Vol. 14, No. 1: January 2004

Table of Contents — Headlines

Cover Story

2004: The Year of Recovery

World Markets

A Manufacturing Superpower

Expanding in Lithuania


Flextronics in Talks with Nortel

Scanfil in China

SMTEK Sells Florida Unit

Valtronic Joins Sparton Network

New Name in NW Readies for Growth

2004: The Year of Recovery

MMI’s annual outlook for the year ahead

After three long years of gloom verging on doom, 2004 promises to brighten at least some spirits within the EMS industry. End markets are expected to improve this year as businesses start to increase capital spending. That means more demand for the EMS industry. With end markets improving and outsourcing unabated, market forecasters are looking for more growth for the EMS market this year. Three forecasting firms (Electronic Trend Publications, IDC and Technology Forecasters) are projecting 2004 growth rates averaging 9.0%, compared with a mean of 5.3% for 2003.

Improving demand this year should translate into higher capacity utilization rates and better financial performance for the industry. Now that restructuring is in its final phase, providers have their manufacturing assets positioned to run more efficiently as demand kicks in. Free from the burdens of restructuring, management teams will be able to put more effort into maximizing the performance of those assets. All in all, 2004 is shaping up as a good, if not great, year for EMS.

But the EMS industry that entered the downturn is not the same one that is exiting it. Design services are much more important now than three years ago. OEM divestitures have become much less desirable as providers avoid adding high-cost capacity. End-to-end solutions have moved from marketing slogans to customer sales. Diversification is in, and EMS providers are paying much more attention to markets outside the traditional computer and communications segments.

This evolution will continue as more changes are afoot in the year ahead. Here are some new trends that MMI sees emerging in 2004.

A new class of provider will appear. Look for the rise of the hybrid outsource services provider.

Broader than the typical EMS company, this new class of provider combines EMS and ODM capabilities. Starting out with ODM designs for cell-phones, Flextronics is the most visible example of this trend at work (Nov. 2003, p. 2-3; Aug, p. 1-3), while Hon Hai is the latest (Nov. p. 1-2). Then there’s Sanmina-SCI, which has staked more than one claim in the ODM market. So three out of the six top-tier companies can now be described as hybrid EMS/ODM providers.

Jabil Circuit may be next. The company recently said it is now in a better position to compete with the ODMs in certain areas.

The two remaining tier-one providers – Celestica and Solectron – have opted to focus on collaborative design with their customers, although Celestica has developed an ODM-like reference design for workstations.

While at least half of the tier-one providers have adopted this hybrid model, it is not the exclusive property of the top tier. Smaller EMS companies can and do offer ODM services in product niches. For instance, among the products developed by Singapore’s Venture is a color label printer. Another Singapore-based provider, GES International Limited, has built an ODM business around point-of-sale systems. Recent entrants to the ODM business include Integrated Microelectronics Inc. of the Philippines and PEMSTAR.

The hybrid EMS/ODM model has its roots in Asia. Two companies with histories of doing both EMS and ODM work are Hong Kong-based providers – Alco Electronics and Elite Industrial Group.

Precedence also exists for a hybrid model on the ODM side in Taiwan. Members of Taiwan’s Kinpo group include ODM Compal Electronics and EMS provider Cal-Comp Electronics. In addition, Wistron, the design and manufacturing business spun off from Taiwan’s Acer, serves both ODM and EMS customers. One of Wistron’s most notable EMS wins was to serve as the second manufacturer of Microsoft’s Xbox video game console. (Flextronics, of course, became the first EMS provider for that product.)

Nonetheless, traditional ODMs have not needed EMS for growth. As a whole, they expanded during the downturn, while the EMS industry contracted. What’s more, the ODM market is projected to enjoy higher growth going forward than the EMS business will. Not only that, ODM margins are typically well above those generated by EMS work. So there’s less incentive on the ODM side for adopting the hybrid model.

On the EMS side of the outsourcing universe, the prospect of additional sales and higher margins on those sales are attracting a number of EMS providers to the hybrid model. This model is a result of EMS-ODM convergence, where most of the movement is coming from the EMS side.

Margin growth, not sales growth, is now king.

The EMS industry is maturing, much as EMS companies would prefer otherwise. With projected CAGRs ranging from 10.3% to 11.6% (Dec. 2003, p. 2), providers cannot expect to return to the boom times of the late 1990s through 2000. Does this mean that earnings will suffer? Not at all. Margin increases can still produce the all-important EPS growth even if sales aren’t spectacular. That’s why you’ll hear EMS providers, particularly the large public ones, talking up margins, as opposed to sales, this year.

Two of the most important levers for raising operating margins are capacity utilization and SG&A expenses. With improving end markets, the stage is set for increases in the capacity utilization of restructured operations. Providers will also continue to focus on SG&A costs even though most of the job cuts have been made.

This focus on margins will make providers more selective about the business they take on. As a result, the large players will pass up more business this year, especially smaller programs.

Another way to boost margins is to engage in non-EMS activities that can produce margins above EMS levels. Hence, some providers are entering the ODM business, as mentioned previously. Vertically integration also offers the potential for higher margins.

Vertical integration will be back in vogue.

Increasing demand will restore or increase the profitability of vertically integrated activities such as PCB fabrication, backplane assembly, plastics molding, cable and harness assembly, and enclosure manufacturing (Oct. 2003, p. 8). PCB fabrication, in particular, has the means to generate disproportionately higher profits when utilization goes up. Key to a vertical integration strategy is the ability to capture margins that would otherwise go to a materials supplier.

Vertically integrated suppliers will again espouse the merits of that strategy, but nonintegrated companies will continue to resist it. MMI believes that OEMs ultimately don’t care unless vertical integration gets them materials in short supply or reduces their costs significantly.

Horizontal integration offers large potential for growth. The question is: Can EMS providers realize this potential?

Exhibit number one is Flextronics’ booming logistics business (December 2003, p. 2). Other providers will be paying more attention to logistics, especially since it does not have the capital requirements of the EMS business. This trend is dividing providers into two camps: own the logistics network or use third-party logistics providers.

Logistics, a large market unto itself, is a natural extension of order fulfillment. And currently there is a major force driving the logistics business. More and more OEMs want to operate their supply chains as a pull system, which gives them more flexibility and potentially less inventory exposure. Logistics providers with their warehouses are the enablers of a pull system.

Still, most of the logistics revenue is already claimed by the carriers and third-party providers. That’s a major challenge for the EMS industry.

Repair, along with reverse logistics, is another horizontally integrated activity with large market potential. But repair has not fulfilled its early promise as a major source of revenue for the EMS industry. The repair industry, which has a history comparable to that of EMS, continues to maintain a hold on OEMs. Independent repair providers typically develop product expertise that keeps OEM customers coming back. Since repair is a mature market for outsourcing, the low-hanging fruit has already been plucked.

Acquiring a repair company is not necessarily the answer because you end up with a lot of repair only customers. Indeed, the EMS industry’s appetite for repair acquisitions may be sated for the most part.

Still, the EMS industry can offer global repair operations to lure away customers from in-house operations and independent repair companies. That bodes well for the long term. But for now, its may be easier for some OEMs to couple product manufacturing with logistics than with repair.

Savvy OEMs will want more, not less, control of critical materials with high cost impact.

Although this trend goes against the tide of full-turnkey programs, it makes sense when demand is in flux. In the current environment where pricing pressure is increasing and lead times are stretching out, OEMs will want more control over critical items that EMS providers are not buying for other customers. Look for OEMs to increasingly lock up buys on “A” items such as ASICs.

If Dell is any example, more OEMs will be dealing directly with suppliers for key components. According to a report from Taiwan, Dell recently held a meeting there to inform ODMs and other suppliers of its intention to implement a bidding systems for certain components.

The conditions that resulted in large numbers of M&A deals in the past have mostly disappeared.

The push to source from low-cost regions, especially China, has made OEM divestitures in high-cost regions largely unattractive. But not completely so. The divestiture pipeline still has some juice. Witness the current discussions between Nortel and Flextronics (see article on p. 5). Still, the major providers are already positioned where they want to be. So don’t expect the major players to be making deals for geographic reasons. Nor do they need to acquire more capacity with utilizations rates well below historic norms.

But there are some factors that could provide the necessary motivation for deal making:

• Providers may still seek out other providers or OEM divestitures that can add market diversification. The Nortel-Flextronics talks are a good example.

• It is easier to acquire a company in good times when its financials have improved.

• A growth market may give some smaller providers the ambition to extend their reach beyond local customers.

• Acquiring ODM or other design capabilities could lead to more deals (Dec. 2003, p. 1).

It is highly unlikely that M&A activity will ever return to predownturn levels when the number of deals closed in the EMS industry climbed past 100. Moreover, M&A levels dropped again in the first half of 2003. If that rate holds up for the full year, the total number of transactions will have decreased by more than 50% versus 2002 (Aug. 2003, p. 3-4). Based on the number of deals done in the first half of 2003, the total for the year is projected at less than 30. (Next month, MMI will present the actual M&A count for 2003.)

The EMS industry will finally confront a perplexing paradox. If the market for outsourcing is still largely untapped, why isn’t growth projected to return to 20% or more.

Given recent forecasts for the EMS market, investors and others will be posing this question in 2004. When one averages three forecasts published in MMI, the result leads to an aggregate CAGR of 10.7% (Dec. 2003, p. 2). That’s well below predownturn growth rates going back to the early 1990s. If one assumes end market growth at about 6%, then outsourcing is projected to contribute less than 5% additional growth per year. Why? There are at least two causes:

• Cost reductions hold down the rate of revenue growth as volumes rise. By offering cost reductions through DFM, volume pricing and low-cost manufacturing centers, the EMS industry is its own worst enemy when it comes to sales growth.

• PCB assembly outsourcing is largely played out. So much of the new outsourcing will have to come from new customers particularly in nontraditional EMS markets, new technologies, and outsourcing extensions from PCBA to finished product manufacturing and distribution. Barring the advent of some killer technology, EMS growth will hinge on new customers and finished product programs. Finished product outsourcing could end up being the EMS industry’s biggest challenge if it is to achieve a reasonably high level of market penetration.

Outsourcing will become more politicized in the US as the presidential election approaches in November.

Outsourcing will become a political football with which the Democrats will try to score points. So far, it seems that Democratic hopefuls have not singled out the outsourcing of electronics manufacturing. But unions are harping on the loss of US manufacturing jobs, and the US public will hear more about it as the election nears. Even though studies have shown that productivity gains are responsible for the majority of the job losses, outsourcing has still played a role that might resonate with Democrats.

While some politicians and voters will pay more attention to outsourcing, it is unclear whether this attention will affect OEM outsourcing in the US on the manufacturing side. OEMs in the US will remain free to do as they please. And much of the current outrage is being directed at the loss of white collar jobs. But it is possible that PR-conscious OEMs will feel pressured to do a better job in justifying outsourcing decisions that affect manufacturing, if those decisions must stand up to public scrutiny.

2004 will hold good news for smaller players with the right capabilities.

Three factors bode well for smaller EMS providers offering full-service capabilities to high-cost regions.

• Due to business failures and restructuring, the numbers of EMS facilities in high-cost areas have been reduced. This means less competition for those operations that remain.

• Improving economic conditions will tend to lift demand in both high- and low-cost regions.

• As mentioned earlier, a greater emphasis on margins will make large providers more selective about the business they accept. And it is likely that they will have more business from which to choose. As a result, OEMs with smaller programs that might have been attractive to the largest providers during the downturn will need to find other EMS sources. The players with the best chances to land these programs will be those that can deliver services akin to what the tier-one providers offer. Testing capabilities, in particular, will be a key selling point.

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World Markets

A Manufacturing Superpower

A new study by Electronic Trend Publications (San Jose, CA) illustrates the growing strength of China as a center for manufacturing. Electronics Manufacturing in China, Second Edition predicts that the market for all electronic products manufactured in China will expand at a CAGR (compound annual growth rate) of 16.5% from 2002 to 2007. At the same time, China’s share of the worldwide COGS (cost of goods sold) for electronic products is projected to expand from 16.4% of 2002 COGS ($590.8 billion) to 28.0% of 2007 COGS ($739.8 billion).

For 2003, COGS for electronic goods made in China is estimated at $113.3 billion, up 17.1% from 2002, according to the ETP study. It predicts similar growth of 17.9% for this year. By the end of the forecast period in 2007, China’s COGS is expected to reach $207.4 billion.

The ETP report also projects double-digit CAGR numbers for each major category of products manufactured in China. According to ETP, some of the highest growth rates will occur in segments that hold substantial export potential, such as computers and peripherals, or are associated with building China’s communication system, i.e., cell phones and networking equipment. At the highest CAGR is the computer sector, which will grow at a 19.1% rate from a COGS of $27.6 billion in 2002 to $66.2 billion in 2007, predicts ETP. The study forecasts a 16.8% CAGR for communications, which will increase from $35.7 billion in 2002 to $77.6 billion in 2007. Combined, the computer and communications segments in 2002 accounted for 65% of COGS value for electronic goods produced in China. That value is expected to reach 68% in 2007.

Next largest in size is the consumer segment at an estimated 27% of COGS in 2002. The study foresees a 14.8% CAGR for the consumer side, starting at $25.8 billion in 2002 and ending up at $51.5 billion in 2007.

Although not nearly as large, other segments also have attractive growth rates for manufacturing in China. Projected CAGRs range from 13.3% for the industrial segment to 17.8% for automotive electronics, which will benefit from the buildup of China’s emerging automotive industry. Growth in the production of medical and industrial equipment will take place as China’s economy becomes more modernized, writes ETP.

The study concludes, among other things, that foreign investment in electronics manufacturing facilities in China will continue to accelerate through 2007, accompanied by significant increases in exports of finished goods from Chinese facilities.

ETP explains that virtually everything in its scenario for China hinges on a noninflating base wage rate, today averaging about $1 per hour for direct labor, excluding housing and other benefits. According to the study, “Labor costs may escalate in special areas and for specialized skills (such as management), but in general, the huge available labor force is almost infinite and so should be available at a fixed rate for many years to come.”

For more information, go to www.electronictrendpubs.com.

Expanding in Lithuania

Yet another Eastern European country is participating in the EMS migration to low-cost regions. Lithuania has joined the likes of Hungary, the Czech Republic, Poland, Romania and Estonia as destinations for products outsourced from Western Europe. A Norwegian EMS provider, Kitron, has been transferring production to Lithuania and expected its staffing level there to reach about 160 employees by the end of 2003.

Kitron established production in Lithuania in July 2001, and its Lithuanian facility is located in Kaunas. The company describes its move into Lithuania as “extremely successful, providing sound financial results combined with excellent quality and a high proportion of on-time deliveries.”

The publicly held provider, which is based in Billingstad, Norway, also has development and manufacturing operations in Norway and Sweden. Indeed, most of Kitron’s employees work in these two countries. As of Sept. 30, 2003, the provider had the equivalent of 1329 full-time employees. Of those, 1200 came from Norway and Sweden, while Lithuania’s contribution was 129.

New to MMI’s pages, Kitron reported Q3 2003 sales of NOK 391.5 million (about $58 million), down slightly from NOK 396.1 million a year earlier. The provider posted a Q3 profit after taxes of NOK 172,000, compared with a loss of NOK 10.5 million in the prior Q3. EMS business accounted for 89.1% of Q3 2003 sales. Kitron also operates development and microelectronics businesses. Nine-month sales of NOK 1.32 billion declined by 10% from the year-earlier period.

Some of Kitron’s customers in Scandinavia are big names in the region. In the data/telecom sector, a published customer list consists of Tandberg, Nera Networks, Combitech Traffic Systems AB and Q-Free. Medical clients are listed as Laerdal, GE Vingmed, Siemens-El-ema AB, Ortivus and MediStim AS. Posted customers in defense/marine are Western Geco, Thales, Kongsberg Gruppen ASA and Saab. On the industrial side, Kitron reports it does business with Saab Transponder Tech AB, Tomra Systems AS, Danaher Motion AB, ABB Robotics, ABB Power Technologies and CPAC Systems AB.

Kitron reported winning contracts in Q3 from Alcatel Space in the data/telecom segment, Hemocue and Radi Medical in medical, and Aimpoint and Dometic in the industrial sector.

Earlier, Kitron announced plans to cut the equivalent of 350 full-time jobs in 2003. Still, the company not only has expanded in Lithuania, but last year also added 65 man-years from Tandberg and 24 man-years from Alcatel Norkets.

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Flextronics in Talks with Nortel

Potential deal worth more than $2 billion in annual sales

Flextronics (Singapore) and Nortel Networks are discussing a proposed relationship whereby Nortel would divest nearly all of its remaining optical, wireless and enterprise manufacturing operations and related supply chain activities to Flextronics.

This proposed deal would result in Flextronics taking over more than $2 billion of Nortel’s annual cost of sales going forward. Flextronics expects to pay Nortel in excess of $500 million in cash over nine months, primarily for inventory and certain manufacturing assets, as well as an additional amount for certain intangible assets.

While subject to negotiation, it is currently anticipated that Nortel’s Systems Houses activities in Montreal and Calgary, Canada; Campinas, Brazil; Monkstown, Northern Ireland; and Chateaudun, France, would be transferred to Flextronics. The provider would assume all systems integration activities, including the final assembly, testing and repair operations carried out in these locations, along with supply chain and supply base management. Flextronics also expects to consolidate and provide Nortel with full supply chain offerings including PCB assembly, fabrication of PCBs and enclosures, and logistics and repair services supported from Flextronics industrial parks.

If discussions are successful, up to about 2500 Nortel employees could be affected. Although Nortel said it is premature to discuss potential effects on employees, the company noted that in similar divestitures a significant number of Nortel employees joined the EMS supplier.

“The significant increase of complex, multi-technology network solutions including carrier-grade products would accomplish a long-standing company initiative to better balance our product mix and reduce seasonality,” stated Michael Marks, CEO of Flextronics.

Nortel intends to retain all strategic management and overall control responsibilities associated with its various supply chains, including all customer interfaces, customer service, order management, quality assurance, product cost management, NPI, and network solutions integration, testing and fulfillment. The company said its outsourcing model has already proved successful in Raleigh, NC, and Billerica, MA.

According to Flextronics, the deal would be accretive to the company in the first year of an agreement.

Also makes network services deal

The network services business unit of Flextronics has expanded the unit’s offering and footprint in Latin America through the acquisition of a Brazilian company in that business. Flextronics Network Services (Stockholm, Sweden) has acquired Construtora JR Paulista in Brazil from Algar Telecom, which serves as the telecom holding company for the Algar Group, a Brazilian conglomerate. Terms of the deal were not disclosed.

JR Paulista handles maintenance and construction of an area of Telefonica’s telecom network in São Paulo. This area corresponds to more than 500,000 terminals. Upon completion of the deal, Flextronics Network Services will continue to serve as a supplier to fixed-line carrier Telefonica in Brazil and the greater Latin American region.

The deal not only will increase the presence and headcount of Flextronics Network Services in Latin America, but also will expand the unit’s service offering by adding indoor site maintenance for telecom switches. In addition, the unit will enhance its outdoor business in network construction and maintenance by providing power supply and air conditioning services in the region.

With multivendor competencies, Flextronics Network Services provides network and field services for fixed and mobile operators and systems vendors. According to the unit’s website, Flextronics Network Services employs 6500 people in 15 countries.
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Scanfil in China

As part of a plan to expand in China, Scanfil (Sievi, Finland), an MMI Top 50 EMS provider, has bought an 85% stake in Hangzhou Fuda Stamping Co, a sheet metal fabricator based in Huang Hu near the Chinese city of Hangzhou. The Chinese company supplies electronics industry customers including UTStarcom, Matsushita and Siemens, and the main products provided are enclosure related. The purchase price was about 12 million euros.

This deal forms part of the second phase of Scanfil’s plan to expand its Chinese operations so they mirror the company’s European services by year end. These services include the design of mechanics, the manufacture and testing of electronics and mechanics, and the design and management of production logistics. The first phase in the development of the Chinese operations was completed last summer, when Scanfil’s Suzhou operation moved to a larger plant of 7000 m2. During the second phase, Scanfil is adding mechanics manufacture and integration to its activities in China.

In this second stage, Scanfil is investing in production at both Huang Hu (Hangzhou area) and Suzhou. Scanfil and Hangzhou Fuda Stamping are turning the Huang Hu operation into a joint venture called Scanfil (Hangzhou) Co., Ltd. About 10 million euros will be invested in the equity of the joint venture. An addition was recently completed at Huang Hu for assembly and integration. The plant’s present size is 22,500 m2, which may or may not include the addition. At the Suzhou facility, Scanfil is investing to raise production and start integration. The Suzhou investments will be ready for use in the first half of the year.

The third phase of Scanfil’s plan will be to expand operations in the Hangzhou area by building a new integration plant, expected to begin production by the end of the year. The newly purchased company owns a 16,000-m2 lot in a Hangzhou industrial park.

Hangzhou Fuda Stamping employs about 400 people and had brought in sales of about 10 million euros for the first nine months of 2003.

Another deal done…Elcoteq Network (Espoo, Finland) acquired Tellabs’ Espoo manufacturing operation in Finland at the end of 2003 in a deal previously reported (Nov. 2003, p. 4). Elcoteq has invited representatives from the Espoo plant to negotiations concerning the transfer of operations and its impact on personnel, which number over 200. The two companies have agreed that Elcoteq will relocate manufacturing by the end of August.

SMTEK Sells Florida Unit

SMTEK International (Moorpark, CA) has sold its Florida subsidiary, Jolt Technology, for about $940,000 to the current president of Jolt and an affiliated investor of SMTEK. Accounting for less than 5% of SMTEK’s annualized sales, Jolt owns and operates what had been SMTEK’s Florida facility. The sale closed on Jan. 9 and became effective as of Dec. 26, 2003.

SMTEK now operates in three US locations – Moorpark and Santa Clara, CA, and Marlborough, MA – as well as in the Ayuttya Province of Thailand.

Valtronic Joins Sparton Network

Valtronic USA (Solon, OH), a contract manufacturer of miniaturized electronics, has joined the Sparton Alliance Network formed by EMS provider Sparton (Jackson, MI). With Valtronic USA, the network is now up to eight companies.

The newest member of the network has sister companies including Valtronic SA in Switzerland and Valtronic Morocco. Valtronic’s technology includes the design and manufacture of electronic modules and microelectromechanical (MEMS) sensors, which are especially useful in implantable medical devices. Assembly techniques used by Valtronic include chip-on-board, flip chip, chip-on-chip, multichip module, and 3D packaging. Customers of Valtronic USA come from the medical, telecom and industrial segments.

According to Sparton, Valtronic’s skills will expand the network’s service offering. “The miniaturization of electronics is and will continue to be a sought-after skill set especially in medical, government and aerospace markets. In addition, the US, European and African geographical presence of Valtronic will expand the market opportunities for the Sparton Alliance Network,” stated David Hockenbrocht, Sparton’s CEO and president.

Other members of the network are Axiom ID, Cirtronics, Gaston Electronics, OCM Technology, Preco Electronics, Sparton Electronics and Texatronics.

New Name in NW Readies for Growth

Anticipating business growth, Vanguard EMS, a newly created EMS company in Beaverton, OR, has announced a 10,000-ft2 addition. The additional space will connect the two buildings on Vanguard’s campus for improved process flow.

The campus originally served as the headquarters of Laughlin-Wilt Group (LWG), an EMS provider acquired by Viasystems Group in 2000. Two former LWG executives, Floyd Sutz and Bill Winther, purchased the Beaverton operation from Viasystems in February 2003 and renamed the operation Vanguard EMS. Sutz became the company’s president, and Winther its VP of operations.

This addition to Vanguard’s leased facilities was recently announced together with the renewal of a ten-year lease for the property. The operation has occupied these facilities since 1988.

“We are pleased to make a long-term commitment to remaining at our original location and look forward to a more flexible, single-plant layout,” stated Sutz.

Winther explained, “More customers are requiring full product outsourcing support, including final system assembly and test, order fulfillment, and depot repair. By performing all these services in a single, connected facility, we will gain efficiencies in process flow.”

When unified, the facility will contain 61,000 ft2 and provide enough capacity to double the number of employees. That number has remained at or slightly below 195 employees since the launch of Vanguard EMS. Construction is expected to be complete in July. An additional 15,000 ft2 is available in the campus to accommodate future growth.

Vanguard has recently noticed mild upswings in demand at its customers. “We’re seeing growth in our existing customers – nothing earth shattering,” said Tim Falk, VP of sales and marketing at Vanguard EMS. “We’ve seen that optimism over the last quarter or so.”

The company serves customers in the medical, industrial, telecom and computing industries. Among its clients are SonoSite, Terabeam, Cognex, Spirent and nCUBE. In addition, Vanguard recently landed two new customers, one of which is Inovise Medical (Newberg, OR). For Inovise, Vanguard will produce the Audicor Cardiograph Expansion System for national distribution. The Audicor System is a cardiac diagnostic tool.

Vanguard EMS positions itself as a high-service, high-complexity provider with tier-one capabilities in a domestic package available to smaller customers. Offering flying probe, in-circuit and functional testing, the company points to its testing resources as an indication of what it can bring to smaller OEMs who are not a good fit for the large providers. Vanguard focuses on two types of customers: OEMs whose volumes are unattractive for Asian sourcing and companies who need to stay on shore because of mix or structural reasons such as serving the defense and security markets.

For about three years, SonoSite used Vanguard in the OEM’s early stages to bring products to market and is now in the process of transitioning business to Asia. But other customers never reach the point where Asia makes sense. “Medical customers have instruments that never get to the volumes attractive for offshore manufacturing. We also look at defense and security type customers as well,” said Falk.

If Vanguard is right, these customers will find fewer EMS sources in the US Northwest. “We’re seeing in our area that there’s a consolidation going on,” he said. One small contractor went out of business, and another is in the process of being acquired, according to Falk. Vanguard believes that it stands to benefit from this consolidation.

At present, Vanguard EMS is operating at a run rate of $30 million plus. Vanguard became the second EMS company, after Milford Manufacturing Services (Milford, MA), to be created from a former Viasystems operation (Nov. 2003, p. 6-7).
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New programs…During the November 2003 quarter, Solectron (Milpitas, CA) won new programs with existing customers including Apple, Ericsson, Motorola, Nortel, Pace Micro Technology, Sanyo, Sun and Trimble. In addition, Dot Hill Systems (Carlsbad, CA) has chosen Solectron’s Budapest, Hungary, facility to provide European manufacturing for Dot Hill’s data storage products. Solectron already manufactures for Dot Hill at two other sites….Lockheed Martin has awarded LaBarge (St. Louis, MO) a $3.25-million contract to product printed circuit cards for the Aegis Weapon System, the sea-based element of the United States’ Ballistic Missile Defense System. Over more than a decade, LaBarge has manufactured a variety of high-performance electronic assemblies for the Aegis program….Sypris Electronics (Tampa, FL), a subsidiary of Sypris Solutions, has received a US Army contract for the Mentor Protégé Program. This two-year contract allows Sypris Electronics to continue coaching a small disadvantaged business and to start mentoring two historically black colleges. For over two years, Sypris has been mentoring Spirit Electronics, an electronics distributor supplying several prime contractors. This new contract will allow Sypris to provide technical direction in value-added services to Florida A&M University’s College of Engineering and managerial guidance to Bethune-Cookman’s School of Business.

Financial news…The US Bankruptcy Court has approved the Second Amended Plan of Reorganization for Reptron Electronics (Tampa, FL), which had filed under Chapter 11 of the US Bankruptcy Code (Nov. 2003, p. 7). Reptron expects that the effective date of the confirmed plan will be January 26. Under this reorganization plan, Reptron’s unsecured class of creditors that includes its existing convertible notes will receive new notes with a total principal amount of $30 million. The existing notes, which totaled about $76.3 million of principal as of October 28, 2003, will be cancelled along with accrued and unpaid interest. These creditors will also receive 95% of the common shares of the reorganized company. Existing common shareholders will receive the remaining 5%. Including this restructuring, Reptron will have reduced its debt load by more than $70 million over the past 12 months….Speedy-Tech Electronics (Singapore), a supplier of power supplies and contract manufacturing services, recently went public on the Singapore Exchange. The company lists manufacturing operations in China, Singapore and the Philippines. According to The Business Times, Speedy-Tech expects to use most of the net proceeds, estimated at S$23.3 million, to expand its production facilities in Singapore and China….PEMSTAR (Rochester, MN) has obtained more favorable financial covenants under its domestic credit facility. As a result, the company does not need waivers from financial covenants for the December 2003 quarter.

New facilities in China…Surface Mount Technology (Holdings) Ltd. (Hong Kong) is adding a new factory at Tang Xia in Southern China. The target date for operation of the new facility is March. The expansion will ultimately add 400,000 ft2 of production space for SMT’s future growth. …Cal-Comp Electronics (Bangkok, Thailand) has opened its first China facility in Wujiang and is building a second plant there. According to a report in DigiTimes.com, the new plant is primarily manufacturing mobile phones and multifunctional peripherals.

People on the move…Rick Ackel, executive VP and CFO at Sanmina-SCI (San Jose, CA), is leaving the company. “I have gained a lot of experience here. A couple opportunities have kind of surfaced where I can use that experience and leverage it. And that’s what I’m going to look to do,” said Ackel during the company’s earnings call this month. He has served as CFO since July 2000. While Sanmina-SCI searches for a new CFO, Mark Lustig, its controller, will serve as acting CFO. Also, Sanmina-SCI recently added Peter Simone to its board of directors. He is a consultant who serves on the boards of three public companies and several private ones….This month, William Graber and Cyril Yansouni joined Solectron’s board. Graber is an executive officer of McKesson Corp., a healthcare services and IT company, and served as CFO at both McKesson and Mead Corp. Yansouni, former chairman and CEO of Read-Rite, serves on the boards of PeopleSoft and Tektronix. The new board members replace Charles Dickinson and Kenneth Haughton, who retired from the board….Finland’s Scanfil has hired Veli Torvinen as group executive VP, whose responsibilities include international activities. He is leaving the position of managing director of Filtronic LK Oy. In addition, Scanfil has promoted Harri Takanen from director of customer relations to VP of technology. Petteri Jokitalo is the new director of customer relations.

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MMI December 2003

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