If there is a single, overarching issue among OEMs and their suppliers,
it has to be optimizing the supply-chain. What quality was to late '80s
and early '90s, the supply chain is to the late '90s and the new millennium.
It's simple: if the supply chain is not configured properly, it creates
time and inventory penalties. Increasingly, OEMs are unwilling to live with
those penalties.
But building products to order isn't the complete answer if it forces suppliers
into carrying extra inventory to make the BTO process work. Somebody still
has to pay. And that supplier inventory likely depends on questionable forecasts.
So there's lots of activity among suppliers and their customers to improve
communications, develop closer relationships, share MRP data, try new software
and pursue other such tactics.
Tactical approaches to optimizing the supply chain certainly have their
place. But supply chain tactics are not the subject of this article because
strategic steps are also being taken. Now operating at the top of the supply
chain, EMS providers are in a position to reconfigure it. And some have.
This month MMI looks at three supply-chain strategies that have emerged
within the EMS industry. They are vertical integration, colocation and corporate
affiliation. While differing in implementation, each strategy is aimed at
supplying materials to manufacturing in a more integrated, responsive manner.
The EMS providers that have adopted one of these strategies also create
a means for separating themselves from the rest of the industry.
Over the last few years, EMS companies in general have become more vertically
integrated as they have moved into box-build work. But some EMS providers
have consciously gone further with vertical integration by internally producing
more of the material they use. Although no provider produces everything
it needs for manufacturing -- those days are long gone -- some providers
have vertically integrated large portions of the supply chain.
For a conspicuous example of a vertical integration strategy at work, take
Sanmina. The company has long adhered to a strategy of producing the raw
boards and backplanes it uses in contract manufacturing. Indeed, it is no
accident that Sanmina's intends to acquire a company with basically the
same strategy -- Altron. (See p. 4.)
Sanmina believes its vertical integration strategy "is a critical factor
to our success and certainly looks for businesses that support that strategy,"
says Bern Whitney, Sanmina's CFO.
Still, the purest example of vertical integration in the EMS industry may
very well be K*TEC Electronics, the contract manufacturing subsidiary of
distributor Kent Electronics. At K*TEC in Sugar Land, TX, not only do board
assembly and box build take place under the same roof, but also cable assembly,
plastics injection molding, battery pack production, sheet metal fabrication
and powder painting.
Why would a CM integrate to this extent? K*TEC can cite at least four reasons.
The first is flexibility, which can be illustrated by way of example. K*TEC
has project where the customer is outsourcing plastics to a Taiwanese source
because of lower labor rates. "But suddenly they said we need 3000
a day instead of 1000. Now the constraint of that source being halfway around
the world is causing a problem," says Mike Gibbons, executive VP and
GM of K*TEC. "We're having to air freight material in here, which cancels
out all of the landed cost advantages. That customer, as so many customers
have done, is transferring the tools here so that we can shoot the plastics
here."
Secondly, vertical integration eliminates nonvalue-added steps such purchasing,
shipping, incoming inspection and warehousing that are associated with buying
materials on the outside. Otherwise, these steps appear in the total landed
cost to the customer.
Since K*TEC is not buying the parts, its does not pay for a parts supplier's
margin. "All that margin stacking gets taken out," says Gibbons.
The fourth reason stems from doing build-to-order work, where a base unit
may take different colors, labeling, firmware, software and documentation.
"Because we control all those pieces, it allows us not to build a lot
of excess inventory, which is the name of the game in this business,"
says Gibbons. For instance, K*TEC can change color on its powder paint line
in 30 minutes so there's no need to source enclosures in different colors.
"We can shoot exactly what we need in small quantities and go straight
to the line literally with no logistics," he adds.
K*TEC points to still other benefits of vertical integration. The customer
deals with a single supplier rather than multiple sources. And if there
is a problem with a part, a vertically integrated manufacturer can take
care of it right away, rather than having to go through an outside supplier.
Finally, vertical integration gives K*TEC pricing latitude. Gibbons can
offer insignificant items in a BOM at or below cost, if it means the difference
between winning and losing a contract.
Vertical integration also appeals to Photomatrix, which combines a Manufacturing
Group offering EMS and a Products Group that makes scanners. The Carlsbad,
CA, company intends to vertically integrate the Manufacturing Group by adding
capability in plastic injection molding, PCB fabrication and metal fabrication.
Photomatrix says this plan will increase the range of value-added services
and products that can be sold by the Manufacturing Group, and should also
result in better operating margins for the Products Group as their manufacturing
requirements can increasingly be met in-house.
Offering a different spin on vertical integration is box builder Electronic
Manufacturing Systems of Longmont, CO. Although the company does not handle
board assembly for its box build programs, it does manufacture the cable
assemblies and metal enclosures that go into those boxes. "It's a different
approach to vertical integration, depending on where you want to end up,"
says Dick Grieve, executive VP of customer management at EMS. And this company
wants to end up with business like large servers and big storage boxes,
"where other things besides the board contribute to a high percentage
of the bill of material and the complexity of the program," he explains.
Vertical integration also comes into play when companies that already build
products for OEM or retail channels decide to enter the contract manufacturing
business. Both Key Tronic, which is branching out from the keyboard business
(Aug., p. 2), and VTech, which manufactures telecom and electronic learning
products in China, have entered the EMS business with vertically integrated
capabilities such as injection molding. Indeed, as a supply-chain strategy
vertical integration tends to arise with CMs that did not start out in the
classic fashion as board assemblers.
But like any strategy, vertical integration is not without risk. Equipment
such as injection molding machines must be paid for, both in terms of purchase
price and start-up costs, and then kept at or near full utilization. A sudden
downturn in demand from customers that are heavy users of the equipment
can hurt utilization and drive up costs. A vertically integrated CM must
also maintain a broader set of competencies, including technical staff,
than required for a typical CM.
Aren't these risks precisely what drove OEMs to outsourcing in the first
place? K*TEC believes its situation is different. "We balance our capital
utilization across the technical industries of 30 customers," responds
K*TEC's Gibbons. "That's how we stay fully absorbed and how we get
the maximum utilization out of the equipment."
Bringing suppliers on campus or within a facility -- also known as colocation
-- becomes a second EMS strategy for improving the supply chain. Like vertical
integration, this strategy is designed to integrate the supply chain, eliminate
unnecessary activities and make it more responsive. Colocation has gained
popularity especially in emerging markets that lack local suppliers.
Perhaps the leading proponent of a campus strategy for colocation is Flextronics,
which has applied this strategy to its industrial parks in Hungary, China
and Mexico. Offering one of the most extensive uses of colocation, the campus
in Sarvar, Hungary, obtains plastics on site from Ecoplast, metal stamping
from Pressmatik/Itochu, polystyrene packaging from Hirsch, cartons from
SCA Packaging and discrete components from Philips. This list may not be
complete as the site has been working to bring on capabilities in cables
and printing of color packaging and manuals.
In Guadalajara, Mexico, where Flextronics just added 190,000 ft2, the company
has expanded its group of onsite suppliers. In addition to plastics supplier
DTM and distributor Insight, Flextronics has brought in Bermo, a sheet-metal
house and Cookson Speedline, an equipment supplier. According to Flextronics,
Mexico needs a stronger supply base in order to compete more effectively
against Asian sources. "To the extent that you can fix that supply
base, you're just going to have more and more things going to Mexico,"
says Mike McNamara, Flextronics' president of operations for the Americas.
A campus partner comes in handy especially when you're moving large quantities
of material into manufacturing. McNamara recalls one project that required
300 skids of plastics per day. A remote supplier even if it were just five
miles away would have added lots of unnecessary activities. "Think
about the coordination, the activity tracking, moving trucks back and forth,
loading them, unloading them, and providing warehouse space as opposed to
having a real JIT kanban operation out of a campus partner," he points
out.
Flextronics has taken its colocation strategy a step further in that it
owns the plastics suppliers on its Mexico and Hungary campuses as well as
holding a 40% stake in FICO, a plastics company with an operation on Flextronics'
Doumen, China, site. The EMS company also owns Astron, a PCB fabricator
that is colocated on that site. "Printed circuit boards and plastics
tend to be very important in terms of the whole front end design of the
product," explains McNamara. Owning those two commodities gives Flextronics
an edge in understanding how to manage and design them, he adds.
"If you look across those subsidiaries, I suspect that no more than
20 to 30% of the overall production of those factories is going into Flextronics
facilities," says McNamara. Flextronics believes the diversified base
of outside customers in its subsidiaries acts to mitigate the downside risk
often associated with vertically integrated companies.
Flextronics is not the only EMS provider in Mexico or China with a colocation
strategy. WKK's complex in Changping, Guangdong, China, contains a plastics
factory, which operates as a joint venture with Nissin Plastics of Japan.
Also in China, The Surface Mount Technology Centre, a Canadian CM, has announced
a new facility outside of Shanghai where plastics and cables will be supplied
on site by SMTC's joint venture partner, Nadfinlo Plastics (see p. 4).
Mexico is also seeing more colocation. In February, NatSteel Electronics
set up a metal stamping operation to operate as new business division on
the company's Guadalajara site. What's more, Pemstar expects to begin colocation
as part of its expansion there. "We're in the process right now of
pulling the trigger on 55,000 ft2 in Guadalajara, of which the plan will
be to add sheet metal bending and plastics injection molding by putting
that into the facility with a relationship with other component suppliers,"
says Gary Lingbeck, executive VP of sales for the Minnesota-based CM.
Still, colocation can be practiced elsewhere. Puget Plastics, an injection
molder, has an operation on Solectron's box-build site in Newark, CA, while
Hadco, the raw board supplier, maintains a cage there.
But no strategy is without risk. So what are the concerns with colocation?
For one thing, the strategy is not cost-free. Even though a CM might lease
space to its colocated suppliers, there is still an initial investment in
land. And someone has to pay for brick and mortar. Secondly, supplier selection
becomes critical. "When you do this, you have to pick the right partner
the first time out because it's very expensive to switch over," says
Pemstar's Lingbeck.
An EMS provider can also gain more control over the supply chain even
when suppliers are not located next door. In this third strategy, which
MMI calls corporate affiliation, a provider sources materials and services
from companies that are affiliated with it through common ownership but
located in different places.
Perhaps the most visible example of corporate affiliation can be seen in
The DII Group's well-publicized strategy of linked marketing. Seven DII
companies can supply services or materials. An EMS customer can get contract
manufacturing from Dovatron, design services from Design Solutions, raw
boards from Multek, ASICs from Orbit, stencils from IRI, test fixtures from
TTI Testron, and test programming from Functional Test Solutions. DII also
adds two assembly equipment companies to the mix.
Mark Herbst, DII senior VP of corporate sales and marketing, says the companies
"are horizontally integrated. It's not true vertical integration because
all the companies stand alone." So there's no force fitting of customers
into a vertically integrated solution. "Combinations [of companies]
are brought together that make sense for the customer's solution,"
he explains.
With this approach, DII is selling time savings as a primary benefit. DII
companies can be brought together early in the design phase to perform design
for board technology, design for manufacturing and design for test, all
in a closed-loop fashion. The company recently won over a customer when
it demonstrated the ability to produce working prototypes from scratch in
seven weeks.
This year, DII expects about 40% of its business to come from linked marketing.
The MATCO Electronics Group, also practices corporate affiliation. Based
in Vestal, NY, MATCO Electronics operates 13 companies, located in eight
states and Mexico, that provide contract manufacturing and associated services
including design, board fabrication, cable assembly, and demanufacturing.
Still other EMS operations are affiliated with companies that can supply
them. Take Mack Technologies of Marlborough, MA. Its parent company, Vermont-based
Mack Molding, is also one of its plastics suppliers. Then there's Elamex.
Last year, the Mexico-based CM acquired Eurotec, a supplier of plastics
and stamped metal also located in Mexico.
One of the advantages of Mack Technologies' affiliation is that it can call
upon the technical resources of its parent. And the availability of those
resources is not contingent upon Mack Molding receiving an order. "If
we run into [tooling] issues on the floor or with another plastics supplier,
we can utilize Mack's expertise in terms of helping to identify the issues,"
says Ron Jellison, president of Mack Technologies.
Here's another example of that advantage. Mack Molding helped direct the
basic enclosure design for a Mack Technologies customer even though Mack
Molding did not get the business. "What ultimately was designed in
as best for the customer and their requirements really did not fit Mack
Molding's model going forward. Now we could not have done that with an outside
supplier because the outside supplier would have been heavily influenced
to ultimately end up with a design that utilized their capability,"
Jellison points out.
Working with an affiliate like Mack Molding also means communications are
well established. "It's easier for us to manage Mack Molding than any
other supplier we have, just from a communication side of it," he says.
But like the other supply-chain strategies, corporate affiliation has its
drawbacks. Unless companies are colocated, there still is distance to overcome
between supplier and CM. And distance generally creates logistics costs.
With a network of affiliated companies, another issue arises. "Our
strategy is only as good as the weakest link in the chain," says DII's
Herbst. "Where one company has a solid relationship with a customer,
it can be put at risk if one of the sister companies fails to perform."
Moreover, supplier performance is key to all three supply chain strategies.
In return for certain benefits, each strategy relies on using pre-existing
sources. If these sources continue to meet requirements, both technical
and economic, into the future, then you'll be hearing a lot more about supply
chain integration in the EMS industry.
Through a merger agreement, Sanmina (San Jose, CA) intends to acquire
Altron (Wilmington, MA), a direct EMS competitor in the backplane side of
the business, in a stock swap worth about $219 million. Altron will become
a wholly owned subsidiary of Sanmina. The companies plan to close the deal
by the end of November, but the merger is subject to government review and
other conditions.
Each share of Altron stock will be converted into 0.4545 share of Sanmina
stock subject to a minimum share value of $13.635, and the exchange ratio
will be adjusted, if necessary, to achieve this minimum value. If Sanmina's
stock price goes below $24, then both parties have the right to reconsider
the deal.
This deal is being presented as a merger between Altron, which is strong
on the East Coast of the U.S., and Sanmina, which is strong on the West
Coast. Altron operates three plants in Massachusetts and one in California.
Sanmina does not know yet whether any consolidation of plants will take
place. "Management is reviewing the organization of both companies
to determine the best manufacturing strategy going forward," says Bern
Whitney, Sanmina's CFO.
But Sanmina does intend to go through with Altron's deal to purchase equipment
and hire people from Hewlett-Packard's Richardson, TX, facility (August,
p. 5).
The Surface Mount Technology Centre (SMTC), a private CM based in Toronto,
Canada, is expanding into Asia through a joint venture to set up a new facility
in Kunshan, China. Located just outside of Shanghai, the facility is due
to be operational by Q4 and will start out with two high-speed SMT lines.
SMTC and Nadfinlo Plastics (Hong Kong), a supplier of plastics and cable
assemblies, have formed the joint venture, known as SMTC Asia. The Canadian
CM will hold a majority ownership in the venture. Nadfinlo, which has operated
in China for many years, has facilities in Kunshan as well as Shenzhen.
SMTC plans to take advantage of Nadfinlo's experience in China in such areas
as importing, exporting, human resources, facility management and government
relations. "We're also planning to leverage off their plastics capability
and cable assembly as well," says Paul Walker, president of SMTC.
Nadfinlo will provide the new facility with plastics and cables in a colocated
arrangement. "China manufacturing tends to be a campus-type approach,"
Walker points out. "Cables and plastics will be on the same campus."
(See article on p. 1).
Since SMTC already operates in North America and Europe, the new Asian facility
will complete a triangular strategy to span the world's three major markets.
"In the tier-two space, not that many companies can say they have the
triangle covered," Walker remarks. "It should end up being another
differentiator for us."
SMTC reported sales of $189 million last year and ranked 30th on the MMI
Top 50.
The CM is treating its joint venture as strictly a greenfield operation.
"We have existing customers who have talked about wanting a facility
there as we go forward. It's kind of a chicken-and-egg thing. You must have
a facility in place before you can market it," explains Walker.
Initially, the new facility will only export from China. But Walker expects
that customers will ask for shipment into China, a change that must be approved
by Chinese authorities. "I believe within six to nine months we will
be shipping to customer facilities in China," he says.
"The management of Nadfinlo and SMTC have known each other for seven
years. This relationship combined with Nadinflo's experience in operating
facilities in China and SMTC's expertise in high-volume assembly will prove
to be the drivers of success in this joint venture," states Wally Sze,
VP of operations at Nadfinlo.
Indeed, Sze at one time worked for SMTC in Toronto and is familiar with
SMTC's team-based model that will be replicated in China. This prior relationship
"gave us the confidence to expand into this new marketplace,"
Walker reports.
Through the joint venture, Nadfinlo not only will get to supply the new
facility, but also will gain opportunities to sell elsewhere. According
to Walker, Nadfinlo does not have a sales presence in the electronics markets
of North America and Europe. "They're looking to leverage off our contacts
and markets in the electronics sector," he reports.
Did the Asian financial crisis play a role in this deal? No, says Walker.
"We've been investigating China for the better part of two years now."
Late last month, The DII Group (Niwot, CO), whose holdings include both
a bare board fabricator and a contract manufacturer, acquired Greatsino
Electronic Technology, whose operations in China combine both activities.
DII paid an initial amount of $44 million, and the total price could go
up to $84 million based on a one-year earnout.
Greatsino's sales are running at an annual rate of about $40 million, of
which $35 million comes from board fab. Contract manufacturing accounts
for just $5 million. But DII says this number is misleading because all
of this contract manufacturing consists of consignment work.
According to DII, Greatsino is in a ramping mode and crossed into profitability
earlier this year. The target for the earnout is about $13 million, which
is both a pretax and aftertax number. The China operation pays no tax in
1999. Based on a maximum price of $84 million and an earnings target of
$13 million, one can calculate a price-to-earnings ratio of 6.5. "That's
a very good price," says Alexander Blanton, an analyst at Ingalls &
Snyder (New York, NY). He adds, "Very few growing companies [like Greatsino]
would be available for that price."
The Greatsino operation gives DII a 76,000-ft2 SMT assembly building with
six SMT lines and a 144,000-ft2 raw board facility on a campus in Zhuhai,
which sits in China's Guangdong Province. While current employment is 900
people, the two-year-old campus contains dormitories and ancillary buildings
that can house 6000 employees. In addition, DII is negotiating to buy a
360,000-ft2 expansion building, currently under construction, for about
$10 million. The company is planning to lease half of the building back
to the seller for three years with a one-year option.
DII's contract manufacturing subsidiary, Dovatron International, will operate
the contract assembly side of the acquisition under the name Dovatron China.
"Although the current level of CEM business at Dovatron China is modest,
this new site fills a significant geographical need in our worldwide supply
strategy. This has been our highest expansion priority," states Dermott
O'Flanagan, DII Group senior VP and president of Dovatron.
The deal comes with a two-year agreement by which Dovatron China will supply
the prior owner on a consignment basis. Counting the seller, Dovatron China
will start with four customers. About 25% of its output will be targeted
for consumption in China. On the export side, board assemblies from Dovatron
China go into Bell South cordless telephones and other consumer products.
As for the acquired board fab unit, it will fall under the control of Multilayer
Technology, DII's raw board subsidiary, and take the name Multek China.
"We've never had high-volume, low-cost manufacturing like this facility
presents," declares Sharon Sweet, VP of DII investor relations. She
adds, "We think there will be a big value add there." DII reports
that Multek China can supply a "significant portion" of Dovatron's
worldwide PCB requirements.
Unlike SMTC's China deal, the financial troubles in Asia did figure in this
transaction. "It was available to them [DII] just because of the Asian
crisis," says Blanton, the analyst. "It's a good example of why
the Asian crisis is not all negative." He adds, "There are lots
of properties available in Asia now at distressed prices to U.S. companies
that want to expand over there."
Economic problems had put the seller in need of cash, which presented DII
with a buying opportunity. Greatsino was part of Universal Appliances Ltd.,
a public company in Hong Kong and a maker of consumer, household electrical
and telecom products.
Following this deal, DII plans to relocate its Asia-Pacific headquarters
from Singapore to Hong Kong.
Another CM bound for China...Pemstar (Rochester, MN) expects to occupy
a new 40,000-ft2 facility in Tainjin, China, on Oct. 1. Expandable to 120,000
ft2, the new plant is somewhat larger than originally planned (June, p.
6). In addition, Pemstar is going ahead with a new 55,000-ft2 facility in
Guadalajara, Mexico, to replace 15,000 ft2 of space currently in use there.
Also expandable to 120,000 ft2, the new Guadalajara plant is being earmarked
for colocation of suppliers (see article on p. 1). Pemstar anticipates that
sales this year will reach $210 million, up from $164.7 million last year.
CM expands into Silicon Valley...Practical Technologies, Inc. (PTI),
a quick-turn house based in Baltimore, MD, has opened a 30,000-ft2 facility
in Sunnyvale, CA. The company had considered enlarging its existing Baltimore
facility, but decided in favor of geographic expansion. "I want PTI
to react quickly to our customers' constantly changing requirements,"
states Dilip Dalvi, PTI president and CEO. "And for that reason, I
chose a growth strategy that will keep PTI facilities small and close to
our customers." Besides this expansion, PTI is also broadening its
service menu by adding design capabilities. The CM's strategy is to offer
smaller companies a one-stop solution from design through final assembly
and pack-out. Annual sales of privately-held PTI are between $15 and 20
million. Most of PTI's business is coming from customers in telecom, networking
and point-of-sale terminals. The company employs about 125 people.
Elcoteq Network Corp., a public EMS company based in Lohja, Finland,
and Kone Corp., also based in Finland, have signed a preliminary agreement
for the transfer of Kone's elevator electronics manufacturing operations
to Elcoteq on Oct. 1. Located in Hyvinkää, Finland, these operations
supply Kone's worldwide requirements for elevator electronics. The Kone
unit has an annual manufacturing value of FIM 100 million and employs roughly
50 people, who will be transferred to Elcoteq.
Under the agreement, Elcoteq will take over electronics manufacturing at
Hyvinkää and operate alongside Kone's elevator factory. But the
EMS provider will evaluate the possibility of transferring production to
its Helsinki plant, which specializes in industrial electronics. The two
companies also intend to conclude a long-term delivery agreement.
This agreement signifies a closer relationship with Kone, covering the entire
product cycle. Kone is a longtime customer of Elcoteq, whose contract work
for Kone includes remote monitoring systems for elevators.
Kone says it is concentrating on its core expertise -- its elevator operations.
According to the company, this asset transfer to Elcoteq will ensure competitive
cost and quality levels and the continued development of the manufacturing
unit. Reportedly, Kone is the world's largest escalator company and the
third largest elevator company.
Elcoteq points out that this agreement supports its strategy to boost its
industrial electronics manufacturing capacity.
Earlier, Elcoteq signed a joint technology development agreement with Elektrobit,
a Finnish company involved in research and design for datacom and industrial
electronics. Elcoteq also acquired a 10% stake in Elektrobit's subsidiary
Extrabit, which has mechanical and layout expertise and can produce prototypes
and small runs for R&D. These capabilities will strengthen Elcoteq's
product development services unit set up in February, says the company.
Q2 sales for Elcoteq totaled FIM 465.5 million, up by 39% from the prior
Q2. For the first six months, net income was FIM 8.3 million on sales of
FIM 918.1 million. In that period, the mobile-phone sector accounted for
71% of sales.
What's more, in June Elcoteq landed two contracts, each from a different
customer, to manufacture GSM mobile phones. Volume production is expected
to start in Q4.
The company's new factory in Pécs, Hungary, will start production
in October with about 200 people, while its facility in Monterrey, Mexico,
is now scheduled to begin manufacturing in Q1 1999 (see June, p. 5). Also,
the factory in Vaasa, Finland, has received ISO 14001, the environmental
certification.
SCI Systems (Huntsville, AL) is gaining capacity in two locations in
Mexico. SCI and the Mexican subsidiary of Ericsson Telecom, AB (Stockholm,
Sweden) have agreed that SCI will purchase from Ericsson certain manufacturing
assets in Mexico City. In addition, SCI has completed a new greenfield facility
in a Monterrey suburb called Apodaca.
In the Ericsson deal, SCI will provide manufacturing services to Ericsson
under a multiyear supply agreement and has offered employment to affected
Ericsson workers. Acquired activities will be consolidated into SCI's existing
Mexico City operations.
This announcement follows from a March 1997 agreement in which Ericsson
selected SCI as one of Ericsson's primary manufacturing partners. The 1997
pact was expected to lead to a series of definitive agreements under which
SCI would purchase certain Ericsson assets and in turn provide manufacturing
services to Ericsson (April '97, p. 1). Primarily being outsourced were
board assemblies for a family of telecom network switches. SCI transferred
work from Ericsson's site in Norrkoping, Sweden, to SCI plants in Scotland
and Hungary.
In addition, SCI announced last year an agreement whereby SCI intended to
take over Ericsson's board assembly operation in Leganis, Spain (July, p.
3). The two companies are still operating under a letter of intent regarding
that operation.
At 100,000 ft2, the new plant outside Monterrey represents the first phase
in a series of planned expansions on the site and will employ several hundred
people. The facility will primarily serve multinational OEMs and their end
markets in the U.S. Initial production will include direct broadcast satellite
receivers for a large European multinational and subassemblies for a family
of medical products for a large U.S. multinational. SCI says the plant will
complement its facilities in Guadalajara and Mexico City.
Already supporting SCI's Mexican operations, the SCI Logistics Center in
San Antonio, TX, will also serve the Monterrey plant.
Another divestiture in the works...Hayes Corp. (Norcross, GA) has
said that as part of its restructuring program it intends to sell its Norcross,
GA, manufacturing operation to a contract manufacturer during Q3. The company
believes that substantial capital and expense reductions can result from
such a transaction. P.K. Chan has been leading the effort to sell the operation.
Hayes, which markets modem products and remote access servers, was formed
from the December 1997 merger of Hayes Microcomputer Products and Access
Beyond.
Celestica (Toronto, Canada) has acquired Accu-Tronics of Raleigh, NC,
a CM specializing in quick-turn prototyping and high-complexity work. According
to Celestica, the acquisition enhances its capability to provide seamless
design, prototyping and global manufacturing services.
This acquisition is an integral part of Celestica's Customer Gateway Centre
strategy, about which details have not yet been released. But a recent industry
trend has emerged with EMS providers locating centers near customers to
provide them with front-end services during new product development (June
p. 1). These centers can act as a point of entry for new programs, which
later on can be transferred to remote sites for volume production.
Founded in 1990, Accu-Tronics is a full-service CM operating from a 25,000-ft2
facility. Offerings include prototyping; high-complexity, low-to-medium
volume assembly; and rework and repair. All Accu-Tronics employees have
been retained by Celestica.
"Accu-Tronics is a perfect fit for Celestica as they share a similar
commitment to customer satisfaction and technology leadership," states
Eugene Polistuk, president and CEO of Celestica.
"Celestica has the global reach, state-of-the-art systems, engineering
resources and worldwide purchasing leverage -- everything that our customers
demand," states Scott Brown, president of Accu-Tronics. "Combining
forces with Celestica will enhance our ability to better serve our customers'
needs."
More quick-turn prototyping centers...EA Industries (West Long Branch,
NJ) has opened its second Tanon EXPRESS center, located in Fremont, CA,
and its third EXPRESS center, located in Methuen, MA.
Other deals done...EFTC (Denver, CO) has closed the previously announced
acquisition of the Wilmington, MA, card assembly operation of Bayer Corporation's
Agfa Division (Aug., p. 5). Besides supplying card assemblies for Agfa's
electronic prepress systems, EFTC will also provide cards to be used by
Bayer's Diagnostic Division, which produces medical diagnostic equipment.
The EMS company has entered into three-year supply agreements with both
divisions....Electronic Components & Systems (ECS) of Tucson, AZ, the
contract manufacturing subsidiary of The Hartcourt Companies (Los Angeles,
CA), has acquired Elan Manufacturing, a competitor in Fremont, CA, with
a 15,000-ft2 facility. The purchase price was $1.2 million, which was paid
in stock and notes. With facilities in Arizona and Mexico, ECS will now
have a presence in Northern California. Including Elan's sales, ECS projects
that total revenue should increase to $22 million for the next 12 months,
and the melding of Elan into ECS will result in an overhead reduction of
about $800,000. "This is but the first step in our campaign to roll
up competitors in this industry. We presently are holding talks with two
other acquisition candidates and hope to be able to complete these acquisitions
by year end," states Jim Pruzin, president of ECS. Dr. Alan Phan, chairman
and CEO of parent company Hartcourt, comments, "With one more major
acquisition, ECS will be ready for an IPO." ECS reports that results
for the first half of the year were not typical because of a delay from
General Instruments, a major customer.
Deal falls through...Last month, Pen Interconnect (Salt Lake City,
UT), an interconnect product provider, and TMCI Electronics (San Jose, CA),
a supplier of enclosures, cable harnesses and other products, have called
off their merger because of market conditions (July, p. 7). TMCI had intended
to subsume Pen through a stock swap, with the aim of creating a complete
outsourcing solution for finished products. Pen says it will "continue
to interact" with TMCI through an existing sales and manufacturing
agreement.
EMS alliance...Michael Carr Enterprises of Salem, OR, and CEI of
Singapore have entered into a sales and manufacturing alliance. This collaboration
will require MCE to develop North American customers that will use its 20,000-ft2
operation for new product development and introduction. Production will
then be shifted to CEI's 30,000-ft2 facility in Batam, Indonesia. CEI will
send a high-volume SMT line to MCE to facilitate the transfer of products
from Oregon to Indonesia. This alliance results from the desire of Planar
Systems (Beaverton, OR) to have a domestic source to launch new products
and assist in their development. Chuck Logie, director of materials for
Planar, initiated talks between the two companies and pledged Planar's support
of the partnership.
New programs...Ericsson Infocom has chosen Manufacturers' Services
Ltd. (Concord, MA) to provide PCA repair services for select products for
Europe, the Middle East and Asia....Hitachi Semiconductor, America has selected
Celestica to provide manufacturing services for memory module products.
Celestica will start production during Q4....SMTEK (Newbury Park, CA), a
subsidiary of publicly-held DDL Electronics, has won a long-term contract
to manufacture customized electronic assemblies for Haas Automation (Oxnard,
CA), a CNC machine tool company. The annualized value of this contract is
expected to grow to more than $10 million. SMTEK offers cradle-to-grave
services for low-to-medium-volume products of high complexity....Pantronix
of Fremont, CA, an IC packaging house, and NovaWeb Technologies, also based
in Fremont, have formed a strategic alliance calling for Pantronix to serve
as the primary manufacturer of NovaWeb's computer networking products. NovaWeb
designs products that allow multiple users to connect to the Internet over
a single phone line. In addition to manufacturing PC cards on a turnkey
basis, Pantronix will offer logistics and fulfillment services....Direct
marketer Insight will sell Monorail's business and consumer PCs, which SCI
will build to Insight's orders and ship directly to its custom-ers....ZEVEX
International (Salt Lake City, UT) has entered into an agreement to manufacture
an automatic defibrillator called the Powerheart from Cardiac Science (Irvine,
CA). Earlier, the company had contracted with another medical CM to complete
development and begin production of this device (Dec.'97, p. 7).
Last month, a flash flood caused by tropical storm Charley hit Del Rio,
TX, and Acuna, Mexico, where SigmaTron International (Elk Grove Village,
IL) maintains manufacturing and warehousing operations. Machinery, equipment
and inventory sustained severe damage at one of SigmaTron's three manufacturing
locations in Acuna. The flood also resulted in significant damage to raw
material and finished goods inventory in the CM's warehouse in Del Rio.
Manufacturing operations in Mexico were shut down on Aug. 25, but by the
next day had resumed at about 50% of prior levels. SigmaTron is evaluating
production alternatives, including using its operations at other sites.
Besides manufacturing in Mexico, the company operates facilities in Elk
Grove Village, IL, and Las Vegas, NV, and has an EMS affiliate, SMT Unlimited
L.P., in Fremont, CA.
SigmaTron intends to take the necessary short-term steps to support customer
requirements without suffering a significant financial impact in the long
term. Management believes that losses are substantially covered by the company's
general insurance, including its business interruption coverage. The company
has pledged all of its resources to rebuild as soon as possible.
IEC Electronics (Newark, NY) will shut down its Arab, AL, plant within
90 days. Yet the CM is expanding into Europe with its acquisition of a contract
manufacturing operation in Ireland.
The 104,000-ft2 plant in Alabama employs about 230 people, nearly all of
whom will be laid off. A few employees will be relocated. IEC will transfer
a majority of the plant's equipment to other locations.
"Primarily what happened was we made a lot of operational improvements
at the facility. We really were not able to build the customer base to turn
it into a profitable operation in that location," explains Diana Kurty,
IEC's CFO.
"We see the closing of our Alabama facility, which has significantly
contributed to the recent losses, as an important step in returning IEC
to profitability over the next few quarters," states Russell Stingel,
chairman and CEO. "This closure will result in a one-time restructuring
charge in the range of $2 to $5 million on a pretax basis." He says
IEC will then be in a better position to utilize the capacity at its facilities
in Newark, NY, and Edinburg, TX, as well as the recently acquired operation
in Ireland.
The company obtained its Alabama operation in 1994 through the acquisition
of Accutek.
IEC expects that Alabama customers for the most part will let IEC move their
work to other IEC locations. "We think many of the customers will transfer,
not all, but many," says Kurty.
On Aug. 31, IEC reported it purchased selected assets of Ohshima Electronics
Manufacturing Ltd., a board assembler with a 37,000-ft2 facility in Longford,
Ireland. The deal was announced earlier (August, p. 4).
IEC says this acquisition opens up many opportunities that were not available
to it as a U.S.-based supplier and is optimistic about growing this business
quickly.
"Our strategy of customer portfolio diversification will be enhanced
by our new Irish operation, since its important customer base is complementary
to the customers we now serve in the U.S.," states Stingel.
IEC has renamed the operation IEC-Ireland.
Meanwhile, Stingel warns, "As a result of industry-wide weakness in
demand for manufacturing services, our fourth quarter revenues may not equal
the revenues of our third quarter. The resulting underutilization of capacity
is affecting our margins, so that the company's fourth quarter operating
loss will be significantly greater than that of the third quarter."
The layoff in Alabama will not be IEC's first. The CM has undergone several
work-force reductions, particularly in Newark, NY. Current employment totals
slightly more than 1800, down from about 3100 at the end of last year.
More softness reported...Altron, which intends to merge with Sanmina
(see p. 4), anticipates that financial results for its Q3 ending Oct. 3
will come in below analysts' estimates. The CM expects Q3 revenue of $47
to $49 million, compared with $41.5 million in the prior Q3, and diluted
EPS of $0.17 to $0.18, versus $0.22 a year earlier. Altron says the lower-than-expected
results reflect overall weakness in the PCB industry and cited lower margins
due to product mix and pricing pressure....Likewise, Sanmina expects that
its Q4 results ending Sept. 30 will be lower than previous estimates due
to shipment delays. The CM anticipates Q4 revenue of $190 to $195 million,
compared with $160.6 million in the prior Q4. Diluted EPS are expected to
be $0.38 to $0.39, versus a year-earlier $0.31 excluding one-time charges.
These preliminary results are about 10% below analysts' expectations. Sanmina
still expects year-over-year growth of about 30% for fiscal 1999 sales and
earnings....EFTC expects Q3 sales to fall short of analysts' estimates of
$60 to $61 million by about 10 to 12%. The company cited softness in the
EMS industry in general and specifically, schedule changes for avionics-related
products and a greater than expected decline in products related to semiconductor
manufacturing equipment. While EFTC expects to have Q3 profits from operations
with modest improvement in Q4, the company is evaluating cost reduction
alternatives....Kent Electronics (Houston, TX) stated that in the first
two months of its Q2 for fiscal 1999, it has seen lower sales and orders
from its contract manufacturing business than had been previously expected.
The fall-off in Kent's cable assembly business, which serves computer and
semiconductor equipment customers, has been greater than projected, but
sales and orders from contract manufacturing customers in other industries
are expected to increase on a sequential basis. The company is expecting
Q2 gross margin from contract manufacturing to be significantly penalized
by factors including ramp-up costs for new customers, underutilization of
plant and equipment, and a change in product mix.
More financial news...NatSteel Electronics (Singapore) has privately
placed 39.1 million new shares at a price of S$3.10. Net proceeds amount
to about S$118.8 million ($67.9 million), of which about S$100 million will
go toward the purchase of new plant and equipment and the expansion of facilities.
The balance will be used for working capital. Placement shares represent
10% of the issued share capital in the company....SCI's board has authorized
the company to buy back up to 2 million shares of common stock and up to
$100 million in principal amount on 5% convertible subordinated notes, due
2006....Last month, Sanmina was scheduled to retire 5 1/2% convertible subordinated
notes, due 2002 and amounting to $86.3 million in principal outstanding.
Note holders had the option of converting their notes into common stock
at a price of $14.096 per share or having them redeemed automatically....EA
Industries, whose stock is being delisted from the New York Stock Exchange,
has arranged for its stock to be traded on the OTC Bulletin Board. The company
says a convertible debenture offering will provide financing for start-up
costs associated with new customers.
Some financial results...In fiscal 1998 ended Aug. 28, Solectron
(Milpitas, CA) reported that sales grew 43% from the previous fiscal year
to $5.29 billion. Net income for fiscal 1998 rose 26% to $198.8 million,
while diluted EPS increased 20%. (See also table.)...For the fiscal year
ended July 31, CMC Industries (Santa Clara, CA) posted sales of $302.0 million,
up 41% over fiscal 1997. Net income came to $3.1 million, an increase of
95% over the prior year, while diluted EPS grew 91%....For fiscal Q3 ended
June 30, Primetech Electronics (Dollard-des-Ormeaux, Quebec, Canada) recorded
sales of $21.9 million Cdn, versus $20.1 million Cdn in the prior Q3. Net
income from continuing operations rose 28% from a year earlier to $1.8 million
Cdn....DDL Electronics reported that revenue for fiscal 1998 that ended
June 30 increased to $53.3 million from $51.6 million in fiscal 1997. Net
income totaled $1.1 million, excluding one-time expenses related to the
acquisition of Jolt Technology. After these charges, net income amounted
to $493,000, compared with a net loss of $868,000 in the previous fiscal
year. (See also table.)... SeaMED (Redmond, WA), a medical CM, earned net
income of $4.1 million on sales of $70.0 million for fiscal 1998 ended June
30. Sales and net income were up 34% and 52% respectively from fiscal 1997....The
K-Byte Manufacturing Division (Tampa, FL) of distributor Reptron Electronics
posted Q2 sales of $32.7 million, up 9% from a year earlier, while K-Byte's
gross profit declined to $3.1 million from $5.2 million in Q2 1997.
Nam Tai Electronics (Vancouver, Canada), which provides contract manufacturing
in China, has hired Shigeru Takizawa as its new president and CEO and has
promoted Tadao Murakami, former vice chairman and CEO, to chairman.
Takizawa joins Nam Tai in Hong Kong after spending 40 years at Toshiba Corp.,
where he was in charge of the engineering department. Besides serving in
various senior management and executive positions at Toshiba, Takizawa has
held senior posts at a number of Japanese industrial, technological and
research organizations. Nam Tai expects that his connections can be utilized
to its advantage.
The new CEO has had an ongoing relationship with Nam Tai for the last 20
years, since the company's inception. In the past, Nam Tai has often sought
Takizawa's advice on engineering and product development processes.
Tadao Murakami, the new chairman, has replaced M.K. Koo, the founder of
Nam Tai. Koo will assume the newly created position of senior executive
officer, corporate strategy, finance and administration and will remain
a director.
Nam Tai says it made these changes in recognition that it should be run
by a strong team of professional managers to achieve growth and expansion.
The company also points out that it has been training a second generation
of management.
In other news, Nam Tai has agreed to pay about $10 million in cash for slightly
more than 50% of the stock in Albatronics (Far East) Company Ltd., a manufacturer
and distributor publicly traded in Hong Kong. Albatronics is mainly engaged
in the trade and distribution of Sony semiconductors and CD mechanisms as
well as OEM and ODM development, manufacturing and trade of consumer electronics.
Manufactured products include CD and video CD players, digital cameras and
audio amplifiers, which are sold to customers such as Sony, Aiwa, Panasonic
and Fuji Film. Albatronics also carries out various R&D activities in
Japan, holds an interest of about 20% in a consumer electronics company
in China and has invested in joint ventures there including plastics and
metal manufacturing, telecom products and wire bonding.
"Nam Tai and Albatronics are both involved in the distribution of electronics
products and contract manufacturing employing similar production techniques,"
states Tadao Murakami, the new chairman of Nam Tai. "With the exchange
of technologies and research, mutual financial support, sharing of market
intelligence and combined management expertise, there are tremendous synergies
and opportunities for improved operating performance for the consolidated
entity."
Hong Kong-based Albatronics employs about 2100 people, and its principal
factory is located in Dongguan, Guangdong, China, within a 312,700-ft2 complex.
In fiscal 1998 ended Mar. 31, Albatronics reported net income of $2.9 million
on sales of $353 million.
Closing of this deal is subject to conditions including completion of due
diligence and approval by Albatronics' shareholders and Hong Kong authorities.
The transaction is expected to go through by the end of this year.
Meanwhile, Nam Tai will pay a Q3 dividend of $0.07 per share, based on an
annual dividend of $0.28 per share for 1998.
GET brings in new management...GET Manufacturing (Mountain View,
CA) recently hired Richard Gourley as VP of worldwide sales and marketing,
Roger Mitri as corporate VP and GM for its Mexican subsidiary, and James
Patty as corporate VP of quality. Gourley was formerly corporate VP of worldwide
sales at Adaptec. Mitri is a former executive at Packard Bell NEC, where
GET president and CEO Roger Nordby had served as vice chairman. And Patty
most recently held the job of executive VP/COO at ATP Technology, an international
CM, and before that was senior VP of operations for AlphaSource Manufacturing
Solutions, a CM in Thailand.
A change of CEOs at Newport... Newport Technology, which provides
contract design and manufacturing services in Raleigh, NC, has undergone
a change in leadership. Graham Frankland has replaced former CEO and president
David Brown, who has stepped down to pursue a high-tech start-up on behalf
of Newport's British parent, Newport Technology Group Ltd. Frankland's most
recent job was managing director of the European subsidiary of Sequel, which
does laptop and peripheral repair. Spun out from SunTechnologies Group in
1996, Newport Technology employs 100+ people in a 35,000-ft2 facility on
the edge of Research Triangle Park. Annual sales are about $15 million..
Other EMS management moves... Iris Grable, a former member of MMI's
board of advisors, has resigned from International Manufacturing Services
(IMS), where she served as VP of marketing and business development. She
will pursue other opportunities in the EMS industry and aims to focus on
international business....Manufacturers' Services Ltd. (Concord, MA) has
promoted Johnny Chan to the newly created position of president of Asian
operations. After joining the EMS company in 1997 from Thomson Multimedia,
Chan was senior VP of Manufacturers' Services' Asian operations. Established
in 1995, these operations offer facilities in Singapore, Malaysia, Indonesia
and the Philippines and employ more than 1300 people. The EMS company has
also named Jeff Kennedy as its first director of advanced manufacturing
engineering. He joins the company from Johnson Matthey Semiconductor Packages,
and his expertise includes SMT manufacturing, MCM/COB and laminate-based
packaging. Kennedy will be based at Manufacturers' Services' site in Arden
Hills, MN....Mack Technologies (Marlborough, MA) has named David Autrey
as VP of business development. His former position was VP of business development
for VALiiANT, Data General's EMS operation....R. Thomas Tropea, the new
senior VP of marketing and business development at Celestica (Aug., p. 8),
has replaced Doug McDougall, who now serves as senior VP of the U.S./Mexico....Solectron
has appointed Julio Leung as corporate VP of finance. He comes with 23 years
of experience at Citicorp/Citibank of New York...Roland Pampel, former president
and CEO of Microcom, has joined the Operating Board of AVEX Electronics
(Huntsville, AL). This board is guiding AVEX toward a possible IPO....XeTel
(Austin, TX) has named Al Schuele, president and COO of Unitrode Corp.,
to XeTel's board of directors...Anja Rouhiainen was named VP of production
development at Elcoteq. She is responsible for start-up and production at
the CM's new factory being built in Monterrey, Mexico....Tim Mullennix has
joined Photomatrix (Carlsbad, CA) as VP and GM of its EMS subsidiary I-PAC
Manufacturing. At one time, he was president of a rep firm that Photomatrix
intends to acquire, and his resume includes a stint at SCI as senior program
manager....LaBarge (St. Louis, MO) has hired Weems Turner as GM of its Houston,
TX, operation and has promoted James Morton to GM of its Tulsa, OK, operation.
Turner comes with oil and gas experience.
Other CMs in the news...Among the recent winners of the annual Service
Excellence Awards are MCMS (Nampa, ID) for technology in the large CM category,
Plexus (Neenah, WI) for quality in the large category, Sparton Corp. (Jackson,
MI) for the highest overall rating in the large category, and Jolt Technology
(Ft. Lauderdale, FL) for quality and overall rating in the small-company
category. Jolt is now a subsidiary of DDL Electronics....Micro Industries
(Westerville, OH) has achieved certification to ISO 14001 for environmental
management....Fortune magazine ranked Jabil Circuit (St. Petersburg, FL)
and Sanmina (San Jose, CA) as the sixth and tenth fastest-growing U.S. companies
respectively, based on EPS growth over the past three years....Smartflex
Systems (Tustin, CA) has qualified a flip-chip-on-flex line in its Monterrey,
Mexico, facility.
Correction: Due to a typo in last month's issue on p. 6, the wrong
company was associated with GET Manufacturing's 1997 acquisition in Mexico.
The correct company name is Proxima Corporation.
Clarification: Included in Celestica's Q2 net loss of $19.2 million,
listed last month on p. 7, were unusual charges of $17.8 million related
to the write-off of fees and financing expenses associated with the prepayment
of debt. Unusual charges for six months totaled $52.8 million.