Vol. 15, No. 12: December 2005
Mexico Is Back on the EMS Map
The cost-cutting pressures of the downturn years took their toll on EMS sites in Mexico, as high-volume work went to lower-cost centers in Asia. During those dark years of 2001 to 2003, Mexico lost its luster as an EMS destination. That left Mexico with no choice but to redefine its place in the EMS world, and EMS sites there had to find business that wouldn’t end up in Asia. Now there is evidence that the EMS business in Mexico has not only turned around, it’s positively humming. New investments and an influx of new programs are putting Mexico back on the outsourcing map.
Why the new interest in Mexico? At least part of the answer lies in OEMs coming to the realization that China is not a universal solution for outsourcing. Some have learned this economic fact of life the hard way. “People usually have grossly underestimated the amounted of dollars to calculate the landed cost from production in China,” said Marc Onetto, executive VP of worldwide operations at Solectron. He provided an example: “They have underestimated the expediting cost. You try to ship something out of Shanghai airport in early November when the toy guys have got their hands on the airlines, and you will have a surprise. Any price goes.” Now that OEMs have the experience to put real numbers on their costs, they are finding that “being in China is much more expensive when you count every element of the landed cost than they thought originally,” said Onetto.
Such cost reckoning does not mean that China is losing its grip as the world’s largest center for EMS work. But Mexico is gaining favor for certain kinds of work where proximity to the North American markets is important. Onetto singled out complex telecom systems, complex servers and complex industrial systems as products that are a good fit for Mexico. “People understand how important it is, especially when you do complex system integration, to be close to customers,” he said.
According to Robert Freid, president of Contract Manufacturing Consultants (Bellevue, WA), Mexico is growing on its own merits, not because OEMs are pulling back from Asia. “Mexico is now taking on more of the mid-volume requirements, but also increasingly, requirements for higher technology that they didn’t do before,” said Freid. His definition of technology combines PCB assembly complexity and test complexity, and he sees Mexico climbing the technology ladder. “They’re not at the highest end, but they’re certainly well into the middle level and moving into the upper areas now,” he said.
Capital spending flows in
The resurgence of Mexico has attracted new investment. Two tier-one providers have made public their intention to add capabilities in Mexico. What’s more, both investments involve system build capabilities and vertical integration. Flextronics recently announced plans to build a new facility in the Mexican border town of Ciudad Juarez and to start operations there in the first half of 2006 (Oct., p. 6). This facility will serve as a North American center for logistics and mechanical services with an offering that includes configure-to-order/build-to-order, product completion and pack-out, distribution and repair. The Ciudad Juarez facility will complement the services of Flextronics’ Guadalajara industrial park, which will remain the company’s PCBA center in Mexico.
Solectron is making an investment in its existing Guadalajara operation in order to add capabilities that will enable the plant to do level-5 system integration. (Up until now, the Mexico plant had gone as far as level-3 integration.) One portion of the expenditure was used to create an Enclosure Center that can produce both hard-tooled and soft-tooled enclosures. This capability will allow the Guadalajara plant to fabricate enclosures as part of a vertically integrated system build. The provider is also funding a Technology Excellence Center there, which will offer advanced design and engineering, particularly in the area of test engineering. With this test engineering in place, the Guadalajara facility will be able to do complete functional testing for level-5 system builds.
“The fundamental reason for making this investment is that our Mexico plant is becoming more and more strategic for us,” said Solectron’s Onetto. Already, the plant has quietly taken on the most important role in Solectron’s automotive business. Now as outsourcing encompasses more and more complete systems, North American OEMs are placing more importance on the proximity of Mexico for building complex systems. By outsourcing these systems to Mexico, OEMs keep their product pipelines short to allow for a flexible response to product demand and last-minute configuration. As a result, “there is a lot of demand from our customers to have a complete capability in Mexico,” said Onetto. “And that’s why we’re making this investment.”
Moreover, Solectron is not through spending its capital in Guadalajara. “We will keep on investing, both in terms of people, which is the most important part, but also capabilities and industrial assets,” he said.
Like the Solectron investment, the new Flextronics plant planned for Ciudad Juarez will include mechanical services. Although Flextronics declined to be interviewed for this article, MMI assumes that these mechanical services will translate into building enclosures for the BTO/CTO products assembled by the new facility in a vertical model. While both providers will rely on vertical integration for system build in Mexico, there are differences in how they are approaching Mexico for this type of work.
Since Flextronics’ new border plant and its Guadalajara site will act in a complementary fashion, it is logical to assume that the Guadalajara operation will supply PCB assemblies to the new border plant, which will then integrate them with enclosures fabricated by the new operation. In contrast, Solectron will build both PCBAs and enclosures in its Guadalajara facility, where they will be integrated.
Flextronics is touting its new border location as offering logistical advantages such as next-day delivery, shorter transit times and lower transportation costs. The company will join some other large providers that already operate on the border. For example, Celestica and Jabil Circuit maintain border facilities in Reynosa, Mexico. Interestingly, one of Celestica’s two Reynosa facilities offers high-volume BTO and CTO services, while the other focuses on high mix. Both Celestica and Jabil conduct repair operations in their border locations (Jabil’s facility is dedicated to after-sales services), as will Flextronics.
This border move by Flextronics brings up a long-time debate about locating plants on the Mexican border. “The problem with the border towns has historically been labor turnover,” said consultant Robert Freid. For that reason, he discourages clients from considering EMS sites that are in border areas. On the other side of the debate are the EMS companies that do operate in logistically efficient border areas.
Solectron, for its part, chose to invest in Guadalajara, rather than in some other location, so the company could build upon the employee skills it has developed in Guadalajara.
It’s no coincidence that at least three tier-one providers have stand-alone repair operations in Mexico. After-sales services such as repair are logistics-intensive activities that can benefit from Mexico’s lower costs and proximity to the US. So it makes sense that capital is also going into after-sales operations in Mexico. Solectron recently expanded its Chihuahua operation, which performs repair as a majority of its work but also offers logistics and fulfillment. Facility space in Chihuahua increased to 250,000 ft2 from 50,000 ft2, and the company expects dramatic growth there as it transitions full-service repair from higher- to lower-cost locations. Solectron has added 400 people in Chihuahua since January and will continue to hire 200 more through early next year. Celestica also aims to invest in after-sales services with its plan to set up an LCD remanufacturing center in Mexico (Nov., p. 5).
Top-tier providers aren’t the only EMS companies investing in Mexico. Other providers that have recently made financial commitments in Mexico include Veris Manufacturing (Fullerton, CA); Key Tronic Corporation (Spokane, WA), which goes by the trade name KeyTronicEMS; and Electronics Evolution Technologies (Reno, NV).
Mexico vs. Asia logistics
Are shipping costs, which of course must be figured in total landed cost, playing a role in the pick up of EMS activity in Mexico? “I really think they are,” answered Henri Duhot, senior director, multinational customers EMS-CM, ODM, distributors, semi-con at DHL Danzas Air & Ocean. Over the last three years, Duhot reported, costs of logistics from Asia have doubled and tripled. By comparison, he estimated that from a transportation standpoint logistics costs associated with Mexico have gone up at most 25 to 40% in that period, mainly because of rising fuel costs.
For example, air freight from Hong Kong to LA would probably cost $3,500 for a 1,000-kilo pallet, Duhot figured. “For $3,500, you can get a truck down to Mexico or in and out of Mexico…, and that’s a full truck, not just a 1,000-kilo pallet,” he said. In addition, Duhot estimated that shipping a 40-foot container from Hong Kong to the West Coast by sea would probably run $2,000. But this figure does not include inventory carrying costs for the 11 to 13 days of ocean transit time versus two to three days cycle time in and out of Mexico. The difference between Asia and Mexico with respect to overall cycle time can be much greater when inventory levels are taken into account.
Cost is not the only logistics issue when looking at Mexico versus China. There is also the matter of capacity. “We have a lot better capacity in and out of Mexico into the US North American market compared to China where capacity is a huge issue,” said Duhot. “For example, right now there are tremendous space problems getting product out of Asia into North America, both air and ocean the whole works because of peak season. So you basically go half the year where you have to deal with the capacity issues.” When logistics channels are strained, tracking shipments can be a challenge.
Consider also the problem of shipping goods within China, something that generally escapes public attention. “It’s a difficult environment from a logistical standpoint shipping intra China,” said Duhot. “It’s a lot easier to get products in and out of Mexico or even [to ship] intra Mexico.” Moving product from one Chinese province to another amounts to crossing an international border, he pointed out. Also, pick-up rules can differ from one locale to another, and Duhot described transport equipment and security as “less than stellar.”
Mexico’s logistics have improved over the last three to five years. The big-three express parcel companies UPS, FedEx and DHL Danzas have all beefed up their capabilities for serving Mexico. Other logistics providers, US-based, have done so as well, probably doubling office staff and facilities overall in the last few years, Duhot estimated.
Border crossings are easier now than in the past when long lines of trucks were held up at the border for a day or more. Truckers can even utilize a fast pass program to eliminate paperwork. Seaports have also been improved, and Duhot reported that most of the ocean carriers now have regular weekly sailings out of Asia to Mexico. More goods are also coming to Mexico by ship from the US, instead of by rail or truck, which costs more.
Tales of woe
Though Mexico is gaining new life as an outsourcing destination, not every EMS story in Mexico is a happy one. Take PEMSTAR (Rochester, MN). In 2004, the provider discovered inappropriate and irregular accounting entries were made at its Guadalajara, Mexico, facility. The accounting review that resulted caused PEMSTAR to increase its previously reported fiscal 2004 loss by $5.5 million. In addition, bottom-line results for Q1 and Q2 of fiscal 2005 were adjusted downward by a total of $1.6 million as a result of this problem. In May 2005, the company announced it was reviewing its options for its Mexico operation to eliminate additional excess capacity. During the June quarter, PEMSTAR closed down the operation.
Another US-based provider, Plexus (Neenah, WI), reported in January that thefts had taken place at its Juarez, Mexico, facility. The company found that a number of high-value parts had been systematically stolen from the Juarez facility. As a result, a number of employees were fired, and a few of them were reportedly arrested. Because the thefts had occurred at a site with other inventory control problems, Plexus had trouble identifying the amount of the loss. The company recorded a $900,000 inventory adjustment in the quarter ended Jan. 1 to reflect the thefts and other inventory control problems at the site.
Plexus took measures to improve security and strengthen control of parts with a high-street value. High-value parts, for example, have been sequestered in a secure area of the Juarez building, and the site layout was changed to enhance security.
Security in Mexico cannot be overlooked, and armed escorts routinely accompany trucks carrying electronics. Or trucks travel in organized convoys. However, Duhot of DHL Danzas sees security as a global problem. “I don’t think we can specifically talk about Mexico being worse than any other place,” he said.
Still, a question lingers. How many other places require such security for trucks on the road?
Mexico and quality
In the early days of EMS in Mexico, the country had a reputation for less-than-spotless factories and substandard quality. To counteract that reputation, global providers built plants there that replicated the cleanliness, equipment and processes of their best sites. Where does Mexico stand today with respect to quality? Recent analysis from Robert Freid of Contract Manufacturing Consultants indicates that process yields in Mexico generally come in below the yields of similar sites in Asia. (Lower process yields obviously require more touch up and repair.) Freid conducted an “apples to apples” comparison of quality statistics from the same kinds of higher complexity products across various sites.
“It’s not to say that yields in Mexico are poor. You can’t say they’re universally poor. But on average, they’re significantly lower than yields in similar sites evaluated in Asia,” said Freid. Few people in the industry know of this finding, which is reported for the first time by MMI.
What’s more, there is the possibility that current business conditions in Mexico will work against quality in the short term. As EMS business has picked up in Mexico over the last year or so, plants there have grown busier and busier. Some plants are now so full of work that their resources, especially their people, are stretched, according to Freid. “When resources are stretched, people in particular, it can impact performance, either quality or delivery,” he said. “Particularly the better plants are the ones that are taxed the most,” he added.
With so much demand in Mexico right now, “there are Asian sites that should also be considered which are busy but not stretched as some of these other sites are,” said Freid, who presents himself as without biases toward Mexico or Asia. He is reluctant to recommend overtaxed sites in Mexico to new customers. In such cases, Freid explained, established customers often will get the more experienced people, while new customers will end up with junior or shared resources.
Whether or not Mexican plants measure up to the best Asian sites, progress is being made in Mexico. Solectron’s plant in Guadalajara is exhibit number one. Considered by Solectron as a great success story, the Guadalajara facility has been transformed into a lean manufacturing plant. “It’s perhaps one of my best lean plants in the world in terms of discipline of manufacturing, in terms of fast response to the customer, in terms of quality,” said Solectron’s Onetto, who has championed lean principles within the company.
The plant has adopted the Solectron Production System, a combination of lean manufacturing and six-sigma quality. SPS required such physical changes at the plant that a person would not recognize it from what it was two years ago. With SPS in place, Solectron believes it has the credibility with its customers to build complete systems for them. Indeed, Solectron has its eye on some customers for PCBA and level-3 integration at the plant, which ships their assemblies to the US. The company now plans to finish the work in Guadalajara.
Lean manufacturing also facilitates vertical integration at the Guadalajara facility. Because tool changeovers are so fast in the lean system, “I can do one morning in the enclosure plant something that I’m going to use in the afternoon in the system plant. That’s a big deal,” said Onetto.
Mexico’s proximity for system integration work isn’t the only thing working in its favor. Based on conversations with senior site management for large EMS companies in Mexico, consultant Freid reported that at least two major players are relocating PCBA technology centers to Mexico. The fact that these centers are being moved to Mexico “is strong evidence as to where the future will be for printed circuit board assembly in North America,” he said.
By making this move, the EMS companies involved are signaling that their Mexico sites will take over at least some high-end PCBA work that would otherwise go to a high-cost facility elsewhere in North America. This shift of technology centers to Mexico is another measure of its growing importance.
MMI asked Marc Onetto whether Solectron is relocating a Technology Center to Mexico. Onetto responded that while he is increasing the level of engineering capability in Guadalajara, he does not plan to do so at the expense of his engineering force in the US. “I’m doing that to complement what my engineering force does in the United States,” he said. For Solectron, it remains essential to keep EMS engineers close to the engineers of its customers.
Increasing technical capabilities in Mexico are among several factors putting it back on the EMS map. For certain work such as complex system integration, BTO/CTO, product fulfillment and after-sales services, Mexico offers the necessary proximity combined with lower costs. As more of this work is outsourced in North America, more of it is going to Mexico. Mid-volume PCBA is another source of work for Mexico. Also helping Mexico’s case are rising logistics costs in Asia, improved logistics in Mexico, and the OEM aversion to carrying inventory. OEMs are now tuned into total landed cost. The days of outsourcing to China no questions asked are over.
Still, China’s low-cost supply base for materials is an ace in the hole that Mexico cannot play. So one should not conclude from this writing that Mexico will jeopardize China’s preeminent position in EMS.
Nevertheless, EMS business is flowing into Mexico and has reportedly taxed some facilities. This should be a short-term problem that providers have dealt with before.
Jabil Buys LCD Repair Operation
Jabil Circuit (St. Petersburg, FL) has acquired the Round Rock, TX, operations of Incline Global Technology Services (Glasgow, Scotland), a provider of LCD and plasma display panel repair services. Terms were not disclosed.
The Incline acquisition enhances shared customer relationships between the two companies and expands Jabil’s capabilities in LCD and plasma display repair. Incline’s Round Rock facility repairs 20,000 to 25,000 LCD panels a month for various OEM and ODM customers. According to the Incline website, the Texas operation employs 150 people in a 100,000-ft2 facility.
This deal follows on the heels of Celestica’s acquisition of another LCD repair activity, which was announced a month ago (Nov. p. 5-6). Use of flat panel displays has exploded in recent years, and LCD repair capability is essential for EMS providers that want to perform full repair of such produces as notebooks, flat panel monitors and handhelds.
“With the exponential growth in sales of LCD and plasma displays for business and consumer markets, demand for repair services in accelerating,” stated Hartmut Liebel, president of Jabil Global Services. “The acquisition of Incline will expand our already robust technical capabilities in LCD and plasma design, manufacturing and repair as well as increase our ability to serve all our customers in this specialized field.”
The Round Rock facility will become Jabil’s LCD Center of Excellence for repair services, and the company plans to deploy Incline’s technology and expertise to Jabil’s facilities throughout the Americas, Europe and Asia.
Incline presents itself as one of the largest independent repair services for flat panel display products. With the sale of its Round Rock operation, Incline will have a total of six facilities among the three major world markets.
Tier-one players such as Jabil and Celestica aren’t the only EMS providers targeting LCD repair. Take Genesis Electronics Manufacturing, or GEM (Tampa, FL). In the spring of this year, GEM started up an LCD repair operation as part of its depot repair offering.
Venture to Gain Control of Asian Firm
Venture (Singapore), a top-ten provider in 2004, has entered into an agreement to purchase 60% of the share capital of Scinetic Engineering Pte Ltd (Singapore), which provides product design, development and manufacturing services. Consisting of both shares from existing stockholders and new shares issued by Scinetic, the cash transaction is valued at S$ 20.9 million ($12.6 million). It is expected to be completed on Dec. 1.
Offering a complete product development capability in-house, Scinetic bills itself as a one-stop outsourcing solution. The company supplies customers in the areas of customized ASICs and board assemblies, medical products, software, and wafer fab process monitors and other industrial products.
New shares of Scinetic, representing 39.1% of total consideration, were valued at 12 times estimated net profit (after tax) attributable to these shares based on the first nine months of 2005, while the shareholders’ stock, amounting to 60.9% of the total value, brought a price of nine times estimated net profit.
Upon completion of the deal, Scinetic will become a subsidiary of Venture.
New programs…IPWireless (San Bruno, CA), a developer of 3G standards-based mobile broadband technology, has chosen Solectron (Milpitas, CA) as the exclusive provider of outsourced NPI and manufacturing services….Luminetx (Memphis, TN), a developer and marketer of biomedical technologies, has awarded Plexus (Neenah, WI) a two-year contract to serve as integrated system manufacturer for Luminetx’s infrared vein imaging device….Catcher Holdings (Hamilton, VA) has entered into a manufacturing agreement with Key Tronic (Spokane WA), which uses the trade name KeyTronicEMS, for production of a portable, ruggedized, wireless handheld computer and communications control device developed by a Catcher subsidiary and built to military specifications. The initial term of the agreement expires on Dec. 31, 2009….Axis Communications (Lund, Sweden) has selected PartnerTech (Malmö, Sweden) to provide lead-free production, final assembly, stock keeping and distribution through a two-year agreement that is expected to boost PartnerTech’s annual sales by about SEK 50 million ($6.3 million). The agreement applies to Axis’ network cameras and video servers in Europe. In addition, Tomra (Asker, Norway), a developer of systems for returning beverage containers, has asked PartnerTech to manufacture, assemble and distribute an additional group of Tomra’s reverse vending machines (see June, p. 7-8). The first order is worth about SEK 100 million ($12.7 million)….LaBarge (St. Louis, MO) has secured contracts valued at $4.25 million from Lockheed Martin. Under these contracts, LaBarge will continue to produce circuit card assemblies for two configurations of a Lockheed Martin design for ground-based radar.
Solectron Launches Medical Facility
Solectron has opened a dedicated medical manufacturing facility in Singapore with the mission to provide medical device manufacturers with access to a lower-cost supply base and the rapidly growing Asian medical device market. The new facility, named the Singapore Medical Center of Excellence, is located in Chai Chee, Singapore’s Techno Park.
Initial products manufactured at the center include high-performance liquid chromatographs and fluidics subassemblies. Center employees include people who have worked at leading medical OEMs.
“Expansion of our medical capabilities to Singapore allows us a critical gateway to Asia from a competitive sourcing and fulfillment perspective,” stated Daniel Tan, GM of Solectron’s Chai Chee site. “It also enables our OEM customers to be strategically positioned to tap into the rapidly expanding demand for medical products in Asia, including refurbishing medical and diagnostic medical equipment and devices for resale in China.”
The company is cooperating with Singapore’s Economic Development Board to help attract medical instrumentation companies to the region.
Solectron, its competitors and other players are in hot pursuit of the medical device market because of its relatively low level of outsourcing.
Footprint expansion…Citing unnamed sources, The Financial Express in India has reported that Hon Hai Precision Industry (Tu-Cheng, Taiwan), the world’s largest EMS provider, plans to set up a handset manufacturing plant in Sriperumbudur near Chennai, India. According to this report, Hon Hai is said to have requested special economic zone status for the facility. If the report is true, Hon Hai would join Flextronics and Nokia in Chennai….BreconRidge Manufacturing Solutions (Ottawa, Canada) has expanded its presence in the US with the opening of an office in the Boston area. This action follows the recent expansion of the company’s Ogdensburg, NY, operation, which added manufacturing capabilities to an existing repair facility….AER Worldwide (Fremont, CA), a recycling provider and components distributor, has opened a recycling center in Penang, Malaysia, to furnish OEMs and contract manufacturers in Asia with close-to-source material sorting and destruction services.
Germany’s VOGT Takes an Asian Partner
VOGT electronic (Obernzell, Germany), a 2004 Top 50 EMS provider and a components supplier, has a new principal shareholder based in Japan. SUMIDA Holding Germany GmbH, a wholly owned subsidiary of SUMIDA Corporation (Tokyo, Japan), has acquired about 39% of VOGT’s shares. This transaction brings the two companies closer together in strategic partnership aimed at giving new prospects to both.
According to VOGT, its previous efforts did not produce significant market shares in the Asian markets because of entrance barriers and complexities. Plans to grow in these markets led to an alliance with the Asian partner.
SUMIDA Group is a supplier of inductive components and modules with a market focus in Asia. VOGT’s component business is also based on inductive components and modules.
More company news…Sanmina-SCI (San Jose, CA) has engaged LRN (Los Angeles, CA) to provide the Sanmina-SCI work force with a compliance and ethics education program. Over a three-year period, LRN will work with Sanmina-SCI to design, customize and roll out a web-based program to inform its management team about key legal and regulatory issues and to communicate expectations for ethical behavior aligned with the company’s code of business conduct.…OCM Manufacturing (Ottawa, Canada) has marked its fifth consecutive year of 30% year-over-year growth. The EMS provider added 14 new customers since last year. Michel Jullian, president and CEO, attributes that growth to a trend toward outsourcing by small and mid-sized electronics companies, and OCM tailors its services for these companies….Vanguard EMS (Beaverton, OR) has introduced its Vanguard Velocity service team to enhance front end product support. The quick-turn team is focused on driving time and cost out of customers’ new product introductions. “This is not just another quick-turn prototype service. This is a team of very experienced people focused on tackling and eliminating problems that create inefficiencies in our customers’ new product introductions, with special emphasis on the supply chain,” stated Floyd Sutz, company president….Neways Electronics International N.V. (Son, The Netherlands), a Top 50 EMS provider in 2004, is combining the development activities of two of its companies, Neways Advanced Applications and Hoyte, under the new name Neways Technologies B.V. A total of 60 developers are involved.
Some financial news…For the fiscal Q1 ended Nov. 30, Jabil Circuit’s sales grew 31% year over year to $2.40 billion. GAAP net income for the quarter rose 38% from a year earlier to $76.9 million, while core earnings increased 43% to $92.8 million. GAAP EPS went up 37%, and core EPS climbed 38%. Core operating margin stood at 4.7% for the November quarter, compared with 4.4% for the same period a year earlier. Jabil now expects fiscal 2006 revenue and core EPS to come in at the high end of its previous guidance. The company currently estimates fiscal 2006 sales of $9.3 billion, amounting to an increase of 24%, and core EPS of $1.65 for the fiscal year, up 29%….According to socalTECH.com, Flextronics (Singapore) recently participated in a $12.0-million round of investment funding raised by Inphi (Westlake Village, CA), a fabless supplier of high-speed components. Flextronics had invested in Inphi previously (Oct. 2004, p. 3).…This month, Sanmina-SCI joined other investors in a $13.4-million round of venture capital funding for Fabric7 Systems (Mountain View, CA), which designs and build servers based on the company’s fabric computing architecture. “We embrace Fabric7 as a strategic partner in building scalable enterprise servers that could revolutionize today’s datacenters,” stated Jure Sola, chairman and CEO of Sanmina-SCI. The company is an existing investor in Fabric7. Meanwhile, Fitch Ratings has revised its rating outlook on Sanmina-SCI to negative from stable. The outlook reflects the company’s tepid fiscal 2006 revenue growth forecast and Fitch’s belief that the provider will be challenged to meaningfully expand EBIT margins. As a result, in the absence of significant debt reduction, Sanmina-SCI’s credit protection measures are expected to remain weak relative to peers over the intermediate term….Fitch issued a stable rating outlook for Solectron and upgraded one rating. Fitch believes that Solectron’s revenue will be flat for fiscal 2006 while operating margins are expected to moderately expand, driven primarily by successful cost restructuring activities. As a result, the company’s credit protection measures are expected to improve slightly over the near term….A jury recently awarded Sparton (Jackson, MI) $3.6 million in damages from a trial in which a Sparton subsidiary sought to recover certain costs resulting from a manufacturing relationship with Util-LINK of Delaware and National Rural Telecommunications Cooperative of the District of Columbia….Nam Tai Electronics (Tortola, British Virgin Islands) was unsuccessful in its effort to privatize two Hong Kong-listed subsidiaries, Nam Tai Electronic & Electrical Products and J.I.C. Technology (Nov., p. 7)….For the fiscal Q2 ended Oct. 31, SigmaTron International (Elk Grove Village, IL) reported sales of $34.9 million, up 41.5% from the year-earlier quarter. Net income in Q2 fiscal 2006 amounted to $1.2 million, compared with $1.3 million in the year-ago period. The acquisition of Able Electronics, which contributed a full quarter of results for the first time, negatively impacted Q2 net income.
IT selections…Recently announced as customers for response management software from Kinaxis (Ottawa, Canada) are Adeptron Technologies (Markham, Ontario, Canada), Benchmark Electronics (Angleton, TX) and PEMSTAR (Rochester, MN).…PEMSTAR has also standardized on a solution from DataMirror (Mark-ham, Canada) for real-time data integration across the enterprise.…Elcoteq (Espoo, Finland) has selected Visiprise (Atlanta, GA) software as its global manufacturing platform.…The EMS business unit of Teledyne Technologies (Los Angeles, CA) has chosen Steelwedge Software (Pleasanton, CA) for sales and operations planning….AWS Electronics (Newcastle-under-Lyme, UK) and Variosytems (Steinach, Switzerland) have picked manufacturing information software from Aegis Industrial Software (Philadelphia, PA)….Chase EMS (Winchester, MA) and Express Manufacturing (Santa Ana, CA) have selected a pre-production engineering solution from Valor Computerized Systems (Yavne, Israel).
People on the move…Celestica (Toronto, Canada) has hired Paul Barsley as VP, design and engineering services. Most recently, he was the founder and COO of Vocera Communications, a provider of WiFi-based products for voice-over-Internet-protocol communications. Barsley also directed the design and development of Vocera’s first-generation communications device. Before that, he spent 13 years at IDEO Product Development, a design and product development consultancy, where he served as COO and VP of engineering….NOTE (Norrtälje, Sweden) has named Henrik Nygren its new CFO effective March 2006. He succeeds Gunilla Olsson, who has been appointed NOTE’s chief accountant. Nygren comes from SNA Europe, which is part of the Snapon tool group; at SNA, he was international controller. In addition, NOTE and Jaltek Systems (Bedfordshire, UK), which teamed up earlier this year (Aug., p. 7), have made Kevin Heath their strategic alliance manager. His resume includes working at Celestica and Sanmina-SCI….BreconRidge Manufacturing Solutions (Ottawa, Canada) has appointed Michael Kenney director of business development for the Northeast and Mid Atlantic regions of the US.
More restructuring…European news sources are reporting that Flextronics has signed a letter of intent to sell assets of its Laval, France, operation to a French EMS provider, Cofidur….Also in France, Sanmina-SCI has closed its site at Isle d’Abeau, an operation acquired from HP in 2002. In addition, Sanmina-SCI has announced plans to close its manufacturing facility in Toledo, Spain, and to downsize operations in Gunzenhausen, Germany. The Toledo business will largely be transferred to some of the company’s low-cost regions. Sanmina-SCI acquired these two operations in 2002 from Alcatel….SigmaTron is consolidating operations of its Fremont, CA, location into its Hayward, CA, site, obtained by the company in its 2005 acquisition of Able Electronics….NOTE is closing its plant is Borås, Sweden, and transferring Borås customers to other plants in the NOTE group.
As the EMS industry approaches end-of-the-year holidays, providers are dreaming of plums, like the children did in the famous poem “The Night Before Christmas.” But the plums that EMS people have in mind are not of sugary variety. What is dancing in their heads are outsourcing plums to feed their top lines. Is it a dream to believe that these plums will always be there for the taking?
The answer, if there is one, is not simple. It depends on what segment of the electronics industry you are looking at. Different segments are at different levels of outsourcing penetration at any given time. And there is no law that says all segments will follow the example of the PC industry, which was the first to outsource (recall the IBM PC) and now depends heavily on the practice.
Two market studies illustrate the differences between segments. Last month, an iSuppli analyst put out a forecast for mobile-phone production. In his view, outsourcing of handset manufacturing stands at 34% of unit production and will increase to 44% by 2009. According to the analyst, Jeffrey Wu, “dynamics in the mobile-phone market combined with limitations in the design services offered by EMS and ODM providers will restrict the amount of outsourcing” in that segment.
The automotive electronics industry offers a contrast in outsourcing. A recent report by Technology Forecasters Inc. estimates that the current EMS penetration rate for automotive electronics is about 9%, which TFI projects will to rise to 13% in 2009. TFI’s forecast for annual growth is 16.7% over five years. Despite this growth, outsourcing will remain at low levels in this segment for the foreseeable future. TFI analyst Charlie Wade reported that tier-one automotive suppliers “do not have confidence in the EMS industry’s ability to deliver on promises.”
Not only can outsourcing levels vary from one segment to another, the ultimate penetration level at which OEMs essentially will do no further outsourcing may not be the same in all cases. Nor will segments necessarily reach this saturation point at the same time. Remember that EMS revenue growth for a segment over the long term is a function of the difference between current and ultimate penetration levels.
Still, the trend toward outsourcing remains healthy. “We would expect it to be in place in the next four, five, six years at least. And we certainly don’t see it moderating. If anything, we see it accelerating,” said Jabil president and CEO Timothy Main during the company’s earnings conference call in December.
If the industry can sleep comfortably for the next four to six years, what happens after that? To prepare for what comes next, smart planners should be treating EMS segments as separate entities with their own outsourcing behavior patterns. It is possible, for example, that large, but mature IT and communications segments will start to peter out before newer segments such as consumer, medical and instrumentation do. Understanding these patterns over the long term will be critical to figuring out where the outsourcing plums of the future will lie.