Vol. 16, No. 1: January 2006

2006: A System Build Year

MMI’s annual outlook for the year ahead

The neat thing about the EMS business is that growth can take a number of forms. EMS providers are no longer at the mercy of PCB assembly outsourcing. They can mine new business in areas either ahead of or following PCBA. MMI believes that in 2006 upstream design activities and downstream system build work will a play greater role in EMS market growth than in the past. That’s because with front- and back-end capabilities in place, EMS providers in effect can take an entire product line off an OEM’s hands. And OEMs are increasingly interested in doing this for several reasons. In some cases, the motivation is product cost; EMS providers can do it cheaper. In other instances, OEMs don’t have the resources to fully support certain product lines, particularly older lines. Sometimes OEMs such as medical or industrial companies see electronics as ancillary, not central, to their core offerings. In still other cases, an OEM that is already benefiting from contracting out PCBA will extend outsourcing to system build. Add up these motivations, and the result is more system build business in 2006.

How much more system build business is the question. Although an attempt to precisely answer the question would be fruitless, MMI believes that the majority of new EMS business in 2006 will come from system-build programs. In the traditional outsourcing sectors of IT and communications, there is not a wealth of new PCBA work to be farmed out. Much of the new outsourcing will come from various kinds of system build programs. In the nontraditional segments such as consumer including handsets and other handhelds, defense and aerospace, instrumentation, medical, and industrial, initial outsourcing often encompasses building the entire product or electronic system. Tier-one providers and others have been pursuing new accounts in the nontraditional segments over the last two or three years in some cases. Their efforts will yield a surge of new programs in these segments for 2006, and much of this work will extend to system build.

Will system build propel the EMS industry into a growth year for 2006? Much of the answer, interestingly enough, lies in what has already transpired in 2005. Probably a majority of 2006 revenue from new business will come from programs won in 2005. So in all likelihood, the die is largely cast for 2006. If tier-one providers as a whole revealed the revenue expected from their contracts won in 2005, one could take a stab at a 2006 revenue growth rate for the EMS industry. Absent such information, one would be merely guessing.

Nevertheless, a few things can be said for 2006 growth. The trend toward further outsourcing shows no signs of abating. Over a multiyear period, this means an overall annual growth for outsourcing providers in double digits, probably between 10% and 15%, on the average. Unless, there are big swings in end markets, end market demand should not have a major impact on the outsourcing market. Remember volume increases in existing programs caused by end market demand will be offset by cost reduction efforts and end-of-life programs. Growth in the EMS business depends on winning new programs.

Looking at end market demand as expressed as semiconductor sales, 2006 demand is shaping up, at least for now, as more or less in line with 2005. The Semiconductor Industry Association is forecasting that global semiconductor sales will increase 7.9% this year, after growing by an estimated 6.8% in 2005. Not much change there. So at this point, one could assume that at minimum the outsourcing market (EMS + ODM) will follow the 10 to 15% baseline for average annual growth, as it appears to have done in 2005.

Although nine large US-traded providers combined for a sales decline of 2.3% in the first nine months of 2005, the revenue change turned nicely positive when contributions were added from five large providers based outside the US and 11 large Taiwanese ODMs. This group of 25 of the largest outsourcing providers accounted for nine-month sales growth of 13.6% (Nov. 2005, p. 5), clearly within the baseline range for outsourcing market growth. MMI believes that the ebb and flow of outsourcing programs even out once you look at a large slice of the global business in outsourcing.

In 2006, attention will focus on whether the US-traded group can rebound from a projected sales decline in 2005 (Nov. 2005, p. 8). It’s too early to make that call. But the increasing diversification of the EMS industry, particularly among the largest US-traded providers, is a good omen.

While MMI’s crystal ball isn’t good enough to predict (with accuracy) how the largest providers will do in 2006, swirling around in it are some thoughts about trends to look for in 2006. In this annual outlook for the year ahead, MMI has identified 11 trends that will influence the EMS industry in 2006.

More system build programs mean more opportunities for BTO/CTO work and an increasing emphasis on proximity. Given the aforementioned growth prediction for system build work, EMS providers will see more opportunities in build-to-order and configure-to-order work. OEMs hate inventory, and BTO and CTO allow them to minimize their finished goods stock. Once confined to PC manufacture, BTO now applies to any product for which manufacturing in a lot size of one is viable. CTO programs will increase as more outsourcing of complex systems takes place. In addition, CTO will continue to generate new business where products must be configured for particular geographic markets. Both BTO and CTO require robust fulfillment capabilities within an EMS provider. Fast cycle times and a highly flexible supply chain are always an asset, but for BTO work they are a necessity.

This system build trend will also place greater importance on proximity to customers and end customers. When building complex systems, it usually helps to be close to the ship-to destination. That way you minimize inventory and logistics costs as well as time in transit. BTO work can also benefit from a short delivery pipeline. Celestica already operates a BTO/CTO facility on the Mexican border, and Flextronics is planning to do so. Mexico’s recent comeback as an EMS center is evidence of the growing importance of proximity (Dec. 2005, p. 1-4).

Increased system build will exert some downward pressure on margins as this activity means more materials content. However, system build implies a deeper and thus “stickier” relationship with the customer.

OEMs will use greater care in determining which products go where for outsourcing. Gone are the days of outsourcing to China with no questions asked. Today, OEMs are much more aware of all the costs incurred when delivering a product outsourced to China. Since labor, energy and logistics costs have gone up in China, OEMs will increasingly evaluate product line by product line whether China makes sense. Risk must also be factored in somehow, and it is likely that at least some OEMs will revisit risk in light of China’s environmental problems, recently highlighted by the contamination of a river supplying water to the city of Harbin.

Still, no region of the world can compete with China’s low-cost supply base for materials. Since materials can represent as much as 80% or more of product cost, China will retain its preeminent position as a low-cost EMS center serving both Asia and the rest of the world. This manufacturing position will be solidified further as more and more production goes into the continually expanding Chinese market.

Design is evolving from a local activity to a global offering. Tier-one providers have been adding design capabilities at various low-cost sites around the world. The most recent example is Solectron’s opening of a design and engineering center in Romania (see News, p. 8). By coupling design services with low-cost manufacturing sites, top-tier providers can offer customers the ability to have their products designed or largely designed at the same location where manufacturing takes place. This approach reduces engineering costs, eliminates handoffs, and facilitates DFM and DFT. It also sets the tier-one providers apart from the rest of the industry – a smart move especially when competing against smaller Asia-based providers who lack engineering capabilities.

But this trend also creates somewhat of a quandary for OEMs used to having design activities in their backyard. MMI sees tier-one providers trying to walk a fine line between offering a local design interface with the customer’s engineers and performing as much design work as possible in a low-cost site.

Taiwan’s Foxconn will solidify its position atop the EMS industry. Foxconn (the trade name for Hon Hai Precision Industry) has managed to keep sales growing at a rapid clip despite its massive size. In 2004, the company leapfrogged into the number-one spot as the world’s largest EMS provider by total sales, just edging out Flextronics. When a company reaches sales of $16.2 billion, as Foxconn did in 2004, conventional wisdom says it can’t keep growing at high rates. Growth would have to come down from the 39% rate in US dollars (34% in Taiwanese dollars) that the company racked up in 2004. Apparently, Foxconn does not recognize such thinking. Company sales for 2005 are on pace, not just to match 2004 growth, but to exceed it with ease. For the first six months, Foxconn’s consolidated sales were up 71% in US dollars (61% in Taiwanese dollars), and its nonconsolidated revenue for the first nine months grew 63% in US dollars (54% in Taiwanese dollars). Propelled by such growth, Foxconn will leave the rest of the industry in its dust as it becomes the industry’s first $20-billion provider in 2005. Because Foxconn will gain such a large lead over the field in 2005, the company’s number-one position will be safe in 2006.

With Foxconn’s reign as number-one will come a better understanding of the company. Because Foxconn is based in Taiwan, it is often lumped with the Taiwanese ODMs. This treatment misrepresents what the company is all about. Foxconn started as a PC components supplier and migrated up the supply chain to become an EMS provider as well as a motherboard supplier. Only recently did the company get into finished-product ODM work as some other tier-one providers have. One ingredient in Foxconn’s secret sauce is its ability to capture margins from its substantial components business. This is a strategy that archrival Flextronics is also pursuing.

The EMS and ODM sectors will continue to intermingle gradually. Don’t look for an M&A-style merger between a major ODM and a large EMS provider. As MMI asserted last year at this time, only when EMS providers decide that they want of piece of the PC ODM space will they have a reason to acquire a major Taiwanese ODM in that space. To date, there is no visible evidence of such a desire within the EMS industry’s first tier.

Still, one can float a scenario where a Taiwanese ODM would acquire an EMS provider to gain a more balanced global footprint. While such a deal cannot be ruled out, there is no precedent for it. In addition, ODM growth strategies have centered on PC product outsourcing and expansion into new areas such as cell phones. Acquiring an EMS provider would depart from this strategy.

Yet the EMS and ODM sectors have converged. You can see this in the emergence of hybrid providers that can provide EMS and ODM services within the same company. In Taiwan, you can find convergence in at least three large companies – Asustek, Foxconn and Wistron – who are building products on both an ODM and EMS basis. Within the US-traded EMS top tier, Flextronics and Sanmina-SCI have openly adopted the hybrid model. In effect, these hybrid companies are spreading their bets, allowing OEMs to choose between the two basic options in outsourcing. Either retain intellectual property through collaborative design in an EMS program or rely on the ODM’s IP to design the product. Either way it’s outsourcing. The difference, which is somewhat artificial, is in the way an OEM chooses to carry out product design.

Large providers will add still more capabilities to fill in technology gaps. Rather than merge with a major Taiwanese ODM, EMS providers are more likely to make smaller design or technology acquisitions to beef up their capabilities in certain product areas. Engineering-type acquisitions are attractive for a large provider because they often involve small groups, which don’t require lots of capital. Such deals can also be slipped under the rug if financially immaterial.

But there is another route to gaining access to technical expertise – partnerships. Jabil Circuit underscored this option with its new joint venture to develop optical modules with Carl Zeiss (News, p. 5-6). Such arrangements allow an EMS provider to team up with a large company with desirable technology, where an acquisition would be prohibitive. Partnerships as well as acquisitions will likely be on the table in 2006.

A complete slate of engineering capabilities is a must for providers who are increasingly engaged in full product design, whether it be on a contract or ODM basis. A major question for 2006 is whether or not other providers will follow of the lead of Flextronics by adding software engineering capabilities. It would seem that sooner or later providers who are doing full product design or redesign will be asked to take on the software side of product engineering, if they haven’t heard such requests already. After all, it is said that in many instances, particularly in the communications space, software engineering plays a larger role in product development than hardware design does. However, don’t expect providers to copy Flextronics’ record of software engineering acquisitions. MMI believes that providers which need to supply software engineering will look first at subcontracting with a software design house for specific projects.

A technology shift from high- to low-cost centers will gain traction. Reportedly, at least two tier-one providers are moving PCBA technology centers to Mexico (Dec. 2005, p. 4). As a result, more high-end PCBA work will be done in Mexico than in the past. Couple this PCBA technology shift with the build-up of EMS design centers in low-cost regions, particularly China, and you have the start of a technology migration from traditional high-cost centers to low-cost sites.

This migration will naturally follow the shift in the contract manufacturing center of mass from high- to low-cost regions. As low-cost sites have gained experience with greater varieties of products and higher complexities, they have been moving up the technology ladder. Providers have also made technology investments in their low-cost sites to better equip them for the climb up the ladder.

Although this technology migration will become more apparent in 2006, it will take years to run its course. Not everyone will move their technology assets in unison, and not everything will be moved.

RoHS compliance will take on a different form in 2006. For OEMs and their providers who have planned and prepared well for RoHS conversion, MMI would be surprised if making the July 1 deadline becomes a problem. But risks do remain. Perhaps the biggest risk is a component supplier failing to meet compliance requirements at the last minute after promising to do so. Still, RoHS compliance in 2006 will shift from meeting the deadline to the logistics of keeping non-compliant parts out of the RoHS product stream. As long as there are products exempt from RoHS, there will be the need to segregate non-compliant parts, a process made more difficult by the fact that some suppliers will be using the same part numbers for both compliant and noncompliant components.

At some point, someone somewhere will slip up. It’s only a matter of time. No organization is perfect. What happens to the provider that mistakenly ships noncompliant product in Europe? Who is liable? What if a component supplier is to blame? How will noncompliance be enforced? Does the penalty depend on how much product was shipped? Savvy providers will be asking these questions, assessing their risks and putting into place procedures that cover accidental noncompliance.

Mid-market OEMs will provide a continuing source of business for operations in the US and Canada. Despite, and perhaps because of, the massive manufacturing shift from high- to low-cost regions, MMI reported last fall that a number of small providers in the US and Canada were busy (Oct. 2005, p. 1-2). MMI believes that there will be continued demand in 2006 for the NPI and low-volume services that these providers specialize in. At the same time, consolidation of smaller players and restructuring among larger ones have constrained capacity in this niche.

Much of the demand will come from mid-market OEMs who seek local EMS partners rather than offshore providers. There are a number of reasons why mid-market OEMs in the US or Canada would want a local partner. They might be developing defense or homeland security products. They might have a medical product requiring FDA certifications. Electronics might only be an ancillary part of the product so lowering electronics cost by offshoring would not be as important as with a pure electronics product. Mid-market OEMs might want a local provider for quick-turnaround of prototypes and ECOs. They might feel, justifiably or not, that with their volumes they would be better off with a small, local provider.

Still, some of this mid-market demand will go to large providers. For example, Jabil Circuit is expanding its US operations as a result of mid-market demand. Other tier-one providers are also pursuing low-volume, high-mix business (July 2005, p. 8).

After-sales services will get more respect from the EMS industry in 2006. Repair and other after-sales services present good growth potential for the EMS industry. A major source of growth will likely come from OEMs consolidating their supply base of repair providers, just as they have done with their EMS providers. By issuing a global repair contract, an OEM can replace a gaggle of regional repair providers with a single global supplier. When it comes to offering global repair, tier-one providers have little competition from independent repair companies, who usually specialize in a particular product area within a single region.

The growth of after-sales services will reveal a split in the EMS industry between providers who offer repair as a follow-on service to their manufacturing customers and EMS companies that have set up stand-alone businesses in after-sales services. Because the stand-alone businesses can also attract non-EMS customers, they have greater potential for growth. These businesses also motivate providers to get into other after-sales services such as asset recovery.

Sooner or later, a tier-one provider will break out the revenue of its after-sales services business. That disclosure will show how far the repair business has progressed in the EMS industry.

Continued EMS investments in India will raise the profile of India’s EMS industry. This year, India will see investment from the likes of Jabil, which is acquiring the EMS and power supply businesses of India-based Celetronix (News, p. 5), and Flextronics, which has selected Chennai as the location of a new industrial park. In addition, Foxconn and Sanmina-SCI reportedly have plans to put a plant in India. It is probable that all of the tier-one providers will have a manufacturing presence in India by year end.

The tier-one build-up in India will encourage more talk about India as a low-cost EMS center for the global market. Well-intentioned as this talk might be, by and large it will not reflect reality, at least not in 2006, because India will still be in no position to compete with China. India lacks China’s all-important supply base of low-cost materials, and it will take time, more than is available in 2006, for India to catch up.

The major EMS opportunity in India lies in producing for the growing domestic market. However, there is a potential niche for India that bears watching – product development. India’s ability to provide hardware and software design resources combined with the build up of EMS operations by global providers may appeal to some OEMs looking for a low-cost solution for product development and manufacturing.


Major Expansion in India for Jabil

Jabil Circuit (St. Petersburg, FL) has exercised its option to acquire the outstanding stock of privately held Celetronix, International, Ltd., an India-based manufacturer with businesses in both EMS and power products. This move will greatly expand Jabil’s operations in India, a country that has recently attracted investment from a number of global providers (Oct. 2005, p. 3-4; Aug. 2005, p. 2-3; April 2005, p. 1).

The acquisition will add 5,750 employees and 270,000 ft2 of total manufacturing space among three India locations: Mumbai, Chennai and Pondicherry. Jabil will more than double its India floor space, currently at 176,000 ft2 in Ranjangaon. A grand total of 446,000 ft2 in India will give Jabil an early lead in manufacturing capacity among global providers operating there.

Celetronix is the unnamed EMS provider that borrowed $25 million from Jabil in fiscal 2005 in exchange for granting Jabil an option to purchase 100% of the company’s shares, as previously disclosed in SEC filings (July 2005, p. 6). In addition to the loan, Jabil expects to pay about $155 million and assume about $30 million of net debt.

Jabil will acquire Celetronix’s EMS business and the company’s power products division, but its memory division, which manufactures memory modules, is not part of the deal. Combined sales of Celetronix are in the range of $300 million. An estimate of sales without the memory division would be in the range of $240 million.

“India has a growing domestic economy and is well-known for engineering services. We believe India will become an increasingly important location to support hardware development and manufacturing for export to the global market. The complementary capabilities of Celetronix will make us the dominant provider of services to and from this important emerging market,” stated Jabil’s president and CEO, Timothy Main.

Greater manufacturing capacity is not the only thing that Celetronix brings to Jabil in India. Celetronix also offers a range of design services that include DFX, test and diagnostics, mechanical hardware, electrical hardware and software. The latter is particularly significant, given India’s strength in software engineering. According to the Celetronix website, the company employs over 400 engineers and designers for its offering in design services. Based on this design offering, it would appear that Celetronix adds product development capabilities to Jabil’s existing design services in India.

This acquisition also puts Jabil in the power products business, something that Flextronics, one of its rivals, is already pursuing. Ironically, Celetronix also helped Flextronics enter the power supply business. In 2003, Celetron, as Celetronix was called then, licensed Flextronics to manufacture Celetron power supplies in China. Besides power supplies, Celetronix also maintains product businesses in RFID and audio.

Founded by the Tandon family, Celetronix serves EMS customers in the consumer, computing and storage markets. These customers sell products such as computers and multimedia products, home electronics, networking and server appliances, and set-top satellite signal decoders. EchoStar, a satellite TV company and supplier of set-top boxes, is a major customer.

Subject to government review and Celetronix shareholder approval, the acquisition is expected to close during March 2006.

Also in optical joint venture

Meanwhile, Jabil will develop optical modules as part of a joint venture with Carl Zeiss (Oberkochen, Germany.) The partnership will enable Jabil to offer optical module capability to its rapidly growing Display Technologies Business Unit, a business that has not been singled out before.

This venture also shows that Jabil is pursuing a strategy to vertically integrate optical modules with consumer products incorporating those components.

Carl Zeiss will bring to the partnership digital light processing (DLP) technology know-how, including core competencies in the development, technology, marketing, sales and production of display applications. Two highly visible applications of DLP are digital projectors and digital projection TVs. Jabil will integrate the resources of the joint venture into an existing global development and production platform for consumer electronics customers.

“Our strong technical and manufacturing capabilities coupled with the superior optics and light processing experience of Carl Zeiss will give us a leading role in the growing optical module and optical engine market,” stated Scott Brown, executive VP at Jabil.

Jabil will have the majority interest in the joint venture.

UK Provider To Buy Backplane Business

Simclar Group (Dunfermline, Scotland), an MMI Top 50 EMS provider in 2004, has entered into a definitive agreement to acquire certain assets of the Litton Interconnect Technologies assembly business in the US, UK and China for $28 million. Owned by Northrop Grumman, the Interconnect Technologies business is a supplier of high-performance backplane interconnect solutions.

Family-owned Simclar projects that the acquisition will boost group sales for 2006 to around $400 million and add design and assembly technology.

This is a vertical integration play in the supply of electronic cabinet packages. “The backplane sits at the heart of every advanced electronic system, and its performance ultimately determines the overall system performance. As technology continues to move forward, we have recognized that having the ability to provide advanced backplane interconnect solutions will enable us to offer a major source of competitive advantage to our customers. Aligned with our capabilities in supply of metalwork and cabling solutions, at a stroke we will become a highly appealing one-stop shop for original equipment manufacturers requiring design and integration services,” stated Sam Russell, Simclar’s chairman.

The Interconnect Technologies business operates facilities in Glenrothes, Scotland; Springfield, MO; and Suzhou, China. The deal brings Simclar’s global payroll to over 2,200 people.

Because the transaction includes the acquisition of the equity of a Chinese company, it is subject to approval by Chinese authorities. Approval was expected within 60 days after the deal’s announcement on Dec. 22, 2005.

A subsidiary of publicly held Simclar, Inc. (Hialeah, FL), which is controlled by Simclar Group, will purchase the US portion of the interconnect business for $16 million in cash.

Russell said the group is “confident that it can grow the interconnect business significantly.”

In addition, Simclar recently invested $3.5 million in the construction of a new sheet metal plant in Mexico.

VirTra Enters EMS Business

Publicly held VirTra Systems (Arlington, VA), which sells firearms training simulators, is poised to step into the EMS arena through a newly signed definitive agreement to acquire three privately owned companies, one of which is an EMS provider. In a stock-for-stock merger transaction, VirTra will acquire Dynalyst Manufacturing Corp., Altatron International and Chrysalis Manufacturing Corp., which does business as Altatron EMS. Altatron EMS, as one would gather, is the EMS provider that will give VirTra its entree into the EMS business.

Operating in Moorpark, CA, from a 54,000-ft2 facility, Altatron EMS supplies manufacturing services to OEMs in the telecom, networking, computer, consumer electronics, and medical device industries. As of March 2005, some names on its customer list were Waterpik Technologies, Aero-Viroment, Future Logic, Phogenix, L3, Luminent and Whirlpool. Altatron offers a range of services including prototyping, PCB assembly and test, procurement, system build and test, packaging and distribution. The provider’s sales in 2005 totaled about $8.7 million, and its current run rate is in the range of $1.4 million per month.

Dynalyst (Taylor, TX) specializes in the prototyping of probe boards and test boards for the semiconductor industry. The third company, Altatron International, is an entity associated with Altatron EMS to facilitate offshore sourcing.

The acquisition is expected to increase VirTra’s revenue ten fold, and 2006 revenue is projected to exceed $30 million. For the first nine months of 2005, VirTra’s sales totaled $700,703, and the company posted a net loss of $1.1 million.

Altatron EMS will also give VirTra manufacturing capacity for larger runs of the company’s simulators. But Altatron EMS is not VirTra’s only option for production of larger runs. In August 2005, VirTra announced a memorandum of understanding with Sanmina-SCI, which would provide VirTra with manufacturing and other services under the preliminary agreement. “All of the options remain open,” said Steve Haag, VirTra’s VP of investor relations. “Whatever the most efficient and productive thing for the company is the direction we’ll go at a given time.”

Does the Altatron acquisition make VirTra both a customer and competitor of Sanmina-SCI? Compared with Sanmina-SCI, “Altatron fulfills another area in the EMS industry. We felt they’re more complementary than adversarial in the areas we’re interested in,” said Haag.

VirTra had also intended to acquire another company, Suntech Circuits (Tempe, AZ), as part of the same transaction. While the parties to the definitive agreement went ahead without Suntech, they intend to complete a merger with Suntech as soon as practical. Suntech provides offshore sourcing of PCBs.

Dictaphone Sells EMS Business

Dictaphone (Stratford, CT) has sold its Electronic Manufacturing Services (EMS) Division to Bulova Technologies, a privately held contract manufacturer of electronics and electro-mechanical systems in Lancaster, PA. Financial details were not disclosed.

Located in Melbourne, FL, Dictaphone EMS employs about 340 people in a vertically integrated operation whose services include PCB assembly, cable assembly, metal fabrication, machining and finishing, final system build, and design support.

The sale of the EMS division is part of Dictaphone’s strategy to focus principally on the healthcare information technology market.

On the buy side, Bulova was following a growth strategy. “We were looking to grow the business. We have been looking for the right acquisition for about a year,” said Stephen Gurba, president, CEO and owner of Bulova Technologies. What’s more, both organizations compete in such market niches as defense, homeland security and the medical sector without customer duplication. The acquisition “really does expand our customer base,” said Gurba.

He also pointed out that the Lancaster and Melbourne operations are complementary. “Where Lancaster has, I think, probably a stronger engineering group, Melbourne has a stronger production group.”

This is the third acquisition that Bulova has made recently. The company also bought an ammunition supplier in Mayo, FL, and a provider of government purchasing services near Tampa, FL. With the three acquisitions, Bulova is now up to about 540 employees.

Gurba said sales should be about $120 million this year, compared with 2005 sales of about $80 million including acquisitions.

The acquired Dictaphone operation has been an EMS provider since 1982. Two long-time customers of the operation are Nice, an Israeli firm, and the parent company Dictaphone.

Meanwhile, Bulova plans to move out of the four-story facility that it occupies in Lancaster. A buyer has signed a letter of intent to purchase the facility, owned by Gurba and listed at 209,821 ft2. If the sale goes through, Bulova will build a new plant about a mile away in a zone with a property-tax holiday.

Sanmina-SCI To Add Adaptec Facility

Under a three-year contract signed last month, Sanmina-SCI (San Jose, CA) will take over manufacturing operations for Adaptec’s data protection, connectivity and storage products. Sanmina-SCI will also acquire Adaptec’s Singapore facility, where the vast majority of its products are manufactured. Adaptec (Milpitas, CA) has agreed to sell to Sanmina-SCI certain assets in Singapore with respect to PCB assemblies and storage system manufacturing.

The EMS provider will purchase Adaptec Singapore Manufacturing assets and related production equipment and inventory for net book value of about $28 million, subject to final closing adjustments. Sanmina-SCI will assume manufacturing operations for Adaptec products upon closing of the asset purchase, estimated to be in early January 2006.

As a result of this transaction, Adaptec will incur about $5 to $6 million in severance costs associated with its work force in its Singapore operations. In conjunction with these agreements, Adaptec management initiated a plan to restructure the Singapore work force. Employees not hired by Sanmina-SCI will be let go by Adaptec over a period of about six months.

More new programs…Solectron (Milpitas, CA) will provide Thales with manufacturing services in a new global relationship across Thales’ defense, aerospace and commercial markets. In addition, Solectron will supply collaborative design services. Manufacturing will take place in Solectron factories in Western and Eastern Europe. Thales “is a customer we’ve been working with for quite some time,” said Solectron president and CEO Mike Cannon in an earnings conference call last month. Thales is an international electronics and systems group, serving defense, aerospace, security and services markets. In 2004, Thales sold off two plants in France and a number of engineering centers to a new EMS company, TES Electronics Solutions (Langon, France)….Sanmina-SCI is serving as one provider of equipment parts for a new line of wireless medical devices to be released by St. Jude Medical….Universal Scientific Industrial (Nan-Tou, Taiwan) has won a manufacturing order for digital video recorders from TGC, a TiVo partner in China and other Asia markets….CXR Larus, a subsidiary of EMRISE (Rancho Cucamonga, CA), has released initial pilot and follow-on production orders for a carrier-class timing product line to Hitachi Oklahoma Manufacturing Division (OMD) of Norman, OK. This is the first in a series of telecom product transfers from in-house manufacturing to Hitachi OMD under a plan to outsource CXR Larus’ domestic product manufacturing to Hitachi OMD. It is expected that all domestic products will be in full production at Hitachi OMD in Q3. In addition, EMRISE expects to bring telecom products from its CXR Anderson Jacobson subsidiary in France under Hitachi manufacturing.…Tomra (Asker, Norway), a developer of systems for returning beverage containers, has expanded its relationship with PartnerTech (Malmö, Sweden) by placing a new order worth about SEK 300 million ($39.8 million). The new order covers production, assembly and distribution for equipment that handles recycling at large stores in the German market (see also Dec. 2005, p. 5).

New design center…Solectron has opened a Design and Engineering Services Center in the company’s Timisoara, Romania, facility, its largest plant in Europe.

Fawn Recovering from Fire

On Dec. 22, 2005, a fire, which was ruled accidental, destroyed Fawn Electronics’ 42,500-ft2 plant in Elm City, NC. Unbowed, the EMS provider has already resumed some operations in a temporary facility and has vowed to come back stronger than ever.

When MMI spoke to Fawn Electronics president Art Rutledge on Jan. 12, about a third of Fawn’s work force was back to work in the temporary facility eight miles from the Elm City plant site. Three weeks after fire, Fawn was still paying all of its employees, whether they were working or not. “We’ve done right by the employees,” said Rutledge. At the time of fire, the Elm City plant had some 92 employees, of which about 12 were temporary workers.

Keeping an experienced work force was one of Fawn’s two major concerns arising from the fire. The other was customer retention. Will customers all remain loyal? “I think it’s going to depend on what we still do over the next several weeks. But right now we’ve had good cooperation from the customer base. They’ve all tried to help in any way that they could,” said Rutledge.

Fawn’s management group has put in long days to restore operations as quickly as possible. Light manufacturing has begun in the temporary facility, whose capability will increase with the addition of an SMT line and a wave solder system. Fawn is also engaging another provider to take on some manufacturing for three months or so.

Although the fire caused some interruption of product flow, the situation could have been worse. The company was able to save nearly all of the plant’s finished goods. So Fawn was able to satisfy a significant amount of immediate customer demand.

“We’ve always said that there were things we would do differently if we did it again, and we’re going to make the most of that opportunity as we do it again,” said Rutledge.

“We have some, I think, good plans for what we’re going to do, how we’re going to do it. We should come back stronger and better than ever if we’re able to execute a plan right,” he said.

One thing Fawn will do differently is to ensure that there is a sprinkler system in its permanent location, wherever that might be. Because the rural Elm City plant relied on a well for water, a sprinkler system was not feasible.

People on the move…As expected, Michael McNamara has taken the reins as CEO of Flextronics. The company previously announced that he would succeed Michael Marks, who would retire and become chairman (May 2005, p. 3).

Copyright 2006 JBT Communications. Unauthorized distribution is prohibited.

MMI December 2005

MMI February 2006

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