in the Western US - no surprise there. One, however, is headquartered in the Midwestern US, not exactly a hotbed of contract manufacturing. Canada, Europe and Asia have each produced a CM expected to hit $100 million this year.
How did these CMs manage to expand beyond their local roots? Here are some answers.
Since its founding in 1994, Flash Electronics has sustained annual growth in excess of 80% per year. What's more, the CM continues to pursue a goal of at least 80% for annual growth. In recognition of Flash's sales growth from 1995 to 1999, the CM has been named to Deloitte & Touche's Fast 50 list for Silicon Valley. Reportedly, Flash was the only CM to make this list. It ranked 19th out of the 50 fastest growing technology companies in the area.
Chin Fan, Flash's president and CEO, credits the company's passion for quality and customer service with its 5,050% revenue growth over the past five years. Flash has endeavored to retain the responsiveness and personal interaction of a small company. "Our strategy is to stay lean and responsive, hire experienced professionals and, above all, grow by helping our OEM customers become successful," says Fan.
Quality and customer service have also been guiding principles at Solectron from its early days. This is no coincidence. Five out of the six founders of Flash had formerly worked at Solectron, where they formed much of their business philosophy. Indeed, Flash believes that it has preserved the spirit that enabled Solectron's early growth.
A sure sign of Flash's rising status is its expansion into China. The CM recently completed a 55,800-ft2 facility in Shanghai, intended to serve existing customers as well as OEMs from both sides of the Pacific Rim (Aug., p. 8). What's more, Flash is already planning to augment this high-volume plant with a larger 150,000-ft2 facility by January 2002.
The private company is also expanding at home. Construction has started on a third plant in Silicon Valley, which will bring total space above 200,000 ft2. By year end, Flash expects to have 800 employees and a revenue run rate of about $300 million.
Flash supports products such as high-speed Internet access systems, digital video editing systems, video phones, VGA cards, PCMCIA cards, Internet security systems, network file servers, Internet computers, and wireless communication systems. The company has been more public than most in naming customers (Aug, p. 8).
LeeMAH Electronics has done business in California's Bay Area for nearly 30 years and has been contract manufacturing in China for about six of those years. Yet this international CM with nine plants and 1800 employees is not widely recognized as a mid-tier player in the EMS industry. That is about to change, however. LeeMAH expects sales to more than double this year to $200 million, which will easily put the company into the Top 50.
Why is LeeMAH making a such quantum leap this year? Two things, answers Joe Avery, LeeMAH's VP of marketing. He cites the explosion in the telecom marketplace, particularly the DSL (digital subscriber line) space. "We have provided a lot of services related to that market space," reports Avery. That business has just boomed, he adds, "when you start adding up the number of customers directly related to that market." The other ingredient in LeeMAH's recent growth is a significant expansion of existing business with four key customers.
Telecom dominates as LeeMAH's number-one source of sales, and that is no accident. "We have specifically gone after that one. We clearly made investments necessary to support that marketplace. We have already seen the benefits of that and intend to continue to invest to meet those telecommunications requirements," says Avery.
Those investments include setting up a four-building complex in Richardson, TX, and then recently adding a fifth building, which brought space in Texas close to 100,000 ft2. The Texas operation serves major players in the telecom space. Within the company as a whole, other telecom investments include equipment at both the PCBA and system level and fiberoptics capability.
"Our niche typically has been lower to medium-size volumes with multiple set-ups," notes Avery. "We've figured out a way to do it efficiently." One of the tricks to this high-mix business is to use test equipment that allows the CM to configure jobs off-line. Another is to do split deliveries to minimize inventory on the floor.
Significant customers include Hewlett-Packard, Lucent, Alcatel, Agilent and Systron Donner. Agilent fits in LeeMAH's second largest market, instrumentation, while Systron Donner comes from the automotive side, the CM's third largest segment.
Additional business from HP and Lucent pushed shipments from LeeMAH's China facility to over $8 million in fiscal 2000 ended Mar. 31. The operation achieved triple-digit growth for the year. "We are growing in China because of those OEMs that are help China build infrastructure," explains Avery.
LeeMAH was founded in 1971 by B. Hong Mah, who continues to run the company as president.
Starting from one location in Kansas, Mercury Electronics Manufacturing Services has expanded outward into five more US states through a series of regional acquisitions. As a result, the company has enlarged its coverage of the Midwest and extended its presence to the Colorado Front Range, the Southeast and the Pacific Northwest. In the most recent deals, both effective this year, MercuryEMS acquired Network Circuit Technologies in Redmond, WA, and Havetronix in Quincy, IL.
Furthermore, MercuryEMS intends to continue expanding within the US. "Objectives are to be in a position to provide regional service in all meaningful domestic electronic assembly markets by the end of calendar 2001," says Dave Anderson, president of MercuryEMS.
The company is set up as a network of contract manufacturers, each of which serves regional customers within driving distance. The idea is to assure responsive, flexible service and personal attention. MercuryEMS describes its niche as high mix and complex assembly requirements.
As a growth strategy, MercuryEMS intends to go after business that large, high-growth CMs don't want because it no longer fits their profile. "With scale change in tier-one competition, and even accelerating growth at the top of tier two, there is tremendous opportunity with OEM outsourcing prospects of $50 million in requirements," says Anderson. He observes, "Even some of the biggest customers are coming back."
"Our perspective has always been that, as the industry matures, even the largest of industry customers will recognize a need for a blend of contract manufacturing support, and that there will be a higher degree of specialization as there is mutual and explicit profiling that consistently matches requirements and capabilities," notes Anderson.
MercuryEMS serves marquee accounts such as Honeywell, Agilent, Lucent, Avaya and Emerson Electric as well as firms that offer between $2 million and $10 million in EMS potential. Other customers include Carrier Access and Antec in telecom and Cobe, Gambro, Medtronics and Physio Control in medical.
The geographic expansion of MercuryEMS has take place under current ownership, a private investor group that includes Dave Anderson. That group bought the predecessor company, Midwestern Electronics, in 1991.
The Finished Products Group of Taiwan's Orient Semiconductor Electronics Ltd. (OSE) has joined several other Asia-based CMs that have expanded operations beyond the Far East. Last year, the OSE group launched its first North American subsidiary, Sparqtron, in Fremont, CA, with four SMT lines (May '99, p. 10-11). Since then, the US operation has won a Service Excellence Award for responsiveness in the small-company category. Sparqtron provides the group's North American customers with more efficient service, while leveraging OSE's capabilities in EMS.
Equipped with 30 SMT lines, the Finished Products Group also has access to OSE's 1500 wire bonders. That's because OSE's other business is IC packaging. The Finished Products Group can assemble SMT components down to 12-mil pitch, micro- BGA components, and passive devices as small as 0402 and 0201. What's more, the group can leverage in-house IC packaging technology for such things as flip chip. Other processes supported include TAB/TCP (tape-automated bonding/tape carrier package) and PCMCIA assembly. Services, which can be turnkey or consignment, range from PCB layout, DFM and DFT to system integration, distribution support and repair. Information systems, including an ERP system from SAP, are used for global logistics.
The OSE group has targeted computer peripherals and systems, telecom and networking, medical instrumentation, and consumer/industrial electronics. In 1999, communications had the largest share of EMS sales with 42%, followed by computers at 32% and peripherals at 24%.
OSE's contract manufacturing business dates back further than most. The Finished Products Group was established in 1976. After making the MMI Top 50 for 1997, the group's sales declined in 1998 and remained flat in 1999. This year, however, is a different story with growth of 61% projected.
The group plans to continue its geographic expansion, with Mexico and Europe presented as future goals.
OSE is listed on the Taiwan Stock Exchange.
Rather than try to match the volume pricing of the large American CMs, Sweden's PartnerTech has opted to offer deepened competence in certain segments, particularly on the front end of the product cycle. "We have chosen to become stronger in more specialized areas, to achieve a higher level of competence in a more limited area. For example, we have built up a high level of competence in wireless technology and medical technology," states Mikael Jonson, CEO of PartnerTech.
As a result, the CM manufactures a lot of antenna-near products for wireless base stations. Included in this category are frequency filters that require specialized processes. For example, PartnerTech has developed an automated process for tuning RF filters. The company sees a major growth opportunity with the adoption of third-generation (3G) wireless networks, which require more stations and antennas. What's more, PartnerTech is assisting Ericsson and other telecom companies in the development of 3G products and technology and expects to serve as a manufacturing partner.
Ericsson is one of PartnerTech's three largest customers. For instance, Ericsson has designated PartnerTech as a partner in a program involving tower-mounted amplifiers for cell phone signals. The CM is handling late stage-design and prototypes through final testing. While the majority of the CM's business comes from telecom, two additional areas targeted by PartnerTech are medical and IT. On the medical side, ProstaLund AB recently engaged the CM to produce microwave equipment for treating prostate abnormalities.
The Swedish company no longer confines its operations to its home country. Earlier this year, PartnerTech started up a US unit in Duluth, GA, near Atlanta. Already in production, the 16,100-ft2 Duluth facility will perform final assembly and testing of telecom and IT products. "In order to support our customers' requirements, PartnerTech needs to globalize its manufacturing capabilities," says Mikka Olsson, GM of the US unit. In addition, PartnerTech is reviewing further expansion options in China and Brazil.
To further its product development capabilities, the company is also setting up Design & Engineering Centers close to customers (May, p. 7).
PartnerTech is listed on the Stockholm stock exchange's O-list.
Although Primetech Electronics manufactures in Canada, about 45% of its fiscal 1999 sales came from the US. That stands to reason as Sun is one of Primetech's largest customers. Primetech, a full-service CM, not only supplies OEMs in the computer industry, but also companies in the communications and consumer electronics sectors. On the communications side, Newbridge Networks, now part of Alcatel, is another major customer.
In the fiscal year ended September 1999, Newbridge and Sun along with a third OEM accounted for about 95% of Primetech's sales. Pierre-Yves Terrisse, an analyst at Yorkton Securities (Montreal), says Primetech was "really evaluated as a two-customer story" by the financial market - the two customers being Newbridge and Sun.
But Terrisse points out that Primetech is broadening its customer base. Recent wins include Matrox, a supplier of image processing boards, and Tecknor, an industrial computers company. Primetech's ability to attract smaller OEMs "is going to have a positive impact on customer concentration," says Terrisse.
According to Terrisse, analysts are projecting fiscal 2001 sales of Cdn$350 to $370 million, up from Cdn$200 to $220 million for fiscal 2000.
Starting out in 1976 as an importer of components, Primetech began contract manufacturing in 1984. The company completed its Canadian IPO in 1998. Earlier this year, Primetech acquired a through-hole facility in Amherst, Nova Scotia (Jan., p. 10).
In Silicon Valley, Victron expects to more than double its sales this year, despite the area's tight labor market. "One of the interesting things for us is we've been able to retain labor as far as engineering, purchasing and program management," reports Craig Miller, Victron's sales and marketing manager. The company prides itself on its ability to keep both professional staff and direct-labor employees.
Retaining professionals, admits Miller, has been a challenge. So Victron offers a compensation package that allows the CM to compete with public companies that can sweeten the pot with stock options. "I'd say the compensation package is one of the main attractions here," notes Miller.
"Much of the growth expansion in the last nine or ten months has been in the box build arena," he notes. Increasingly, customers that engaged first at the PCB level are transitioning to box build and system integration. Victron is also seeing growth from a couple of new strategic customers whose programs are now running full production as well as from existing customers that are increasing their PCBA volumes. Miller remarks, "It's the best of all three worlds."
This year's rapid growth comes after a sales decline in 1999 caused by an overall downturn in Victron's customer base. The company made the Top 50 in 1998 with $130 million in sales.
Rather than expanding elsewhere, Victron is planning to add a mezzanine level of about 25,000 to 30,000 ft2 to its Fremont plant. That level will free up more space for production on the main floor. The CM is looking at adding a facility probably by the end of 2001. Still, Victron offers an offshore solution in the Philippines through an alliance with a Korean-owned company, Dae Ryung.
Privately owned Victron was founded by Todd Yun, who remains its president.
The above summaries do not cover companies that are expected to reach $100 million next year. For example, Qtron (San Diego, CA), which expects to do about $70 million in the current year, says it will definitely surpass $100 million in 2001. "We're probably looking at north of $150 [million] for next year based on what we see now," says Qtron's president, Lynn Brock.
Express Manufacturing, Inc. (Santa Ana, CA), which bills itself as the nation's largest consignment house, expects to reach the $100-million level by Q2 2001. Sales for 2000 are estimated at $55-$60 million. EMI's growth is all organic, and the CM has landed five major programs each worth $10-$20 million a year in turnkey sales. In addition, the company is considering acquisition possibilities for Q2-Q3 next year.
While acquisitions have removed some companies from the MMI Top 50, growth is propelling others onto the list, albeit toward the bottom. These emerging players are not drop-in replacements for some of the larger mid-tier CMs that have been acquired, but these up-and comers do offer additional possibilities for OEMs. With more and more CMs swamped with business, OEMs need new choices.
Editor's note: The above CMs are not intended to represent a complete list of CMs expected to reach the $100-million level this year. There are probably others, and they should feel free to contact MMI for inclusion in the next survey of Top 50 companies. Please call 781-444-2154 or email jbt@mfgmkt.com.
Under a new agreement, Solectron (Milpitas, CA) will take over two of Sony's facilities including one in Japan. The provider will acquire certain assets associated with Sony Nakaniida Corp. in Miyagi, Japan, and Sony Industries Taiwan in Kaohsiung, Taiwan.
Within the EMS industry, this agreement is likely to be seen as a watershed event. Although Japanese OEMs - principally Mitsubishi and NEC - have divested facilities outside Japan, Japanese operations until now have remained off limits for takeover by global EMS providers. It is believed that Japanese OEMs have been slow to adopt the outsourcing model because in Japanese culture a company is expected to take care of its workers. In the past, that has meant life-long employment.
Solectron will supply Sony from the two facilities, which produce high-end consumer products such as automobile satellite navigation systems, car audio systems and lithium-ion battery packs. Combined, the facilities contain about 490,000 ft2 of manufacturing space.
Also, Solectron will offer jobs to all affected Sony employees under essentially the same salary and working conditions. About 1300 people work at the Sony Nakaniida facility, and about 750 are employed at the Taiwan site. According to Sony, the parties are targeting the transfer of the Nakaniida facility by year end and the Taiwan facility closing by spring 2001.
Sony says outsourcing part of its production will help create a flexible manufacturing system that can quickly adjust production mix and product volume.
For Solectron, the pact will expand its presence in Japan, where more than a third of the world's electronic products are manufactured. At present, the provider operates a program office, an NPI center and a Force Computers facility in Japan. In Taiwan, another important electronics center, Solectron will gain a manufacturing presence. Also, the deal will give Solectron a foothold in high-end consumer electronics
Solectron believes, to the best of its knowledge, this is the first time a Japanese company has sold a manufacturing facility in Japan to an EMS company.
Will this move encourage other Japanese OEMs to do the same? "While we can't predict how other companies will react to this announcement, we see significant outsourcing opportunities for Japanese companies in the near future," replies Kevin Whalen, Solectron VP of corporate communications. "We feel that the market in Japan will be interested in taking advantage of the EMS outsourcing model. We are confident that other Japanese and American companies will be watching this cooperation closely to gauge its impact in Asia."
Sony has been in the process of shrinking the number of its plants. Some time ago, the company announced it would reduce the number from 70 to 55. With the divestiture of the Nakaniida and Taiwan plants, that number will be 62. So Sony has seven more plants to dispose of under its current plan. Still, it is unclear whether all seven would be candidates for EMS-type divestitures.
The company said it selected the two plants for divestiture because they possess a solid management team capable of independent operation and can manufacture a range of products from a strong technical base.
What's more, Sony said it chose Solectron because the provider operates globally as does Sony and has a sincere attitude toward employees with regard to the transfer of facilities. In addition, Sony has prior experience with Solectron, to which Sony outsourced some amount of Vaio PC assembly in 1997.
Kent Electronics, a distributor based in Sugar Land, TX, has sold K*TEC Electronics, its contract manufacturing division also based in Sugar Land, to Thayer Capital Partners (Washington, DC) in partnership with BLUM Capital Partners (San Francisco, CA). These two private equity investment firms also own a controlling interest in another CM, EFTC, which is publicly traded on the NASDAQ exchange.
The purchase price is $225 million, consisting of $175 million in cash and a $50-million note. Thayer and BLUM are providing 60% and 40% respectively of the equity transaction, resulting in a 60-40 ownership split. This price, described as a minimum, is subject to a post-closing adjustment based on K*TEC's book value as of Oct. 7.
For Q1 of fiscal 2001 ended July 1, K*TEC generated sales of about $85 million, which converts to an annualized run rate of about $340 million. Employing 2500 people, the unit is said to be profitable. For fiscal 2000, K*TEC had sales of $251 million. Known as a vertically integrated EMS provider, K*TEC serves OEMs particularly in the semiconductor capital equipment and networking sectors (April, p. 5). Applied Materials is a customer on the semiconductor equipment side, while Ericsson, Dell, Compaq, Emulex, Vixel, Siemens Medical and Abbott Labs are listed as other customers among MMI Top 50 data (March, p. 3). Earlier this year, K*TEC won a semiconductor equipment contract worth $600 million over three years (Feb., p. 11-12).
This transaction provides Kent with funds to expand its two core businesses - networking and component distribution. "By deploying the transaction proceeds to selectively build our networking services offerings and our specialty distribution business, we believe Kent is positioned to continue its company-wide revenue growth plan while significantly increasing returns on assets and capital employed," states Larry Olson, president and CEO of Kent Electronics. The company expects gross margins to benefit from a combination of value-added services, product mix and pricing that could not be achieved in the more commodity-like EMS business.
Olson also says the sale eliminates the cyclical business and channel conflicts associated with the contract manufacturing division.
The K*TEC deal is likely to rekindle the longstanding debate about whether or not a component distributor should operate a contract manufacturing business. Some years ago, the largest distributors had the opportunity to acquire contract manufacturers. But they passed, preferring to participate in outsourcing by supplying materials and value-added services, rather than by trying to compete with some of their customers.
Yet some mid-tier distributors including Kent went in the other direction. They saw an opportunity to supply both components and manufacturing services to their OEM customers. At one time in the US, there were at least five distributors that also maintained contract manufacturing businesses. In 1999, Bell Microproducts sold off its Quadrus contract manufacturing division to focus on its core distribution business. Today, MMI can list three US distributors that continue in contract manufacturing: Jaco Electronics, Nu Horizons Electronics and Reptron Electronics. In Asia, at least one distributor, Sumitronics of Singapore, also operates an EMS business.
Steve Petracca, executive VP for business development at CM Pemstar, has experienced both sides of this debate. He was GM of Bell Micro's Quadrus operation before it was sold to Pemstar. "Just as in the case of Bell Micro, distribution and contract manufacturing are two very different animals - different capital structures, different margin structures, different customer sets, different management and cultural philosophies. So I think the whole concept of having a distributor and a manufacturer joined at the hip was a flawed idea. And I think slowly what you're seeing is people coming to that realization."
Nevertheless, Reptron's president recently defended its hybrid model in the Sept. 25 issue of Electronic Buyers' News.
Under Kent's stewardship, K*TEC went from cable assembler to vertically integrated EMS provider. K*TEC's offerings include PCB assembly, enclosures, cable assembly, plastic injection molding, system build and after- market repair services. The CM's 425,000-ft2 plant in Sugar Land, TX, is one of the most vertically integrated facilities in the world.
K*TEC also has two other facilities and a warehouse. In Silicon Valley, the CM is moving from a 40,000-ft2 facility in Milpitas to 87,000 ft2 in Fremont. A 100,000-ft2 facility sits in Plano, TX, and a warehouse of about 25,000 ft2 is located in Austin.
The K*TEC sale marks the emergence of Thayer Capital Partners as another financial player in the EMS industry. Since 1998, Thayer has invested about $250 million in five EMS-related companies with combined revenues over $1.0 billion. In partnership with Brockway, Moran & Partners, Thayer purchased two companies that were combined as TTM Technologies, a newly public PCB fabricator with a quick-turn focus. Also, Thayer owns Cosmotronic, a fabricator of mil-spec PCBs.
On the contract manufacturing side, Thayer and BLUM Capital Partners have together obtained an ownership stake of a little less than 80% in EFTC, a CM targeting high mix. The two firms recently undertook a recapitalization of EFTC and brought in new management (April, p. 8 and July, p. 8).
With Thayer's PCB and CEM investments, the firm is following a niche investment strategy within the larger EMS sector. "We're looking at differentiated areas where we don't have to compete against the big guys, where we can get what we think are higher than normal return on invested capital positions in areas that are defensible," explains Jeffrey Goettman, managing director at Thayer.
"For example, with TTM we're trying to focus on the quick-turn aspect of the [PCB] market, not the high-volume end of the market," continues Goettman. "With EFTC, we're trying to focus on the high-mix environment, which we think is a more difficult area to execute in. But the customer base, we think, is a little stickier there." He also believes that outsourcing has not penetrated this area as much.
"K*TEC is more or less an extension of that, where they are primarily focused on the high-mix market. But they're doing it through a vertical integration strategy by providing cables, enclosures and PCB assembly," says Goettman. He describes K*TEC's customer mix and target markets as very much in the high-mix, low-to-medium volume category.
K*TEC and EFTC also share another trait: they have invested in advanced information systems. That trait was important to Thayer, which avoided investing in small CMs that lacked a top-flight information system. Investing in small PCB companies, on the other hand, made sense as a consolidation play because demands on the information side weren't as great.
Goettman expects that Thayer's platform businesses will make more acquisitions over time. "With regard to contract manufacturing and additional EMS assets, I would say it's most likely everything would be done through EFTC or K*TEC," he says. But Thayer is not ruling out direct investment in related areas.
Thayer would not comment on the possibility of combining K*TEC and EFTC. Goettman would only say Thayer is evaluating its options among its portfolio companies.
Mike Gibbons, president of K*TEC, will continue to run that business.
Under a new multiyear, multibillion-dollar contract with Ericsson, SCI Systems (Huntsville, AL) will take over production of all current and future Ericsson radio base stations in Lynchburg, VA.
According to SCI, this transaction represents an expansion of SCI's global alliance with Ericsson. The deal also contributes to SCI's objective to globalize its expertise in the broadband mobile communications infrastructure market.
"This clearly is an endorsement of our stated strategic objective to expand the company's growth in the mobile communications infrastructure market," states Gene Sapp, SCI's chairman and CEO.
In connection with this agreement, Ericsson will move mobile phone production in Lynchburg as well as Kumla, Sweden, to other suppliers. The freed up capacity will be needed for the production of mobile telephone systems.
The changes in Kumla and Lynchburg are part of Ericsson's efforts to meet strong demand for existing products and the anticipated demand for third-generation wireless systems. The cell phone outsourcing also reflects Ericsson's need to restore profitability in its Consumer Products division.
SCI has announced another deal as well. The company has signed an agreement to purchase CMS Hartzell (Lexington, KY), a supplier of enclosures, from Linsalata Capital Partners (Cleveland, OH), a private equity firm. A full report on this deal will appear in MMI next month.
In other news, SCI closed on its acquisition of Telrad Networks' Ma'alot facility in Israel (Aug., p. 6). The provider has also filed a $1-billion shelf registration.
On Sept. 30, Manufacturers' Services Ltd. (MSL Concord, MA) purchased 3Com's manufacturing and distribution operations in Mt. Prospect, IL, after NatSteel Electronics Ltd. (NEL Singapore) decided not to proceed with the acquisition (March, p. 8). The outsourcing agreement signed by MSL and 3Com is also expected to generate $1.2 billion in revenue for MSL over two years. This contract includes 3Com's connectivity and networking product lines.
At Mt. Prospect, MSL acquired about 400,000 ft2 of space and about 1200 employees. MSL paid about $60 million in cash and about 1.5 million shares of its common stock valued at about $18 million. 3Com expects to record a loss of about $11 million related to this sale in its fiscal Q2.
Originally, NEL expected to pay $130 to $160 million for the Mt. Prospect operations. NEL's proposed acquisition, initially listed at 690,000 ft2, would have been larger than what MSL bought. NEL's supply agreement with 3Com was also different. That agreement, which covered broadband modems and carrier-based access platform equipment, would have lasted three years instead of two.
Also note that the value of the two deals would have been closer had MSL's stock not lost value after its deal was announced on Sept. 26. On that day, MSL also disclosed that it would miss Q3 consensus estimates.
MSL says its Mt. Prospect purchase adds depth to its offerings for the increasing convergence of wireless communications and the Internet. From the Mt. Prospect site, MSL will provide a full range of product life-cycle services, with an expanded focus on new product introduction, including advanced electronic packaging, functional- and system-level test development and quick-turn prototyping. The site will also offer high-density PCB assembly, complex system integration and configuration, and advanced engineering and test capabil- ities in RF and microwave technology. Among the 3Com employees obtained in this deal are 150 engineers.
But NEL points out that it is still participating in 3Com's divestiture, which included the spin-off of 3Com's analog modem business. With about a 45% stake in the U.S. Robotics spin-off, NEL is supplying USR through NEL's global manufacturing base. Other USR shareholders include Taiwan's Accton Technology and 3Com. Originally, all USR products were to be built at Mt. Prospect.
"Since NEL already has other sites in North America that can better provide for the needs to 3Com at cheaper costs for those products made in Chicago, a takeover of the Mt. Prospect plant by NEL would lead to the inevitable shutdown and relocation of the manufacturing plant later. So both 3Com and NEL had agreed, amicably, to source for another party that can make better use of a Chicago facility on a longer term basis," explains Y.M. Chay, NEL's CFO.
According to NEL, 3Com is a strategic customer, which NEL will continue to support from its facilities worldwide.
MSL also has a relationship with 3Com, and the Mt. Prospect acquisition will expand the strategic nature of that relationship. Last year, MSL acquired 3Com's facility in Salt Lake City, UT, which supports both Palm, a 3Com spin-off, and 3Com.
With this deal, MSL's 2000 annualized revenue will surpass $2 billion.
Viasystems Group (St. Louis, MO) has entered into an agreement to acquire Laughlin-Wilt Group, a privately held CM based in Beaverton, OR. Terms were not disclosed.
The deal provides further evidence of Viasystems' strategy to extend its business beyond PCB fabrication and become a vertically integrated EMS provider. For Q3, PCB assembly and electromechanical services accounted for 45% of Viasystems' sales, up from 35% in the year-earlier quarter.
With about 475 employees, Laughlin-Wilt Group (LWG) operates facilities in two locations - Orange County, CA, and Beaverton, OR. The two plants offer 107,000 ft2 of combined manufacturing space. Before the deal was announced, LWG told MMI that sales were running at a rate of around $120 million, and that projected 2000 revenue would be $105 to $110 million. At that level, LWG's 2000 sales will more than double its 1999 total of $49 million.
"Laughlin-Wilt's strategic customer relationships and advanced manufacturing capabilities further enhance Viasystems' penetration of the telecommunications sector," states James Mills, chairman and CEO of Viasystems.
According to John Hastings, Viasystems' VP of investor relations, the deal gives Viasystems more exposure to the RF segment of the telecom market. He contrasts that segment with the large network boxes that the company builds for Lucent. A number of companies in the vicinity of LWG's Oregon facility are working on RF communications.
The deal also gives Viasystems a facility in the Pacific Northwest, where it previously lacked a manufacturing presence.
LWG focuses on emerging and growth-oriented companies characterized by rapid new product introduction, complex products and lots of engineering changes. "We're managing flexibility and responsiveness. It's a high-service orientation," says Jay Wilt, executive VP and COO of LWG. "As a result, we've designed the company around that." He explains that LWG's people, systems, relationships and facilities all reflect this high-change orientation.
About five years ago, LWG adopted a telecom market strategy. At that time, the company saw that large OEMs were moving to large contract manufacturers. LWG knew it couldn't play in that arena so the company started looking for business with high-growth, high-change needs that played to LWG's strengths. "The telecom market fit that characteristic quite well," says Wilt. Today, telecom infrastructure products, including test systems and base stations, account for about 70% of sales.
LWG keeps its customer list close to the vest, but has told MMI of one client - Credence, a supplier of semiconductor test equipment. In an unconfirmed report, Bear Stearns analysts list Redback Networks, Terabeam Networks and MetaWave Communications as LWG customers.
"Teaming with Viasystems enables Laughlin-Wilt to serve our growing customer base on a global scale," states Joe Laughlin, president and CEO of LWG. "With their global footprint of EMS facilities, Viasystems can elevate our customers to the next level of their growth strategies."
Providing services through box build and fulfillment, LWG was founded in 1988 by Joe Laughlin and Jay Wilt. Both came out of Tektronix.
Meanwhile, Viasystems closed on its acquisition of Lucent's Rouen Global Provisioning Center in Rouen, France (Sept., p. 7).
Kimball Electronics Group (KEG Jasper, IN), a unit of Kimball International, has bought manufacturing assets associated with an Alcatel facility in Poznan, Poland. KEG will also take responsibility for manufacturing Alcatel's telecom equipment at the 80,000-ft2 facility. The transaction gives KEG its first plant in Central Europe.
"This strategic move is yet another step toward expanding our global footprint. With the recent opening of our new facility in Laem Chabang, Thailand, and the construction of our new microelectronics facility in Valencia, California, we continue to expand our global support strategy for our customers by offering this important Central European location," states Don Charron, president of KEG.
Offering full system build and board-level assembly, the Poznan facility is registered to ISO 9002. KEG plans to obtain QS 9000 certification for the facility so KEG can utilize excess capacity there to support transportation customers. The facility employs about 200 people.
Plexus (Neenah, WI) intends to acquire e2E Corp. (Hillsboro, OR), a privately held PCB design and engineering service provider. Billed as the largest independent services firm in the PCB design and engineering business, e2E has an annualized revenue run rate of about $20 million.
The acquisition will take place as a stock transaction of about $20.5 million and will be accounted for as a pooling of interests. Plexus will also assume e2E's debt of $3.1 million. Subject to customary closing conditions, the deal is expected to close by December.
According to Plexus, the acquisition of e2E will significantly increase Plexus' PCB design and engineering capabilities as well as its geographic footprint. The deal will add more than 100 engineers/designers in seven US design centers, including Hillsboro, OR; Nashua, NH; San Diego, CA; and Dallas, TX, as well as international design centers in Melrose, Scotland, and Tel Aviv, Israel. What's more, e2E's strong capabilities in medical and telecom will contribute to Plexus' growing presence in these key sectors.
Customers of e2E include Nortel, Lucent and Intel.
After acquiring an optical services company, Flextronics International (Singapore) has formed Flextronics Photonics, a business unit to service the optical component and optical networking industries.
The company recently acquired Photonic Packaging Technologies (PPT Beaverton, OR), a provider of photonic manufacturing services for the telecom, test and measurement and defense segments. Flextronics is combining PPT with existing Flextronics personnel and optical capabilities to create the new unit. PPT's staff of 20 engineers and four Ph.D.s are joining Flextronics.
Flextronics Photonics can provide photonic packaging design and turnkey manufacturing services for a broad range of active and passive optical components. It offers manufacturing and test services for optical modules and optical subsystems. In optical networking, the unit has strengthened capabilities that include photonics assembly, optical fiber processing and optical parametric and Bellcore testing.
Not be outdone by competitors (Sept., p. 2), Flextronics has more than two dozen optical networking customers including Alcatel, Cyras, Ericsson, Extreme Networks, Lucent/Chromatis, Optical Access and Seabridge Networks (a Siemens subsidiary). Among optical component customers is Perkin Elmer. It is forecasted that $2.5 billion of Flextronics' EMS sales will come from optical networks products in 2001.
Ron Keith from Flextronics has been named VP and GM of the new unit.
In another deal with optical implications, SMTC (Toronto, Canada) has signed a letter of intent to acquire Qualtron Teoranta (Donegal, Ireland), a privately held provider of custom cable harnesses and fiberoptic assemblies. Following a strategy of supply-chain integration, the deal will extend SMTC's capabilities into cable and harness services.
With about 300 employees, Qualtron operates facilities in Ireland and Haverhill, MA. In 1999, Qualtron's sales were $28 million. Its services focus on single-mode and multimode fiberoptic connector assemblies and volume cable assemblies in coaxial, shielded, twisted-pair and ribbon cable forms.
"Qualtron's specialization in cable and harness interconnect is very important to us, along with its focus on the optical networking space," states Paul Walker, SMTC's president and CEO. "This acquisition will fit well with our core strategy of providing our customers with value added services within our integrated supply chain."
Over the past year, SMTC has acquired an enclosure operation (Oct., '99, p. 2) and a design-oriented EMS company (June, p. 10).
As part of SMTC, Qualtron says it will be able to reach a wider range of customers and leverage existing business to expand it worldwide.
C-MAC Industries (Montreal, Canada) intends to launch a takeover bid for DY 4 Systems (Kanata, Ont., Canada), a developer of embedded systems for harsh environments. In another move, C-MAC has reached an agreement to acquire Kavlico Corp., a sensor supplier with manufacturing operations in Moorpark, CA, and Minden, Germany. C-MAC says both deals are steps in carrying out its strategy of selective vertical integration.
The DY 4 acquisition "will allow C-MAC to add embedded intelligence into systems hardware to enable our systems to perform highly complex, real world functions in support of our communications, automotive, industrial and aerospace customers," states Dennis Wood, C-MAC's chairman and CEO.
Of course, acquiring embedded systems capability is not unheard of in the EMS industry. Solectron has done so through acquisitions of SMART Modular Technologies and Force Computers.
C-MAC says adding Kavlico will create opportunities to expand C-MAC's modules and subsystem content in the automotive, industrial and aerospace markets.
As for other deals, C-MAC recently completed its acquisition of Invo-tronics Manufacturing (Farmington Hills, MI), an automotive supplier of body controllers, electromechanical systems and intelligent switches (Aug. p. 6-7). C-MAC bought the company from Magna, itself an automotive supplier that has become a C-MAC customer as a result of this deal.
Furthermore, C-MAC in August acquired certain Nortel activities in electronics computer-aided design, electronic systems packaging, product integrity engineering and product assurance. About 100 people from Nortel joined C-MAC. Sanmina (see below) and Solectron have made similar acquisitions from Nortel.
Nam Tai Electronics (Hong Kong), which provides EMS from China, has entered into an agreement to acquire the JIC Group of companies, which primarily manufacture LCD (liquid crystal display) panels.
This acquisition will help Nam Tai to alleviate LCD shortages. Nam Tai is a long-time supplier to consumer electronics OEMs. The deal will also allow the company to expand its chip-on-glass LCD business in the future.
Nam Tai expects to pay between $32 and $40 million, of which one third will be in cash and the balance in Nam Tai's common stock. JIC's sales are in the $25- to $35-million range.
Meanwhile, Nam Tai has acquired a 5% indirect shareholding in two companies collectively known as TCL Mobile, a mobile phone manufacturer with facilities in Hong Kong and Huizhou, China. A Nam Tai joint venture supplies TCL Mobile with battery packs, and Nam Tai aims to strengthen its relationship with TCL Mobile and develop new business with other companies in the TCL Group.
More deals done...Last month, Flextronics acquired Benchmark Electronics' operation in Katrineholm, Sweden. Benchmark had earlier announced its intent to sell the facility. In addition, Ericsson has signed a letter of intent to sell its Printed Wiring Board Technology Center in Kumla, Sweden, to Multek, a subsidiary of Flextronics....Sanmina (San Jose, CA) has completed its acquisition of Lucent's San Jose system integration and fulfillment operation for messaging systems (Sept., p. 7). Also, Sanmina earlier took possession of certain Nortel activities in electronics computer-aided design, electronic systems packaging design and product integrity (Aug., p. 7)....Teradyne recently announced definitive agreements to acquire two companies for its Connection Systems division (Nashua, NH), a manufacturer of backplanes, interconnects and electromechanical subassemblies. The two companies are Herco Technology (San Diego, CA), a PCB fabricator, and Synthane Taylor (La Verne, CA), a laminate supplier. This move gives the Teradyne division more PCB processing capacity....CTI Technology (Springfield, MA), a newly public EMS provider, has completed the acquisition Maquila Americana, S.A. de C.V. of Rosarito, Mexico, and a related US company (Aug., p. 7-8). The Mexican operation is expanding its 30,000-ft2 facility to 58,000 ft2, with completion due in January 2001.
OEM manufacturing strategies...At the recent opening of Cisco's manufacturing center in Salem, NH, the company unveiled its optical manufacturing strategy. The strategy includes development of a portable photonics manufacturing process to help Cisco's strategic partners quickly adopt optical manufacturing processes and produce optical systems based on Cisco's requirements. The new center will become the hub for production of Cisco's next-generation optical systems....Marconi (London, UK) has started discussions with a number of global CMs to transfer various operations and increase substantially the outsourced portion of its telecom equipment manufacturing. Subject to consultations with unions, works councils and other bodies and agreement by CMs, up to 2900 employees will be transferred to CMs. Affected sites are in Coventry and Liverpool, UK; Bedford, TX; Marcianise, Italy; and Offenburg, Germany. The proposed transfers are expected to be completed during 2001.
More new programs...Jabil Circuit (St. Petersburg, FL) will provide turnkey manufacturing service for Redback Subscriber Management Systems from Redback Networks (Sunnyvale, CA). These systems connect and manage large numbers of subscribers using any of the major broadband access technologies. Also, Jabil has announced new relationships with Kestral, JetStream and Adtran....NatSteel Electronics Ltd. (NEL) has landed a contract to build wide-format engineering printers in Asia for a subsidiary of Xerox. In addition, Trek2000 International (Singapore) has selected NEL as main manufacturing partner to support production of Trek's ThumbDrive, a portable flash memory drive. And Netro (San Jose, CA) has chosen NEL to produce two product families for the indoor subscriber terminal portion of Netro's broadband wireless access system....Ionics EMS (Philippines) has won a three-year contract to assemble and test network equipment for ECI Telecom (Israel). The contract carries an approximate value of $150 million....SMTC will provide Spike Broadband Systems (Nashua, NH) with key components for base station and customer premise equipment units that go into the Spike HighPoint Broadband Delivery System....PCI (Singapore) will manufacture the DocuPen, a full-page scan pen, for DocuPort (Fairfield, NJ)....Nam Tai Electronics will start to produce caller ID phones for Japan's Kanda Tsushin Kogyo Co....Planar Systems is moving a portion of its electroluminescent display assembly from the US to CEI Contract Manufacturing Ltd. (Singapore), which will perform the work in Batam, Indonesia....Flextronics has entered into a contract to manufacture a set-top box for MSU Corp. (Milton Keynes, UK)....CTI Technology has signed a three-year contract to provide turnkey manufacturing and order fulfillment for a motorized surfboard product from PowerSki International (Brea, CA). Estimated value of the contract is $50 million.
Outsourcing to ODMs...Original design manufacturers continue to get a piece of the outsourcing action (July, p. 1; Aug, p. 4). Based on a letter of intent, Arima, a Taiwanese ODM, will be one of Ericsson's partners handling development and manufacturing of its entry-level mobile phones....Delta Electronics, another Taiwan-based ODM, will design and manufacture core electronics and related subassemblies for Xplore (Toronto, Canada), which sells to the rugged mobile pen/touch PC market.
New facilities and expansions...Solectron recently completed an expansion of about 198,000 ft2 to its Westborough, MA, facility, which had been at 166,000 ft2. The company plans to increase its work force there from 1000 to 1800 people within two years. In Charlotte, NC, Solectron has acquired a 225,000-ft2 building, bringing facility space to about 1.1 million ft2. The provider expects to add about 600 jobs at the Charlotte facility, which will increase employment to at least 3850....C-MAC has opened an 85,000-ft2 facility in Cornwall, Ontario, Canada, to provide electromechanical assembly and system integration for the communications market....In Shenzhen, China, NatSteel Electronics Ltd. (NEL) has launched a 300,000-ft2 facility. The company will move operations from an existing plant in the area to the new facility. According to NEL, it employs 1000 people in Shenzhen and 500 people in a Shanghai facility of 65,000 ft2. NEL opened the new plant because it expects more orders for both export and the domestic Chinese market, especially after the kick-off of its joint venture with a domestic IT distributor (Dec. '99, p. 5)....Also in Shenzhen, Nam Tai Electronics plans to expand its manufacturing facilities with the construction of a 138,000-ft2 building. It will include a clean room for chip-on-glass and chip-on-board work. The CM expects to open the new factory building before the end of 2001....XeTel (Austin, TX) has added a high-volume Fuji SMT line at each of its two Texas locations, Austin and Dallas. The provider says it is responding to greater demand from new and existing customers in telecom and networking.
MCMS (San Jose, CA) has filed with the U.S. Securities and Exchange Commission for an initial public offering. Earlier this year, MCMS said it was aiming for an IPO (June, p. 8).
The full-service provider becomes the sixth EMS company to go public in the US this year.
MCMS will use substantially all of the net proceeds to redeem preferred stock, repay notes held by some stockholders and pay down its revolving credit facility.
For the nine months ended June 1, 2000, MCMS reported sales of $312.5 million, down 1.7% from $317.9 million for the same period a year earlier. The sales decrease resulted primarily from lower sales to Fore Systems, from which MCMS has disengaged. That shortfall was partly offset by growth in other business. Excluding sales to Fore, revenue grew 15.2% in the first nine months of fiscal 2000 compared with the year-earlier period.
MCMS posted a net loss of $20.0 million for the first nine months of fiscal 2000 versus a net loss of $11.1 million for the year-earlier period. Preferred stock obligations increased the net loss to common stockholders in both periods. But the company earlier told MMI that it expects investors to use an EBITDA valuation (June, p. 9). For the first nine months of fiscal 2000, EBITDA adjusted for management fees and other charges was 10.3 million, compared with 13.1 million for the year-earlier period.
People on the move...Jabil Circuit has promoted Tim Main to CEO. He will also retain the title of president, a position he has held since January 1999. "Over the past year, Tim has continued to assume a broad range of chief executive roles, so we view this shift in title as a formality," states William Morean, whom Main has succeeded. Morean will continue as chairman of the board and will remain active within Jabil. He will participate in customer relationships and strategic planning and will serve as an advisor to key officers....In August, long-time IBM executive George Moore joined Solectron as corporate VP and president of Solectron Americas. Most recently, he served as IBM's VP of corporate manufacturing staff. Moore took over from Walt Wilson, senior VP of business integration and IT, who had handled the Americas role on an interim basis since April. In addition, Solectron recently promoted Alejandro Gomez-Montoy to president of Solectron Latin America. Gomez-Montoy will report to George Moore. Solectron has also promoted Kevin Burns to senior VP and chief materials officer and elected him a corporate officer, a title held by only eight other people at the company.
