Vol. 13, No. 8: August 2003


Cover story

Border Disappears Between EMS and ODM Worlds


Reptron Readies Modular Platform

Plexus Will Design In Fingerprint Sensing


M&A Down Again


OEMs Looking Beyond Tier 1 for Asset Buyers

Hon Hai to Add Plastics Supplier

Tellabs Outsourcing to Sanmina-SCI

Q2 and Six-Month 2003 Results

Last Word

Sobering Outlook

Border Disappears Between EMS and ODM Worlds

Twelve months ago, MMI made the case that the EMS and ODM markets were starting to converge (Aug. ’02, p. 1). This trend has continued over the last year as the wall between the EMS and ODM worlds has come tumbling down. The promise of higher margins and additional revenue from ODM-type business is attracting a number of EMS providers. Two tier-one providers have launched major ODM efforts including the acquisition of ODM capabilities, while other EMS providers have entered or shown interest in the ODM business. Still others have opted for ODM-like services.

Although not everyone in the EMS industry has the same approach to ODM services, a common theme is emerging. Providers are developing product platforms that correspond to their product specialties in design and manufacturing and allow them to sell a design-and-build solution. The addition of these product platforms, typically in the form of reference designs, is perhaps the single greatest change to appear in EMS offerings in the last year or two.

Two of the best examples of EMS-ODM melding are Flextronics and Sanmina-SCI. Each has announced an acquisition to enhance its ODM capabilities. More recently, Flextronics has agreed to acquire Microcell (Zug, Switzerland), a mobile-phone ODM. As reported here last month (p. 3-4), Sanmina-SCI has purchased Newisys (Austin, TX), a server developer.

The Microcell acquisition will strengthen Flextronics’ ODM capabilities for mobile phones by adding Microcell’s ODM competence in GSM, GPRS and EDGE handset products.

“Microcell’s superior high-end design and development capability nicely complements Flextronics’ focus on lower-end cell phones,” said Flextronics COO Mike McNamara during the company’s mid-quarter conference call. “In addition, their customer base is synergistic with ours as they have relationships with many of the top mobile phone OEMs in the world including, but not limited to, Siemens and Sony Ericsson.” Both companies are also handset customers of Flextronics.

To acquire Microcell, Flextronics will pay about $80 million plus adjustments based on meeting earnings targets through December 2005 and assume about $120 million of net liabilities. Flextronics modeled the deal to return a minimum 15% on investment. Subject to a number of customary conditions, the deal is expected to close in October.

Founded in Finland in 1997, Microcell achieved sales of about $250 million last year. “Because we do most of their manufacturing already, consolidated revenue will increase only slightly in the next couple of quarters,” said McNamara. “With new designs in the pipeline, however, we expect that this acquisition will add to revenue, profits and earnings per share in fiscal ’05.”

Microcell’s operations include product creation centers in Finland and Denmark, administrative offices in Switzerland and the US, and a manufacturing operation through a joint venture in Nanjing, China. Of Microcell’s 760 employees, over 300 are product creation engineers, and Flextronics is touting the ODM’s strength in product creation.

“The two companies have had a close working relationship for the past few years during which Flextronics has been a major supplier to Microcell. This longstanding relationship gave us unique insight while we evaluated this potential combination,” stated Michael Marks, Flextronics CEO.

Flextronics is parlaying its cell-phone expertise into an ODM offering for the mobile-phone industry. That effort started last year with the much reported PhoneOne design for low-cost handsets.

Supplying ODM products to the mobile-phone industry is a high-growth business, according to Microcell. The company reports that ODM volume within the mobile-phone market was in the range of 30 to 40 million units in 2002. Microcell estimates an increase of 75 to 100% for this year, resulting in a volume of 50 to 80 million units, or around 15% of the market. ODM penetration of the market is expected to increase to 40% by 2006, says Microcell.

Microcell itself has a history of high growth. Its sales went from 7.1 million euros in 2000 to 17 million euros in 2001 to 227.9 million euros in 2002.

Although Flextronics began its ODM business in mobile phones, that business goes beyond handheld products to unrelated product areas that the company has not specified. Flextronics believes its ODM business can reach $4 billion over the next three to five years (Oct. ’02, p. 1; March, p. 4-5).

While Flextronics focuses its ODM efforts on cell phones and other such high-volume products, Sanmina-SCI has adopted a different ODM strategy. Sanmina-SCI is targeting high-end performance products, specifically enterprise-class servers and storage systems, for its ODM offerings.

“Our goal here is to work with a few OEMs and offer them ODM solutions across their entire enterprise-class server and storage systems portfolio. This is not limited to one architecture. There’s a lot of commonality between servers and storage, and this expertise in technology will be leveraged to provide new platform products for both of these areas in the future,” said Randy Furr, Sanmina-SCI’s president and COO, during a July conference call.

The company’s ODM strategy also covers commodity products, where ODMs are well established. For these products, Sanmina-SCI will partner with ODMs and utilize their design skills together with its global manufacturing and distribution capabilities. For example, the company has teamed with Taiwan’s Wistron for personal computing solutions.

Sanmina-SCI expanded its ODM capabilities with the recent acquisition of Newisys, a developer of enterprise-class servers (July, p. 3-4). “In a nutshell, Newisys provides us with design capabilities to do high-end enterprise-class servers and systems management,” said Furr. Sanmina-SCI believes this server space is ripe for combining an ODM solution with the company’s BTO and CTO capabilities given the highly configurable nature of these servers and the need for short-cycle production. Again, an EMS provider is aligning its ODM strategy with its strengths.

Sanmina-SCI’s goal for Newisys is to contribute revenue of about $200 million in fiscal 2004 and $500 million in fiscal 2005. The EMS company expects the transaction to start being accretive in the March 2004 quarter, followed by sequential improvements in future quarters.

The company has two other ODM lines – InfiniBand products such as host channel adapters (March, p. 5) and ECOBAY enclosure products (July, p. 6). Sanmina-SCI has three customers for InfiniBand including Voltaire (June, p. 7).

Other ODM newcomers include PEMSTAR and the Philippine provider Integrated Microelectronics Inc. (IMI). PEMSTAR has developed a platform targeted at handheld products, compact operating consoles, and wearable devices (Nov. ’02, p. 8). IMI has unveiled a range of wireless products and other ODM designs (March, p. 5-6).

In addition, Singapore-based GES International Limited (GIL), an MMI Top 50 EMS provider, adopted an ODM strategy to design and manufacture point-of-sales systems. And it’s working. GIL’s ODM activity grew 43% to S$245.3 million in its fiscal year ended June 30. The addition of new ODM customers, which came on stream during the second half of the prior fiscal year, helped fuel this growth. GIL has extended its design capabilities into other industrial segments and reports that it is converting EMS customers into ODM customers.

Canada’s SMTC has also entered the ODM market, but in a different way. Earlier this year, SMTC announced a partnership with Hong Kong-based Alco Electronics, which has been engaged to provide SMTC with EMS and ODM services as needed (Feb., p. 6). Alco will manufacture in China for SMTC.

Let us not forget that besides Alco, two other Asia-based companies, Elite Industrial Group (Hong Kong) and Venture (Singapore), have a history of doing both EMS and ODM work. So the seeds of EMS-ODM convergence were planted by such companies in Asia.

Then there’s, Solectron, which has expressed interest in the ODM model. But the company has yet to reveal any ODM plans it might have (May, p. 3).

At least two providers have developed product platforms, but avoid using the ODM label for the design-and-build services they provide. Celestica has introduced an Intel Itanium 2-based reference design for workstations and plans to bring out more designs for servers and workstations in the future (July, p. 3). The provider describes this offering as ODM activity without private labeling and without customer concerns about intellectual property protection. Instead, Celestica uses the term collaborative design and manufacturing for this offering.

Likewise, Elcoteq is developing mobile-phone platforms but does not want to be tagged an ODM (June, p. 4). Elcoteq considers itself an EMS company that offers ODM-type solutions. Whether or not the latter two companies are trying to make too fine a distinction remains to be decided by the marketplace.

One thing is clear to EMS companies that have developed product platforms for ODM and ODM-like offerings. Some major OEMs outsource using both the EMS and ODM models. With an ODM solution, these providers are now in a position to capture both types of business from a customer. In such cases, the line between EMS provider and ODM disappears.

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Reptron Readies Modular Platform

Reptron Electronics (Tampa, FL) has introduced a new twist on design platforms, which are becoming increasingly popular among EMS providers looking to sell a design-and-manufacture solution (see above). Instead of offering a platform developed for a specific product area, Reptron has come up with the Modular Development Platform (MDP) that can be used to create a wide range of products. Not only that, the MDP provides engineers with an out-of-the-box solution to shorten the design cycle, said Reptron.

Here’s how the MDP works. Starting with a motherboard, an engineer can plug in predesigned modules such as a CPU card, an LCD card, a PCMCIA card, an input/output card, a wireless module, and an Ethernet controller. In parallel with this process, the customer can proceed with software development for the new product. “A functional mock-up of the final product is readily available to designers, thereby reducing time and effort in the design and debugging of a new system,” explained Tony Musto, Reptron VP of sales and marketing.

Reptron handled the hardware design for the MDP, while Vibren Technologies (Boxborough, MA), which partnered with Reptron on the project, did the software engineering.

Although Reptron would provide the MDP on a stand-alone basis if necessary, the provider is planning to use the platform as a way to sell customers both design and manufacturing services. Reptron and Vibren have also formed a strategic alliance whereby Vibren will sell the MDP as part of a board support package.

Plexus Will Design In Fingerprint Sensing

Under a new partnership with AuthenTec (Melbourne, FL), Plexus (Neenah, WI) will offer complete engineering, design and integration services for AuthenTec’s TruePrint technology-based fingerprint sensors. As AuthenTec’s newest certified design center and member of its Solution Provider Network, Plexus will provide customers the means to integrate biometric fingerprint sensors into their products.

Plexus becomes the second EMS provider to announce a capability for developing products that incorporate fingerprint sensing. Earlier this year, Sanmina-SCI said it planned to develop products based on Fujitsu’s fingerprint sensor technology for biometric authentication (March, p. 5). Sanmina-SCI and Fujitsu Microelectronics America have formed an alliance to comarket products using the Fujitsu technology. So it seems that fingerprint sensor competitors have paired with EMS competitors to see whose fingerprint technology will win the hearts and minds of security-conscious customers.

Biometric fingerprint sensors are used to replace PINs, passwords, physical access cards and keys. AuthenTec is marketing its fingerprint technology to the PC, wireless, access control and automotive markets.

“Our medical customers, in particular, are aware that HIPAA guidelines recommend biometrically enabled systems as the preferred option to passwords,” stated Mike Verstegen, president of Plexus Technology Group.

New design subsidiary…In the US, Venture (Singapore) has incorporated a design subsidiary called Venture Design Services Inc. Venture intends that VDSI will provide design, engineering and customization services to electronics companies worldwide.

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M&A Down Again

Reflecting industry-wide overcapacity, the number of EMS transactions closed in the first half of 2003 was down 48% from the same period last year (July ’02, p. 3). MMI counted 14 EMS deals done in the first six months of this year, compared with 27 such deals completed in the first half of 2002.

Deal making in the EMS industry has been on the decline since it peaked with 111 deals done in 2000. If the first-half rate of closing deals holds up for the full year 2003, then the total transactions for the year will be around 28, which would be 75% below the 2000 peak and 56% below last year’s adjusted count of 63 (Feb. ‘03, p. 1).

Beset with underutilized plants especially in high-cost areas, EMS providers made half as many acquisitions of OEM manufacturing assets in the first half of the year as compared with the same period in 2002. According to MMI’s tally, providers closed five purchases of OEM manufacturing assets in the first six months of 2003 versus 10 such deals in the year-earlier period. It’s no secret that EMS providers are generally more selective these days about the OEM deals they will entertain. They may pass up OEM plant assets in high-cost areas or require that the work be transferred to existing EMS facilities.

In addition, providers were less inclined to snap up the assets of competitors in the first half of 2003. MMI counted four acquisitions of EMS assets in the first half as opposed to seven in the same period last year. So this form of industry consolidation – one provider acquiring another’s assets – actually slowed down in the first half. But that’s not surprising. In a downturn, it’s harder to merge with or acquire another company if the deal requires immediate restructuring and is burdened with weak financial results.

These results showed something else, and the news is good. The level of distressed sales of EMS assets was down markedly in the first half. MMI found one distressed sale reported in the first six months of the year versus six in the comparable 2002 period. The hope is that after nearly three years of a down market most of the EMS businesses that were in jeopardy have either been sold or closed. But time will tell.

EMS providers continue to acquire businesses that add to their service offerings, although this activity was also down in the first half. There were five acquisitions of activities in either front-end or postmanufacturing services during this period in contrast with nine such deals done in the year-earlier half.

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OEMs Looking Beyond Tier 1 for Asset Buyers

BreconRidge acquires Nortel assets

Tier 1 providers have generally lost their appetite for acquiring OEM manufacturing capacity in high-cost areas. So it’s no wonder that two of the latest OEM divestitures involve providers farther down the EMS ladder. BreconRidge Manufacturing Solutions (Ottawa, Canada) has acquired optical component assets from Nortel, while PEMSTAR (Rochester, MN) has entered into an asset purchase agreement with an unnamed OEM.

BreconRidge has purchased certain assets of Nortel’s High-Speed Modules business unit and obtained a three-year agreement to supply these modules for use in Nortel’s 10 Gbit/s (OC-192) optical transmission systems. Nortel is a new customer for BreconRidge and will rank among the provider’s top-five clients.

As part of the deal, BreconRidge has acquired Nortel’s leasehold interest in a 330,000-ft2 facility in Ottawa. In addition, about 100 Nortel employees are joining BreconRidge.

The Ottawa facility includes 70,000 ft2 of class 10,000 clean-room space and 10,000 ft2 of class 1,000 space. BreconRidge plans to consolidate its Canadian operations into this facility and establish the Ottawa location as its headquarters.

The assets acquired relate to the design, development, manufacturing, test and sale of high-speed modules suitable for optical and wireless transmission systems, satellite communications systems, military radar systems and other microelectronics applications with speeds greater than 10 Gbit/s.

“With this acquisition, we will have broadened our service offerings such that we will be able to provide advanced design and development services, from multichip modules to complete microelectronics packaging,” stated Bruce Rodgers, BreconRidge president and CEO.

“It basically puts BreconRidge in the forefront of the design services and manufacturing for optical and RF capabilities,” said Don Hnatyshin, executive VP for business development and procurement at BreconRidge.

“The closing of this transaction will essentially complete the plan we announced last year to focus our investment on the systems side of the optical business and to work closely with external suppliers for our optical components needs,” said Brian McFadden, president of Optical Networks at Nortel. “As a fast-growing company with strong management, we believe BreconRidge is a supplier that will help Nortel Networks maintain its leadership position in optical networking.”

BreconRidge made the MMI Top 50 in 2002, its first full year of operation. Sales last year totaled $136.2 million. The provider was started in 2001 by combining divested Mitel Networks operations with two other entities – Ridgeway Research, which provided engineering consulting and Asian sourcing, and 4Test, a developer of testing software and hardware (Sept. ’01, p. 5).

In addition to its Canadian operations, BreconRidge has a manufacturing and repair facility in Caldicot, UK, and a repair facility in Ogdensburg, NY. In Asia, the company offers engineering, supply chain management and manufacturing services by leveraging a network of about 30 partners.

Meanwhile, PEMSTAR has announced an asset purchase deal and a three-year supply agreement with an existing customer, which has not been identified. The customer is described as “a major technology company.” PEMSTAR will serve as an exclusive production partner and expects about $30 million in annual revenue from the supply contract. To meet this new demand, PEMSTAR will expand its presence in Austin, TX.

“Our work with this particular customer spans more than three years and demonstrates PEMSTAR’s strengths in efficiently managing complex, highly configurable product lines,” stated Al Berning, company president and CEO.

PEMSTAR expects to complete the transaction in September, subject to the terms and conditions of the agreements.

Hon Hai to Add Plastics Supplier

Taiwan’s Hon Hai Precision Industry Co., Ltd., a tier 1 provider that also goes by the trade name Foxconn, has agreed, through a subsidiary, to purchase a portion of the outstanding shares of Eimo (Lahti, Finland), a plastics supplier, and to make a tender offer for the remaining shares of the company. Eimo is a global manufacturer of precision and decorative plastic components, whose main customers are in the mobile communications and health care industries.

The value of the proposed transaction is 67 million euros. Four members of the Paananen family have pledged their 24.3% holding to Foxconn at a selling price of 0.96 euro per share. The price of the tender offer will be 1.04 euro per share.

Eimo posted sales of 251.9 million euros in 2002. For the first half of 2003, the company recorded sales of 108.4 million euros, down 9.9% from the year-earlier period, and an operating loss of 5.8 million euros.

The plastics supplier operates injection molding plants in three locations in Finland; Pécs, Hungary; Vicksburg, MI; Ft. Worth, TX; Manaus, Brazil; and Shenzhen, China. Employees totaled 2,312 on June 30.

“To the strengths that we have especially in Asia, we add the excellent capabilities of Eimo in Europe and the Americas, serving…[the] same important customers as well as several interesting customers that are new to Foxconn. We see Eimo as a springboard to speed up the globalization of our business, initially in the sphere of telecommunications, but possibly for our other business sectors as well,” stated Samuel Chin president of Foxconn Global Wireless Operations.

Tellabs Outsourcing to Sanmina-SCI

Telecom equipment maker Tellabs (Naperville, IL) will outsource the circuit board assembly and repair for Tellabs’ North American products to Sanmina-SCI (San Jose, CA). As a result of this move, Tellabs is laying off about 325 employees. Board assembly and repair services for these products will be transferred to Sanmina-SCI facilities, primarily in Guadalajara, Mexico. Tellabs told MMI that the revenue from this deal will be in the hundreds of millions of dollars over three years.

So Sanmina-SCI is taking on neither Tellabs employees nor a Tellabs facility. This deal is yet another indication that tier 1 providers have largely lost their taste for buying OEM operations in high-cost regions. Instead, Sanmina-SCI will use the Tellabs work to increase utilization rates and operating efficiencies at Sanmina-SCI facilities.

However, Tellabs is both leasing and selling assets to Sanmina-SCI. Any remaining equipment will be sold via auction.

Tellabs’ manufacturing operations in Bolingbrook, IL, are expected to cease by year end, and the company plans to sell its 545,000-ft2 main building in Bolingbrook.

According to Reuters, Tellabs is examining the viability of its factory in Espoo, Finland.

This agreement expands Sanmina-SCI’s relationship with Tellabs, which has been a customer for more than ten years. Sanmina-SCI has supplied Tellabs with PCBs, backplanes and enclosures for a number of product lines.

Tellabs expects to lower manufacturing costs and free up capital now tied up in equipment, inventory and facilities. The company will record an estimated $90 to $110 million in charges associated with the outsourcing move.

This move follows similar actions at Tellabs competitors Lucent and Nortel. For those who skim, the most recent outsourcing move from the latter also appears in this month’s News on page 4.

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More new programs…Under an agreement in principle, Solectron (Milpitas, CA) will become the contract manufacturer of NEC’s 3G handsets for markets outside Japan. NEC plans to gradually transfer production of these handsets, currently made in Japan by NEC, to Solectron’s facility in Suzhou, China, after pilot production of each new product in Japan. With this agreement, NEC’s handset manufacturing capacity outside of Japan will rise to more than 1 million units per month. Solectron recently began producing the first product covered by this agreement, an NEC 3G handset for wireless service provider Hutchison 3G. The agreement also extends to after-sales services, and Solectron recently started providing pan-European repair services for NEC 3G products. The two companies said they would negotiate to add handset customizations to the work done by Solectron. This agreement will strengthen Solectron’s relationship with NEC, a major customer, and expand the provider’s consumer-products business….Emulex (Costa Mesa, CA) has selected Benchmark Electronics (Angleton, TX) to provide EMS for production of Emulex’s host bus adapters for storage networking. Emulex will also continue its manufacturing relationship with MSL….Reuters reports that Flextronics (Singapore) is manufacturing disposable digital cameras for a start-up company, Pure Digital Technologies. Also, Flextronics is producing the Robotic Dispensing System for processing pharmacy prescriptions. The system was developed by Parata Systems (Durham, NC)….Genesis Electronics Manufacturing, an EMS provider based in Oldsmar, FL, has won an IBM contract for monitor reclamation services. The provider operates its Repair and Warranty Service Center in Tampa, FL. Since opening this repair, warranty and refurbishment business on July 1, Genesis has added other customers for it….DRS Technologies (Parsippany, NJ) has received an $8-million contract to provide wire harnesses, cable assemblies and related interconnect equipment for the US Army’s M2A3 Bradley Infantry Fighting Vehicles. The order came from United Defense Industries’ Ground Systems Division (York, PA) )….Boeing has awarded LaBarge (St. Louis, MO) a $12-million contract to supply cable assemblies for aircraft extremities under Boeing’s MD-10 freighter conversion program.

Pursuing aerospace work…Both Jabil Circuit (St. Petersburg, FL) and PEMSTAR have achieved aerospace certification. Jabil’s facilities in Billerica, MA, and St. Petersburg, FL, have attained AS 9100 certification. According to Jabil, this certification is a critical step in obtaining aerospace contracts because it is the highest level of qualification for aerospace manufacturers. Jabil continues to pursue additional aerospace customers as part of its diversification efforts. PEMSTAR’s Rochester, MN facilities have also achieved AS 9100 registration, and the company has scheduled AS 9100 audits of facilities including Guadalajara, Mexico, and Dunseith, ND, for this year. PEMSTAR reports that aerospace industry leaders and key customers are strongly encouraging their major suppliers to get certified to AS 9100. Based on the core requirements of ISO 9000, AS 9100 includes additional quality system requirements necessary to meet the demands of the aerospace industry.

Raising money…Flextronics has announced a private offering of 1.0% convertible subordinated notes with a total principal value of $500 million. They are due August 1, 2010. Initial buyers have a 30-day option to purchase an additional $30 million worth of notes. The company intends to use the net proceeds to repurchase outstanding senior subordinated notes and for general purposes. Following this announcement, Flextronics commenced a tender offer for all of its 9 7/8% senior subordinated notes due 2010, of which $500 million in total principal is currently outstanding. If the company retires all of this debt, it will reduce annual interest expenses by about $45 million, or 7 cents a share….PEMSTAR has filed for a proposed public offering of 6.5 million shares of its common stock and expects net proceeds of about $17.5 million. Underwriters have the option to purchase an additional 975,000 shares to cover any overallotments….Nam Tai Electronics (Hong Kong) has filed for a proposed public offering of 9 million common shares, of which 6 million shares will be offered by the company and 3 million will come from selling shareholders. The company intends to use a portion of the net proceeds from the 6 million shares to construct and equip a new factory of about 250,000 ft2 adjacent to its facilities in Shenzhen, China. Nam Tai expects to use the balance for working capital and other general purposes.

More financial news… Celestica (Toronto, Canada) has received approval from the Toronto Stock Exchange for a new normal course issuer bid, allowing the company to repurchase, at its discretion, up to 10% of the public float of its subordinate voting shares on the open market. The issuer bid is effective for 12 months starting August 1, 2003….Benchmark Electronics is calling for redemption on September 8 of all of its 6% convertible subordinated notes due 2006. The principal amount outstanding is $80.2 million….Credence Systems (Fremont, CA), a manufacturer of automatic test equipment for the semiconductor industry, and EMS provider Reptron Electronics (Tampa, FL) have settled the litigation between the two companies. As part of the confidential settlement, Credence will pay Reptron a total of $1.3 million and will receive from Reptron additional inventories of components used in the manufacture of two Credence product lines.

Deals done…Beyonics Technology and Flairis Technology, two Singapore-based EMS providers, have merged, with Beyonics as the surviving entity (June, p. 6). Flairis has become a wholly-owned subsidiary of Beyonics….Privately-held Linsang Manufacturing Inc., an EMS provider in Beltsville, MD, has merged with Cheshire Distributors (New York, NY), a publicly-held company with no reported revenue (June, p. 7). The resulting public company has changed its name to LMIC, Inc. and will be listed on the OTC Bulletin Board under the symbol LMII. Concurrent with the merger, a reverse stock split of about 1 for 67 took place. LMIC is certified as a minority business entity by the Maryland/District of Columbia Minority Supplier Development Council, which facilitates government contracting activities….LaBarge has sold the remaining portion of its remote equipment monitoring business, which goes by the name ScadaNET Network. The company said the sale of this business, which represented less than 1% of its total sales, enables it to concentrate on its growing EMS business.

Expansion plans…Sparton (Jackson, MI) is exploring expansion into Southeast Asia and is considering Vietnam as a location for a facility. This location would provide Sparton customers with an alternative for cost reductions as well as access to a new and growing market. Assuming that Sparton invests in a Vietnam facility, the company expects that its market strategy will reach beyond its current focus on regulated businesses with high mix and low-to-medium volume. The expansion project is a joint venture between Sparton and Texatronics (Richardson, TX), a member of the Sparton Alliance Network. Texatronics would have a minority interest in the venture and assist in managing operations….Namtek Software Development Company, the software development arm of Nam Tai Electronics, plans to further expand its sales and marketing team in Japan and to upgrade its software development capability by recruiting more sales people and software engineers locally. Namtek specializes in embedded software applications for consumer electronics, especially in the Japanese market. Namtek opened an office in Tokyo in Q2. It also has offices in Shenzhen and Shanghai, China.

Some restructuring moves…Flextronics has decided to close its PCB fabrication facilities in Roseville, MN, and Guadalajara, Mexico. Also, the company closed a Swiss plant, originally part of its DII acqui-sition….SMTC (Toronto, Canada) is in discussions to sell its Appleton, WI, manufacturing operations while retaining its design and engineering capabilities at this site. The company obtained this site when it acquired Pensar in 2000.

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Last Word

Sobering Outlook

Last month on page one, MMI reported a rather sobering outlook for the EMS industry. Acting independently, two market researchers came to virtually the same long-term forecast for the industry’s compound annual growth rate from 2002 to 2007. They are predicting a CAGR of 10%. As noted in the July issue, this rate is well below CAGR projections made during the industry’s boom years. If this rate proves true, it will mark the passage of the EMS business into a mature industry.

Taking a conservative approach, let’s assume that the forecasters are right and EMS will behave like a mature industry. What will this mean for those who depend on the industry? For one thing, outsourced manufacturing, as a secular driver, will not exert as much influence over industry growth as it once did. The corollary is: end markets will have a greater effect on growth than during the go-go years. This effect, of course, appeared during the past two years of declining growth.

If providers can only expect 10% annual growth on the average, then they will look even harder to supplement traditional EMS revenues with sales from other businesses. One such business is ODM (original design manufacturing), which has the potential to create a new revenue stream at higher margins (see page 1). Major opportunities on the back end include order fulfillment and depot repair and reverse logistics.

More than ever, providers will encourage their customers to utilize as many services as possible. Increasingly, providers will attempt to convince customers to use their one-stop service offering rather than split outsourced activities among two or more suppliers. This is one way to take market share.

If 10% growth becomes the norm, then it will become much harder to move up the EMS ladder from one tier to the next. During the boom years, superheated growth rates allowed some providers to leapfrog others. In a mature EMS industry, positions will remain largely stable, barring any major M&A deals.

But in this modest-growth scenario, some providers may turn to M&A as their salvation. It would not be surprising to find M&A activity picking up among providers below tier one. They may conclude that a merger or acquisition is the only way they’ll achieve the scale they need.

In this scenario, the EMS industry will have to show Wall Street that it remains a good business for investment. At first blush, thin margins and 10% average growth do not make a convincing argument. The industry will need to focus investors’ attention on its strengths: the ability to generate cash and the means to provide an adequate return on invested capital.

Being a mature industry isn’t such a bad thing. It means that the industry has gone through its growing pains, and operations have been right sized and fully integrated. MMI believes customers will prefer this environment rather than the upheavals of recent years.

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Copyright 2003 JBT Communications. Unauthorized distribution is prohibited.

MMI July 2003

MMI September 2003

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