Vol. 13, No. 11: November 2003

Table of Contents — Headlines

Cover Story

Hon Hai Makes $1-Billion Play


ODM Offerings Branch Out


Alcatel and Tellabs to Sell European Assets

Elcoteq Invests in Two Companies

Celestica Feeding Cards to Channel

Offering Window on Production and Supply

Last Word

The Shape of the Industry to Come

Hon Hai Makes $1-Billion Play

Plans to acquire a communications ODM

Although Taiwan’s Hon Hai Precision Industry Co. remains a tight-lipped company, it has made three moves this year revealing a desire to expand both capabilities and business in communications.

In the latest move, Hon Hai, also known by its Foxconn trade name, has made a stock offer to acquire a communications ODM, Ambit Microsystems (Hsinchu City, Taiwan). Of the three acquisitions Hon Hai has announced in 2003, this deal would be its largest by far. The company proposes to exchange each Ambit share for 0.672 share of Hon Hai stock. Based on an Ambit share price of NT$154 and 354.2 million Ambit shares outstanding, the deal would be worth NT$ 36.7 billion, or about $1.08 billion. The proposed exchange ratio is subject to shareholder approval, and the transaction is scheduled to close in March 2004.

Hon Hai is often lumped together with Taiwanese ODMs, but it shouldn’t be. The vertically integrated provider belongs in the EMS industry’s top tier (Mar., p. 2). Nonetheless, the Ambit deal will give Hon Hai ODM capabilities in the communications segment, blurring the line between Hon Hai and Taiwanese ODMs. Moreover, this deal provides yet another example of an EMS provider crossing over into the ODM space (Aug., p. 1).

Ambit’s business comprises R&D, design and manufacturing of wireline communications equipment, wireless equipment, power components, and RF transmitters and related products. Design capabilities cover hardware, software and firmware. Under communications, Ambit lists products for DSL, voice over IP, wireless applications and LANs as well as cable modems and analog modems.

The company was founded in 1991 as a joint venture between a Daimler-Benz subsidiary and Acer. Ambit went public on the Taiwan Stock Exchange in 1998 and reported 2002 sales of $800 million. Through October, Ambit’s sales were up 24% over last year to NT$24.5 billion (about $720 million). Manufacturing takes place at two sites in Taiwan and one in China.

According to Hon Hai, the proposed acquisition will further enhance its vertical integration model by combining the strengths of the two companies in engineering, development, product design, and new market expansion.

Clearly, Ambit will expand Hon Hai’s communications business and give Hon Hai the ability to offer a design-and-build solution to communications OEMs that Ambit would court. The extent to which Hon Hai already provides product development services is unknown, given the paucity of information disclosed by the company. But Hon Hai does not have a product development history comparable to what the ODMs have.

The Ambit deal combines Hon Hai’s vertically integrated manufacturing model with communications design. This is but the latest step in the progression of that model as Hon Hai has moved up the supply chain from its early position as a cable and connector supplier. The company began producing PC enclosures in 1996 and later added motherboard and PC assembly.

Indeed, Hon Hai has grown its motherboard business so rapidly that a report by Lehman Brothers Global Equity Research in Asia estimates that Hon Hai will likely become the second largest motherboard supplier this year behind Asustek. According to Lehman Brothers, Dell, HP and Intel are Hon Hai’s three largest customers for motherboards. At the final-assembly level, for example, the report notes that Acer has selected Hon Hai as sole supplier for two models of Aspire PCs.

Still, PC-related products will only represent about 50% of Hon Hai’s projected sales in 2003, Lehman estimates. Accounting for the other half are businesses that Hon Hai has grown in communications and consumer electronics. In the latter space, it is well known that Hon Hai produces PlayStation 2 game consoles for Sony.

Within communications, Hon Hai serves customers such as UTStarcom, for whom Hon Hai builds handsets, and Cisco. Hon Hai’s communications business will benefit not only from the Ambit deal, but also from two other acquisitions announced earlier this year. The provider acquired control of Finland’s Eimo, which supplies plastics to the mobile communications industry (Aug., p. 5), and agreed to purchase Motorola’s mobile-phone operation in Chihuahua, Mexico (Oct., p. 2-3).

It’s important to keep tabs on Hon Hai because the company has grown rapidly despite the downturn. For the first three quarters of 2003, its operating revenue (not consolidated), which totaled NT$ 220.1 billion, or about $6.5 billion, would place Hon Hai fourth in the EMS top tier (see table on p. 7). What’s more, sales for the first 10 months were up 37%, not as high as growth in 2002 but well above all but one of its EMS competitors (p. 7).

Certainly, Hon Hai’s large manufacturing presence in China held it in good stead during the last three years. Now the question is: How fast can a larger Hon Hai grow? Acquisitions, it appears, will play a role in the answer to that question.

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ODM Offerings Branch Out

Flextronics is a prime example

Those who questioned whether the EMS and ODM models could coexist within the same company need only look at Flextronics. The company’s ODM business not only is gaining traction in cell phones, but is branching out into other areas as well. Meanwhile, Taiwanese ODMs have extended their businesses into such products as cell phones and servers. So the ODM model, which has become a staple for outsourcing in the PC industry, threatens to do the same in other market segments.

Although Flextronics’ ODM efforts have been highly visible in cell phones, its ODM activities also encompass other handheld products, printing and imaging, and the PC sector. The company recently discussed for the first time its ODM efforts beyond cell phones during a September meeting with analysts and investors.

In the handheld arena, Flextronics has developed a digital camera. On the PC side, the company has designed the Panorama, which doubles as a laptop and a TV. Not only is Flextronics broadening its ODM activities across more product segments, the provider is also drilling down to develop component-level technology. Flextronics has gone public with one such technology – camera modules, a hot component for cell phones.

Indeed, camera modules have become a stand-alone business for Flextronics and the only product area outside of cell phones classified as “meaningful” by CEO Michael Marks during the company’s earnings conference call last month.

Camera modules make up a large and attractive market for Flextronics. “It’s a high-growth area with huge potential opportunities, not just in cell phones but many other emerging markets,” said CTO Nicholas Brathwaite during the September meeting with analysts and investors. He cited analyst estimates of 125 to 150 million units next year. Brathwaite added, “For many applications, the camera modules represent somewhere between 10 and 12 percent of the total cost of the bill of material in a phone. And I would argue as camera modules migrate into lower-cost phone products, the camera module as a percent of the overall bill of material is going to increase.”

For Flextronics, reducing product costs through an ODM strategy means driving out costs at every level including components such as camera modules.

These modules also match Flextronics’ capabilities in injection molding and assembly. Modules may contain molded plastic parts and a plastic lens element along with flex circuitry to which an IC sensor is attached. “Flextronics has the manufacturing and the technical capabilities to make everything on here except the sensor, the IC itself,” said Brathwaite.

Reflecting the progress of Flextronics’ efforts, both camera modules and ODM cell phones are production constrained in the current quarter, according to CEO Marks.

In cell phones, the ODM offering now covers three different platforms, not counting the high-end designs that the Microcell acquisition (Aug., p. 1-2) will bring to the table. Flextronics has booked five customers for two of the platforms.

Beyond pure cell phones, the company also finds an opportunity in products that combine the features of a cell phone and a PDA. These are often called smart phones. Flextronics plans to combine its cell-phone knowhow with the PDA experience it gained from customers such as Palm and the watch maker Fossil. “We’re getting expertise in the PDA sector to be able to go to the smart-phone integration at some point in time,” said Ash Bhardwaj, Flextronics senior VP of ODM, in the analyst and investor meeting.

Another handheld product targeted by Flextronics’ ODM strategy is the digital camera. This end market, which grew despite the downturn, promises robust growth going forward. Flextronics designed its first digital camera, a 2-megapixel unit, just to get experience. For the next fiscal year, Flextronics’ roadmap calls for developing cameras ranging from 2 megapixels up to 5 megapixels.

In the PC sector, Flextronics already has an ODM components business in high-volume enclosures. The company plans to integrate such things as power supplies into these enclosures without entering the motherboard business at this point. This strategy includes designing some of the power supplies internally. In addition, Flextronics has landed its first customer for manufacture of a complete PC. That work is taking place in China.

What’s more, Flextronics plans to capitalize on the prospective merger of television and personal computing. The company believes it makes sense to offer a laptop product that allows a user to view TV and do computer work on the same machine. So the company developed the Panorama as an ODM offering. “We predict that we’ll have a customer soon on this product line,” said Bhardwaj.

Flextronics also has ODM work going on in printing and imaging, although the company has not said explicitly what its ODM offerings in this space will be. Still, the company has worked on print head engines, inkjet dispensing, wireless features for printers, and multifunctional printer design. Last year, Flextronics acquired two design groups in this space. One of them, a Japanese group, has been working primarily for Epson, while the other group, located in San Diego, is doing design work for HP.

Although Flextronics’ ODM efforts seem to be farther along in cell phones and camera modules, handhelds are not the only ODM area expected to produce revenue for Flextronics. “On the computer side as well as on the printing side, we’re going towards the ODM model, and I think that will be a substantial part of the [ODM] business next [fiscal] year,” said Bhardwaj.

Taiwanese ODMs pursue non-PC business

While Flextronics intends to be a major player in the ODM business, a number of Taiwanese companies already are (Sept., p. 4-5). And many of them are diversifying into markets outside the PC sector. Two of the most popular segments chosen for diversification are cell phones and servers. In both categories, Taiwanese ODMs have made major inroads.

According to DigiTimes.com, handset manufacturers in Taiwan are projected to ship some 70 million mobile phones next year. Based on a market forecast of 500 million handsets in 2004, Taiwanese companies would account for 14% of the market. But this share is not entirely ODM. It includes an estimated 10 million phones to be produced on an EMS basis by Hon Hai (Foxconn) and 4.5 to 5.5 million branded handsets. Subtracting these numbers, one arrives at a total of about 55 million ODM phones from Taiwanese companies in 2004, or 11% of the total market. That’s still a respectable number.

Flextronics’ Bhardwaj cited a forecast of 60 million phones overall for the ODM side in 2004 and expected that the projection will be exceeded by a comfortable margin. “I think close to 75 million will go to the ODM side of the business,” he said. That number, of course, includes what Flextronics will contribute.

Based on data compiled by DigiTimes.com, BenQ is expected to be the largest Taiwanese ODM producer of cell phones by volume in 2004 as it is this year. DigiTimes.com reported 2004 handset targets at 14 million units for BenQ, followed by 11.5 to 12 million for the Compal Group and 10 million each for Arima Communications and Quanta Computer.

BenQ stated in October that its monthly run rate for handsets will exceed 1 million units in Q4, up from 800,000 phones in September. September’s total was affected by delayed component deliveries. Quanta recently landed handset orders from Legend and plans to ship color clam-shell phones to the customer in Q4. These shipments will help to bring Quanta’s handset shipments to 1 million units a month, according to Quanta.

As a sign of how far Taiwanese ODMs have come in the cell-phone space, Motorola reportedly plans to set up an ODM center in Taiwan (Oct., p. 3).

Still, Taiwanese ODMs have more than Flextronics to worry about in the cell-phone space. Elcoteq, a major EMS provider in the cell-phone segment, is offering collaborative design and manufacturing (CDM) services, which allow OEMs to customize the phone specification and solution. The company says its approach gives OEMs flexibility that they cannot get from pre-engineered ODM offerings. Elcoteq has formed a partnership with Cellon International, a wireless design and development house, to expand Elcoteq’s range of design solutions in the cell-phone space (see article below).

Taiwanese ODMs have also penetrated the server market. According to market researcher IDC (Framingham, MA), Taiwanese ODMs ranked second, third and fourth in outsourced manufacturing of entry-servers for the first half of 2003. Entry-servers are defined as servers priced under $100,000. IDC estimates that Mitac, Inventec and Wistron accounted for 17.3%, 12.9% and 9.2% respectively of the 1.04 million entry-servers that were outsourced in the first half. All three companies supply HP with servers.

What’s more, at least one ODM has started manufacturing servers outside of Asia. Quanta has opened a server plant in La Vergne, TN, according to an article on the website of The Tennessean. Although most components are sourced in Asia, it is more profitable for Quanta to build servers to order in Tennessee, the article reported.

Pioneered by the likes of Accton Technology and D-Link, communications infrastructure equipment is another non-PC segment that has attracted ODM offerings. ODM competition in this segment will likely heat up with Hon Hai’s proposed acquisition of Ambit Microsystems, a communications ODM (see article on p. 1).

The ODM business is no longer confined to PCs and laptops. As it spreads to other segments, more and more OEMs will have the option of choosing between the EMS and ODM models. On the supply side, this trend means that EMS providers will increasingly find themselves looking over their shoulders at what is happening in Taiwan. But as the Taiwanese ODMs enter more segments, they will find new competition such as Flextronics.

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Alcatel and Tellabs to Sell European Assets

Tellabs (Naperville, OH) and France’s Alcatel, both communications OEMs, plan to sell manufacturing operations in Europe. Alcatel is negotiating to sell plants in Saintes and Coutances, France, while Tellabs has agreed to hand over its manufacturing operation in Espoo, Finland, to Elcoteq Network (Espoo, Finland).

Tellabs will outsource manufacturing of its international products to Elcoteq, which will become a preferred supplier to Tellabs International. The deal mainly involves the manufacturing of Tellabs’ digital optical cross-connection products and broadband access systems. Elcoteq expects Tellabs manufacturing programs to increase 2004 sales by “clearly over” 100 million euros. The provider also expects this deal to enhance 2004 profits.

The assets to be acquired by Elcoteq consist of equipment and materials. So Elcoteq is not buying a facility. In fact, the two companies have agreed that the acquired operation will move from the Tellabs facility during autumn 2004. About 200 Tellabs people working in the Espoo operation will become Elcoteq employees on current terms. The transfer of operations will take place after competition authority approvals have been obtained, which are expected by year end.

Tellabs had said it was reviewing the viability of the Espoo operation, which resides in a 154,000-ft2 facility also used for product development and design (Oct., p. 4). This outsourcing of international products follows Tellabs’ earlier move to contract out PCB assembly and repair for North American products to Sanmina-SCI (Aug., p. 5).

In Finland, Tellabs will continue some final assembly, product customization, repair and returns as well as product development and support.

“We are satisfied about having won this deal in a tough international competition. Getting Tellabs as a new customer in a big way fits perfectly with [our] communications technology strategy,” stated Elcoteq CEO Lasse Kurkilahti. He also said that as soon as the deal is closed Elcoteq will need to start analyzing where to continue manufacturing these products.

For Elcoteq, this deal marks the second OEM divestiture that the company has announced in as many months (Oct., p. 3).

Meanwhile, Alcatel intends to sell two French facilities – one in Saintes and the other in Coutances – by the end of the year. The company is negotiating with GMD, a French sheet metal fabricator, for the sale of the Saintes facility, which manufactures cabinets used in telecom and other applications. This facility employs 300 people.

In Coutances, Alcatel is in talks with plant management toward a management buyout of the facility, which manufactures printed circuit boards used telecom as well as in military, avionics and IT markets. Employment there totals 220.

Alcatel said these transactions are in line with its strategy to focus on its core business and outsource components manufacturing, which has become a specialized business.

Elcoteq Invests in Two Companies

Partnerships are design-related

Elcoteq recently invested in ISIS Surface Mounting, an EMS company in San Jose, CA, and Cellon International, a wireless design and development house also based in San Jose. Both moves involve partnerships that enhance Elcoteq’s offering for the front-end of the product cycle. And both center on the communications segment, which is Elcoteq’s focus.

Elcoteq and privately-held Cellon have reached an agreement that will make Elcoteq a preferred manufacturing partner to Cellon. As a result, Elcoteq and its customers will gain access to more than 600 engineers at Cellon’s mobile-phone design units in Le Mans, France; Beijing and Shenzhen, China; and Vancouver, Canada. The Le Mans unit resulted from Cellon’s 2002 acquisition of a Philips R&D operation. Elcoteq already has 120 engineers in its Design Center in Salo, Finland.

In addition to this agreement, Elcoteq made an equity investment of $12.5 million in Cellon. Elcoteq will also have one seat on Cellon’s board.

Founded in 1999, Cellon is presented as the world’s largest independent wireless design and development house. Its customers include global OEMs such as Siemens through its Xelibri brand and Philips as well as Asian brands including Haier, Konka, CECT and Qiao Xing. Over 10 million phones in use today are powered by Cellon technology.

Cellon’s mobile-phone designs range from entry-level models to high-end handsets and fashion designs based on GSM and GPRS platforms. The company provides designs at the module, platform and finished-product level for OEMs and private-label distributors.

The Cellon deal is in line with Elcoteq’s 2002 acquisition of Benefon design activities (July ’02, p. 6), which allowed Elcoteq to begin providing collaborative design and manufacturing (CDM) services. “Our strategy is to develop and to provide to our customers a variety of mobile-phone platform designs to evaluate and choose from. The Cellon agreement allows us to expand our range of design solutions from GSM to CDMA,” said Bill Coker, director of sales and marketing at Elcoteq Americas (Irving, TX).

Although Cellon’s business model supports an ODM solution, Elcoteq continues to avoid the ODM label. “Our strategy is not to be an ODM,” said Coker. While the benefits of the ODM and CDM models are very much the same, Coker argues that OEMs prefer the CDM model because it has the flexibility to let them customize the phone specification and solution. “In an ODM model, it’s pick one and go. Engineering-centric OEMs have a certain amount of NIH, not invented here, syndrome and find a collaborative relationship to be more interactive,” said Coker.

According to Elcoteq, the new agreement will have only a marginal impact on Elcoteq’s performance in 2003. However, the company expects the Cellon partnership to generate new design and manufacturing contracts that will boost Elcoteq’s sales and profits next year.

As for the other investment, Elcoteq has acquired 20% of the shares of ISIS Surface Mounting under an agreement between the two companies. Elcoteq will acquire the remaining shares at the end of 2004 if ISIS meets certain performance targets.

Privately-held ISIS provides NPI services and low-volume manufacturing to companies predominantly involved in networks, both fixed-line and wireless. This agreement gives Elcoteq an NPI and manufacturing center to service and support West Coast customers. The deal reflects Elcoteq’s strategy to locate NPI centers close to its customer base. The company wants to parlay the resulting customer contacts into business for its global sites (June, p. 3). This has been a popular strategy within the EMS industry.

Doug Brenner, president of Elcoteq Americas, stated, “This agreement with ISIS in Silicon Valley expands Elcoteq Americas’ US footprint in a strategically significant region, enabling Elcoteq to develop a strong engineering and NPI center from an established base.”

The investment in ISIS follows Elcoteq’s purchase of NPRC, an NPI operation in Dallas, TX. That deal was done in March.

Founded in 1987, ISIS has 100 full-time employees. According to its website, the company operates a 130,000-ft2 facility, and SMT equipment includes 4 Fuji lines and 3 Zevatech lines. ISIS said the partnership will enable the company to offer manufacturing in low-cost geographies, large-scale supply-chain management, and additional design and engineering capabilities. The company is changing its name to ISIS Surface Mounting, an Elcoteq Company.

Elcoteq’s Q3 sales were up 9% year over year to 496.1 million euros. The provider earned a pretax profit of 5.1 million euros in the quarter. Nine-month sales totaled 1.51 billion euros, an increase of 18% from a year earlier, and pretax profit amounted to 8.6 million euros.

New programs…During Flextronics’ recent Analyst and Investor Day, the company disclosed a number of new customers that have not been reported here. They are Advanced Fibre Communications (Petaluma, CA) in telecom equipment; automobile maker BMW; Calix (Petaluma, CA), another telecom equipment company; Flarion Technologies (Bedminster, NJ), which sells an IP-based wireless access system; Hughes Network Systems for a satellite phone and set-top boxes; NCR for scanners; Quantum for automated tape libraries; Schlumberger for banking terminals and other products; Tellabs; Toshiba for set-top boxes; and France’s Thales in avionics. Flextronics has also expanded its business with Extreme Networks….AirIQ (Toronto, Canada), a telematics company, and Solectron (Milpitas, CA) have entered into an agreement that enables AirIQ to add a suite of vehicle information services….M-Systems (Fremont, CA) is utilizing Celestica (Toronto, Canada) to meet increased demand for M-Systems’ Smart DiskOnKey devices for flash-based data storage….Plexus (Neenah, WI) has announced program wins from Harmonic, Le Croy, AMX, Kodak Health Care Imaging, GE Medical Systems and GE Power Systems….PEMSTAR (Rochester, MN) has landed programs from CIENA, Hitachi Global Storage, LGC Wireless, Seagate and Texas Instruments….NMS Communications (Framingham, MA) has signed Suntron (Phoenix, AZ) as a channel partner to combine NMS technology with Suntron’s Level 5 integrations services. These services include system architecture design, regression testing, and hardware and software integration. Suntron is also stocking NMS products….Distributor Arrow Electronics is also in the system integration business through its OEM Computing Solutions unit (June, p. 5). The Arrow unit will perform procurement, integration, warranty and service for a network monitoring appliance from Oculan (Raleigh, NC). What’s more, Arrow Enterprise Storage Solutions serves as Oculan’s distribution partner for the product….Nam Tai Electronics (Macau, China) will build the USB microphones and converter box for Sony’s PlayStation 2 singing game. Nam Tai has also increased capacity to manufacture the EyeToy USB camera accessory for the PlayStation 2. Capacity went from 50,000 to 750,000 units a month.

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Celestica Feeding Cards to Channel

Driven by new Computer Peripherals Unit

Reflecting a new effort in peripheral products, Celestica has launched its System Builder Partner Program, by which the company will supply the distribution channel with ATI graphics cards as the initial offering.

This is the first time that Celestica has disclosed a peripheral products business, which falls under its new Computer Peripherals Unit. But a products business is nothing new for Celestica. The provider has sold power supply and memory products since its beginning.

Although Celestica has been in the graphics business since 1998, the company decided last year to reach more than the handful of major OEMs who contracted Celestica to produce graphics cards. The number of potential customers in that business was large. “There are 20 big guys and thousands of little guys,” said Ed Grondahl, Celestica VP and GM, who leads the Computer Peripherals Unit (CPU). But selling direct to the little guys was not an option.

“You really can’t afford to go out and make one-on-one sales calls. You can’t afford to try to clear credit for a guy that’s going to buy 500 boards a month,” said Grondahl. The natural way to reach those people, according to Grondahl, is through the distribution channel.

Under the System Builder program, Celestica has set up in Dallas, TX, a central warehouse from which distributors can draw ATI graphics cards. The idea is that the distributors will keep minimal inventory levels on hand and rely on the Celestica warehouse for any quantities that exceed distributors’ stocks. Celestica calculates that this approach should reduce the number of boards in the overall channel by about 40%.

Celestica isn’t worried about inventory risk per se. “The risk isn’t really the inventory because it’s a commodity. It’s a very saleable product. The risk is the price,” said Grondahl. When new-generation cards come out, they drive down the price of cards in stock.

The CPU group has been chartered to find other products for the new peripherals business. The next two products to be added will be LAN cards and wireless LAN cards. Grondahl expects his group will be into those products very early next year.

Celestica’s Gold Edition graphics cards are certified by both ATI Technologies and Microsoft Windows Hardware Qualification Lab.

New facilities…Celestica has also opened a 400,000-ft2 facility in Suzhou, China. The new plant, which employs more than 1600 people, replaces an existing facility there….Construction of MSL’s new fulfillment center in Reynosa, Mexico, was completed in Q3. The center will support Lexmark….Proto-Pac Engineering has moved its EMS operation from Wakefield, MA, to a new 20,000-ft2 facility in Wilmington, MA. For over 35 years, Proto-Pac has served OEMs in the US Northeast that require small to mid volumes and high-mix production.

Offering Window on Production and Supply

Milford Manufacturing Services (MMS), a new EMS company in Milford, MA, is offering OEMs a virtual manufacturing portal, called The Looking Glass, which gives them a real-time view onto the shop floor and into the supply chain.

The Looking Glass not only gives customers 24×7 status of product builds and shipments, but it also allows customers to perform their own what-if scenarios for such things as change requests, cost reduction and ECOs. The idea is to “return an element of control back to the OEMs,” said Doug Voiland, newly named vice president, general manager of MMS.

Through the portal, customers can access MMS data without having to contact anyone at the provider. That reduces unnecessary communications, or noise. “If we can answer 90% of questions in real time at the customer’s schedule, we take a lot of noise out of the system,” said Voiland.

By enabling customers to communicate more efficiently with MMS, the portal also reduces the number of people that MMS needs to service individual customers. As a result, MMS expects savings in SG&A costs over time.

Communications through The Looking Glass can take three forms: alerts, library postings or threaded discussions. For example, when a customer transmits a bill of material, it is posted to the library, which is a depository for rapid deployment. An email-like alert notifies all customer service team members that the customer sent a BOM. Threaded discussions, if necessary, can follow the alert.

Customers can also use the portal to look at the supply chain and obtain supplier performance information. For instance, The Looking Glass can show everything on order for a customer. Other features include access to online quality data and the ability to personalize a user’s home page.

According to Voiland, the portal was the deciding factor in landing two customers recently.

Specializing in low-volume, high-mix work, MMS began as a new company in January when Ed Price, MMS president, acquired the operation from Viasystems (St. Louis, MO). According to MMS, the sale was part of a new strategy for Viasystems, which emerged from a Chapter 11 process in January. Viasystems originally purchased the operation from Price in 1999, when it went by the name PAGG.

MMS operates in a 110,000-ft2 facility with about 160 employees. At present, the company’s sales are running between $1 and $1.5 million a month. Voiland reports that at current levels the company is both profitable and cash flow positive.

Other news…Assets of Chase Advanced Technologies (Bradford, UK) will be auctioned next month….To restructure debt, Reptron Electronics (Tampa, FL) has filed under Chapter 11 of the US Bankruptcy Code….The maturity date of SMTC’s revolving credit facility was extended to Oct. 1, 2004 (Oct., p. 7).

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Last Word

The Shape of the Industry to Come

MMI recently heard one CEO predict that the EMS industry will eventually coalesce into no more than four or five large players and bunch of small niche companies. One cannot deny that the consolidation behind this thinking continues to take place. Other industries have behaved this way as they matured. So some day, the EMS market may resemble the accounting industry. But MMI would submit that the EMS sector has a long way to go before reaching such a stage. And it is not preordained that the EMS world would end up populated by giants and Lilliputians.

People have been calling for the demise of the EMS industry’s middle tier for years. A Last Word column written in March 1999 discussed this school of thought. What has changed since then? In 2000, there were 31 MMI Top 50 providers with sales between $200 million and $2.0 billion. This range can serve as a rough definition of mid-tier for the purposes of comparison. By the end of 2002, five of those companies had been acquired or dissolved, and a sixth withdrew from the industry. Still, last year MMI found 29 Top 50 providers in this mid-tier range. So over the worst two years of the industry, it lost an average of three Top 50 providers each year from the specified mid-tier range.

But growth in low-cost regions, especially those in Asia, brought new players into the Top 50. Although this middle tier lost about 19% of its Top 50 companies from 2000 to 2002, the entry of new players brought the net loss down to two companies, or 6%. A 6% net loss over two difficult years does not portend a rapid consolidation of the middle tier.

Nonetheless, of the six mid-tier providers that were lost from the 2000 Top 50, five were based in North America. So it would seem that providers based in developed regions are more vulnerable to consolidation than those in low-cost geographies where growth rates are higher. Celestica’s recent move to acquire MSL supports this thesis. In addition, new players are more likely to emerge from the low-cost regions, particularly China, than from the developed world.

But is there room for a middle tier over the long term? MMI believes that a case can be made for mid-tier providers who have a strong position in certain market segments and a low-cost solution. In segments such as medical, industrial and military/avionics, reduced pricing pressure, lower volumes and the use of regional supply chains all play into a mid-tier strategy.

Here’s another way to look at it. The middle tier will only disappear if top-tier companies are willing to take on most of the customers currently served by mid-tier providers. Today there are more mid-tier customers than the top-tier is willing to swallow.

The middle tier is shrinking slowly. So it is likely that the industry structure of today will be around for years to come.

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Copyright 2003 JBT Communications. Unauthorized distribution is prohibited.

MMI October 2003

MMI December 2003

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