MMI November 1999

MMI November 19992013-07-08T17:36:33-07:00

Vol. 9, No. 11: November 1999

Table of Contents

Cover story

Flextronics To Add Dii Group In Blockbuster Deal

Market Data

TFI Lowers Market Estimates

M&A Activity To Top 100

Market Makers

The Flextronics View of EMS: Q&A With CEO Michael Marks


Dii To Acquire HP Storage Assets

Ericsson Continues To Restructure

3Com Sells Utah Operation To MSL

SCI To Produce For Marconi

More new programs

Packard Bell NEC To Outsource

EPIC Acquired By Investor Group

More deals done

Another alliance

Facilities opened

Some financial news

Q3 and Nine-Month 1999 Results for 16 EMS Providers

People on the move

Flextronics To Add Dii Group In Blockbuster Deal

In the EMS industry’s largest deal yet, Flextronics International (San Jose, CA) just signed an agreement to acquire The Dii Group (Niwot, CO) through a stock-for-stock merger. Based on Flextronics’ closing stock price on Nov. 19, the deal is valued at more than $2.4 billion.

While the two companies are both global in operations, this deal offers benefits to each. For one thing, it transforms Flextronics from a regional PCB fabricator, with operations in Hong Kong and mainland China, to one of the few global players in the bare board business. Flextronics will add Dii-Multek board fab sites in California, Minnesota, Texas, Germany, China and Brazil. As another benefit, Flextronics will gain a manufacturing presence in the Czech Republic, Ireland and Germany. The last two countries have been on Flextronics’ wish list for Europe (see MMI’s earlier interview with Flextronics’ CEO Michael Marks on p. 3). Also, the company will expand its PCB assembly capacity in China, Malaysia, Mexico, Austria, and the U.S. What’s more, Flextronics will gain design and semiconductor centers in California, Arizona, India and Israel.

For The Dii Group, this deal allows its stockholders to participate in the expanded growth that the top-tier EMS providers are experiencing, according to a statement from the two companies. As part of Flextronics, Dii will join up with an card-carrying member of the industry’s top tier, clearly an advantageous position in today’s outsourcing environment.

Under the agreement, Dii shareholders will receive 0.805 Flextronics ordinary share for each Dii share. Based on Flextronics’ closing price of $81.25 on Nov. 19, the exchange value of Dii stock is about $65.41 per share, representing a 26% premium above the stock’s closing price on that day. As a result, Dii shareholders will own about 34% of the combined company. To be treated as a pooling of interests, the deal is subject to shareholder approvals and other customary conditions. The companies expect that the deal will close in early April 2000.

The combined company will operate under the Flextronics International name. Together, the two companies accounted for sales of over $3.8 billion in the last 12 months. Flextronics is laying claim to the position of fourth largest EMS provider. With Dii, Flextronics will add more than 12,000 employees and over 2.9 million ft2 of facilities offering services from 22 locations.

Dii’s top-five customers are Hewlett-Packard, IBM/Mylex, EMC, Pace Micro and UAL. Customers such as these will provide new or expanded customer relationships for Flextronics.

According to one source, Flextronics was not the only company interested in acquiring Dii.

This deal serves as yet another sign that consolidation not only is picking up speed, but is reaching large providers that would not have been acquisition targets in previous years.

Market Data

TFI Lowers Market Estimates

Technology Forecasters, Inc. (Alameda, CA), whose market projections are widely cited throughout the EMS industry, has lowered its estimates for the contract manufacturing market. The consulting firm has cut its 1998 estimate for the world market to $60 billion, compared with TFI’s earlier projection of $89.6 billion. Also, the company has adopted a somewhat more conservative average growth rate of 20% a year from 1998 through 2003. In 1997, TFI forecasted an annual growth rate of 25% for 1996 to 2001.

As a result, TFI puts market size for this year at $73.2 billion instead of $112 billion as predicted earlier. The forecast for next year is now $87.7 billion, and the contract manufacturing market will not exceed $100 billion until 2001 when it will reach $105.5 billion. In 2003, the market will total $149.4 billion, TFI now projects. (See first chart.) The new forecasts appear in TFI’s report Contract Manufacturing from a Global Perspective, published last this month.

If the 1998 market size is in fact 33% smaller than previously estimated, then the largest CMs ended up with significantly higher market share. For 1998, the MMI Top 50 accounted for some $33.31 billion in sales. So the Top 50’s share increased to 56% of the EMS market (Mar., p. 1). And the Top 10, with a total of $23.46 billion, owned 39% of the 1998 market.

How did this reduction in market size come about? TFI performed a “bottom-to-top” analysis by estimating the sales of CMs in three size categories. See second chart. This analysis produced a 1998 sales total of $56.6 billion from a universe of 3130 CMs.

But there is good news: A reduced EMS market size means less penetration of the total available market. Less penetration in turn gives the contract manufacturing industry more room to grow in the future. Typical estimates for outsourcing penetration of COGS (cost of goods) fall in the range of 15% to 20%. Using TFI’s numbers, though, one can calculate a much lower level. Starting with Dataquest’s 1998 estimate of $931.3 billion for electronic equipment revenue, TFI estimates an average of 68% of it came from COGS. That leaves $633 billion in available COGS for 1998. To come up with a $60-billion market, the level of outsourcing penetration must then be 9.5%. TFI predicts that this penetration will increase to 17.1% in 2003.

While TFI is forecasting 20% growth for the market overall, CMs with $500 million or more in 1998 sales will expand at a 35% average annual rate. Mid-sized companies in the $100- to $500-million range will grow at 12% a year — slower than the overall average, predicts TFI. And those with sales below $100 million will barely grow as group, eking out an average rate of 2.5%.

Over the forecast period, TFI’s average annual growth rates for various regions of the world range from 16% for South America to 25% for emerging regions (first chart). Although North American growth is forecasted at 19% a year, the region remains the largest EMS market by far through the forecast period. In second place, Western Europe maintains a lead over Japan through the period.

More Estimates for N. America

Frost & Sullivan (San Antonio, TX) recently released estimates of its own for the North American market for contract manufacturing. In a new report entitled North American Electronics Contract Manufacturing Markets, Frost & Sullivan estimates that in 1998 the North American market reached $23.78 billion in revenue, somewhat below the TFI’s estimate for the region. Frost & Sullivan predicts a compound annual growth rate (CAGR) of 26.9% for the market from 1999 to 2005, according to analyst Adam Fries. This rate exceeds TFI’s forecast over a shorter period by nearly 8%. Frost & Sullivan projects a market size of $125.95 billion in 2005.

As expected, Frost & Sullivan foresees Mexico growing faster than the U.S. According to Fries, the U.S. market’s CAGR is projected at 25.7% from 1999 to 2005, while the Mexican growth rate is expected to be 35.9%.

The differences among these and other estimates for the contract manufacturing market — see last month, p. 4 — only point to the existence of certain unknown factors. In a bottom-to-top analysis, for example, one cannot measure how much of the market results from revenues in the small-CM class. Or if one looks from the top down, the outsourced portion of the total COGS remains an estimate at best. Even COGS can’t be calculated with precision because there is no complete source of aggregate data for COGS.

For more information about the above reports see:

M&A Activity To Top 100

According to another new report from Technology Forecasters, more than 100 mergers, acquisitions and strategic alliances will be concluded this year among CMs and other companies. This second-edition report is called Mergers and Acquisitions in the Contract Manufacturing Industry: Trends and Best Practices.

But 60% to 70% of the time one or both parties are unhappy with the deal, warns Dr. Charles Mullen, director of High-Technology Consulting at TFI. “The biggest errors made,” says Mullen, “concern mismatched information technology and culture between the companies, lack of clear goals for the alliance, and uncertainty about the value of the deal. The report helps executives make the best of their M&A deals and avoid common pitfalls.”

back to TOC

Market Makers

The Flextronics View of EMS

Q&A With CEO Michael Marks

In the EMS industry where change is a given, the transformation of Flextronics International has been more dramatic than most. Five years ago, most of Flextronics’ manufacturing capacity was in Asia, and none of it was in Europe. Today, the company is a global producer with some 4 million ft2 in facilities, which include a large manufacturing base in Europe. In fiscal 1994, Flextronics posted sales of $123 million. Five years later, company sales had grown more than tenfold to $1.8 billion for fiscal 1999. The architect of this rapid rise is Flextronics’ chairman and CEO, Michael Marks.

One of the industry’s original thinkers, Marks introduced the concept of industrial parks, oversaw his company’s pioneering strategy in product introduction centers, and facilitated Flextronics’ early entrance into Central Europe, among other things. So in September, MMI sat down with Marks to find out what he is thinking about these days. The following interview covers a range of subjects pertaining to Flextronics, the industry and the supply chain.

MMI learned, for example, that corporate style is a key differentiator for Flextronics. What’s more, Marks believes that the EMS industry will end up looking like the accounting industry.

MMI: Flextronics has done so much in Europe lately. Where do you go from here? Do you start emphasizing other parts of the world?

Michael Marks: The reason we’ve done so well in Europe is that when I started here in ’93 the U.S. was taken in a sense. All the strong companies in the industry were very well established in the United States and pretty well established with the customer base. Europe just came alive for contract manufacturing after I got here, which made it a much more level playing field.

We’re continuing to grow in Europe. Our Scotland operation is doing well. We’d eventually like to have something in Ireland. Probably, we’d eventually like to have something in Germany. Now we’re in France and Finland [through the acquisition of Kyrel EMS], so from a manufacturing standpoint Ireland and Germany are probably the two last places we’d like to be in Europe. We’ll continue to grow there, but I think we’ll grow other parts of the world faster now that we’re so well established there.

The U.S. is still an underpenetrated market for us. No question about it.

MMI: On the East Coast, you have one location, a facility in Westford, MA.

Michael Marks: We just expanded that….It’s quite a nice facility. But that will not be a volume manufacturing facility. So we will most likely expand on the East Coast through OEM divestiture. There’s plenty of stuff for sale. [Note: See also a related article in the box on p. 4.]

Right now Dallas is going very well for us. We have a small operation. I guess it’s around 50,000 ft2. It’s completely full so we’re getting ready to move into a larger facility, I guess around 100,000 ft2 or 110,000 ft2…. That has been a greenfield and is doing great.

We definitely need something on the East Coast. So that’s an underpenetrated market.

Asia is growing nicely. I don’t think we’re looking to buy stuff there particularly. Brazil is doing very nicely. We’re expanding there. But I think we’re really in a position now where most of the growth will come in the locations where we are. San Jose is still growing nicely, but I don’t think we’ll expand it much more. We now have some 10 factories there. That’s probably enough because Guadalajara continues to be absolutely on fire. So Guadalajara will undoubtedly be the largest location we have in the world at some point.

Hungary is growing very nicely, and we can continue to grow really well in Hungary and Guadalajara. I believe eventually we’ll get enough business in Guadalajara that we’ll think a second location in Mexico is probably the right idea. So maybe that would be Monterrey or Chihuahua or some place, but we have no current plans for that.

The same, I think, goes for Hungary. We already have 6000 employees in Hungary. So maybe we’ll have a second location in Central or Eastern Europe. Maybe we’ll do something in Poland or the Czech Republic or some place. Again, we have no plans at the moment, but you can kind of see it developing. Hungary is a very small country, and like Malaysia did before the devaluation, it will get to where there’s no unemployment very quickly. There’s a lot of stuff barreling in.

But the East Coast of the United States and maybe Germany and Ireland are probably the only places where we don’t operate today but think it’s important to operate.

Maybe one of these days we’ll wind up with something in Japan. Again, we have no plans, but eventually I think the Japanese market will begin to open up. And Israel has become sort of a hot spot lately. But there are no plans to go into any of these places other than the East Coast. We’re actively looking at the East Coast and some odds and ends in Europe. So our global footprint is getting pretty solid.

MMI: Are there are other plants besides Dallas that are in need of additional capacity?

Michael Marks: In Malaysia actually, we’re building a new facility. It’s kind of nice because Malaysia has been very quiet for a few years. We were building up in China. Malaysia was getting tight in labor and expensive. After the devaluation, it no longer has tight labor and is cheap.

MMI: What is the size of that expansion?

Michael Marks: We’re building a new building, around 110,000 ft2, and we’ve been in two 40,000-ft2 buildings.

MMI: So are you moving out of those two buildings?

Michael Marks: No, we’re probably going to keep the two. The two buildings in Malaysia are right next to each other, sort of one factory. It’s really the only one in the world that isn’t first rate. We were never going to expand it because there wasn’t that much business. We were making money, but it wasn’t growing. Now we’re building a new one, and I’m pleased about that.

MMI: Regarding industrial parks, you’re up to five counting Brazil and the second one in Hungary.

Michael Marks: That’s right. Brazil is under construction. We have the land. We’re just building our first building there. We have the first building in Hungary, and a couple of vendors are getting ready to locate there. We’re still in very early stages of this strategy….The strategy is pretty clearly understood, but we have many more vendors to go.

We’ve been at this for two years. It’s come along nicely. We’re adding vendors. But I think it’s probably five years before that’s a mature strategy. It’s not easy to bring all these vendors there and get everybody working together.

MMI: Do you see any more industrial parks in the foreseeable future?

Michael Marks: I would say probably not because I’m not sure that there is a necessary demand for them. The industrial parks are really a consumer electronics strategy at the end of the day. You can talk about it in a lot of different ways, but the low-cost locations are where you have high-volume, low-cost stuff. Of course, lots of things are becoming consumer products, like cell phones and computers.

We have one [park] in Asia, one in Central Europe, one in Mexico. Brazil is an odd ball. It’s not cheap, but it has all the duties. Those are really the four locations you need.

The second one in Hungary is strictly a factor of employment. Hungary has lots of little towns. We were going to saturate the available labor pool there so we built a second one. It’s only 45 minutes away, but for all intents and purposes that’s one [park], just two different sites.

MMI: What are you doing on the Doumen, China, campus?

Michael Marks: We have plans to expand and have a building designed. Our business in China is really quite good.

China is just going to be a huge market. We will probably do something in Shanghai at some point. China is a giant country. So it’s like thinking San Jose is enough [for the U.S.]. It’s not. That’s why we have to be on the East Coast and in the middle. The same will happen in China as the market develops. Shanghai is a long, long way from Shenzhen. So it’s like two completely different markets. As the internal market develops — and it is — then we will want to be in several locations, I think.

MMI: How does Flextronics differentiate itself from the other top-tier providers? How do you position the company as opposed to the others?

Michael Marks: Of the things that differentiate us, one is the industrial parks pretty clearly. We have them; nobody else does. That’s great for some customers, and for other cus-tomers it’s not necessary.

The second is our Product Introduction Centers….All the top-tier guys have some capabilities there.

MMI: Flextronics was about the first to have these centers.

Michael Marks: We were the first. And we have the most. But that’s not a sustainable competitive advantage. Everybody will have those eventually, I think. Celestica has done a pretty good job with them now. But I think we have 11 of them, and we’re going to add several more this year.

The third point is we’re doing a lot with IT infrastructure, which is a Silicon Valley thing. There are lots of new companies that are developing in Silicon Valley and doing web-based applications.

MMI: We’re aware of Flextronics’ beta-site efforts with some of these companies.

Michael Marks: This is a big issue for the future. It’s basically about managing information flow between us, our customers and the supply chain. Everybody calls it supply chain management, but it’s an area we’re actively engaged in. We’re making investments in the area. We’re working with a lot of companies to tailor products for the industry. And that’s hard to do unless you’re around in Silicon Valley and have the kind of venture contacts we have. So that’s the third thing.

The fourth, I think, is just style. The top-tier companies are all good companies. They’re all good manufacturers. They’re all solid financial organizations and well-run companies. And we’re different. We’re just different in styles. Our style is a very lean, very fast moving style. We’re not formal: we don’t wear ties. This isn’t good or bad — it’s a differentiator. Some companies like the kind of style we have, and others don’t. Those prefer a more button-down style, if you will, a more formal approach.

We make a big deal about not having organization charts. Everybody jumps in to participate where they can help. It’s a cultural phenomenon in our company that I don’t allow organization charts. For example, some companies really don’t like that because it’s harder to tell who’s responsible for what. We like it that way, and some of our customers really like it that way.

With certain companies, you can see this. We’re doing really well with Ericsson; we keep adding business. We’re doing really well with Philips. We’re doing really well with Cisco. We don’t do anything with IBM. We don’t do anything with Sun Microsystems. We don’t do anything with Silicon Graphics. We do very little with Hewlett-Packard. And there’s no particular reason for those things other than style, relationships and such. We don’t feel good or bad about that. It’s just who we are. And it appeals to a lot of companies.

We put a lot of emphasis on speed and being streamlined. That has some real advantages and sometimes has disadvantages too.

MMI: Some of the key moves you made, for example the Neutronics acquisition, we’re done very quickly. Perhaps another company may not have been able to pull that off the way you did.

Michael Marks: That’s true. We make decisions very quickly. We’ve made a bunch of acquisitions, both plants and companies. We have a very simple process for it. Just myself and a couple of senior managers will say we think this is a good idea. We then do it. The board has been very supportive.

We just don’t have a long process for it. And that works great. You make mistakes, of course. But generally we’ve made enough good moves that it’s been all right.

MMI: Do you have any specific plans about the types of acquisitions you are interested in?

Michael Marks: Yes, sure. First of all, [OEM] plant acquisitions will clearly be a major part of the business going forward, more than they have been in the past. It’s picking up steam. Everybody wants to sell off all their factories. So as a part of serving the customers, we will clearly do some. How many is just hard to know. I think without any question that will be our major mode of acquisition.

Those plants are not really acquisitions. Those are just adding assets. We always say in the industry that taking over a factory at book value is not an acquisition. It’s just the same as winning a piece of business.

Company acquisitions like Kyrel, I think, we will continue to fill in here and there as we see an opportunity to add to our product offering. There’s an almost unlimited set of things we could be involved in.

MMI: Are you saying that about 100 factories could be for sale?

Michael Marks: I would say could be for sale, right. I wouldn’t say there are 100 that are up for sale. We’re talking with a number of companies all the time about how we’re going to expand our relationship with them and whether that includes some of their facilities. I assume that our competitors are all doing the same. So that extrapolated into lots of opportunities on the factory side. It’s hard to know what the numbers really would be.

MMI: Obviously, some OEM plants are more desirable than others. SCI is paying about two times book value for the Nortel assets it is buying. Do you see more bidding for certain kinds of plant divestitures?

The answer is no. We don’t think so. Nortel is a very unusual case for a number of reasons. We’re actively engaged in discussions around the world with OEMs, and we’re not engaged in any where the issue is to pay more than book value. Remember a plant divestiture is a bit of a sale and lease-back kind of a transaction. The more [EMS] companies pay, the more they have to charge. It’s just that simple.

Since most [OEM] companies are divesting something because they’re trying to lower their costs, there’s just not very much incentive to charge up. Particularly because if they charge up, they get a one-time gain. They get a capital gain; the market doesn’t give them any credit for it. So you get this gain that nobody values, and in exchange you get a higher cost of doing business going forward.

There will always be certain cases where there’s a strategic need on both the seller’s and the buyer’s part to have a gain as a part of the transaction….But I don’t worry about it becoming systemic.

MMI: As your revenue grows, do you think you’ll still maintain about half of it in telecom and networking?

Michael Marks: Yes. The computer side is going to grow. That’s a huge segment we’ve not really participated in on purpose. But we’re now participating in it on purpose. It depends on how fast that grows as to whether that edges down the other parts. Industrial controls is growing. That’s the ABB business. We’re looking at some other stuff in that area. But the major segments are going to be consumer, computer and datacom/telecom. And I think if datacom/telecom stayed 50%, that would be good. If computer were 25%, that would be fine. And if consumer were 20% and [the rest] miscellaneous, that would be fine.

Telecom/datacom are generally considered to be better markets because they’re more complex with a little higher margin. I don’t find any one to be particularly better than the other ones. They all have different characteristics. You have lower margin in consumer and computer

, but you have very high volume, and they’re easy to make.

Motherboards these days are very easy to make. They have very high volume. You turn your lines on; you just crunch around the clock. You don’t need much margin in that kind of business. In telecom/datacom, you have a lot of product churn, a lot of ECOs — all that kind of stuff. So you need more margin, and I’m not sure that makes it any better. If you just look at margin as a characteristic, then you think that’s better. But it takes much more talent to do datacom/telecom. I’m not sure at the end of the day you make any more money on it.

So we like all the segments. We just try to be effective at them and try to keep some balance. We mostly try to keep a balance, not as a margin mix, but as [protection] if computers get weak or the consumers stop buying….Brazil is a great example. In Brazil, we’re doing mostly telecom infrastructure stuff because the government is paying for that. The consumer market just dried up dead when they devalued the currency. But telecom infrastructure is great. Then by the time telecom infrastructure is built out, maybe the consumer will be buying like mad.

MMI: Do you see the EMS providers taking over the supply chain and essentially performing the OEM’s role? And if so, what does that do to some of the other suppliers in the supply chain such as distributors and enclosure companies?

Michael Marks: The answer to the first question is yes unquestionably, sort of. What I mean by that is there’s no doubt that the top-tier contract manufacturers will take more and more responsibility for the supply chain. But they will never take all of it, because they don’t design the products. And in the design element, the OEMs are always going to be involved in the selection of suppliers.

So now, what does it mean to suppliers? With distributors, I just don’t know. We’re doing more business with distributors than we used to and at lower margins.

As a general statement, I think distributors get squeezed by the use of the Internet….I wouldn’t want to be a distributor because I think their life is difficult to find enough value-added proposition. But on the other hand, they’re clearly not going away. I think their business, like ours, just gets tougher, but manages to be OK. So I don’t really know what that says.

For the enclosure guys, it’s a little different. I think the enclosure business will be owned by the contract manufacturers. We do a tremendous amount of enclosure integration already. The [former] Ericsson Visby facility does GSM infrastructure. It’s essentially a big-box integration facility, which is one of the things enclosure manufacturers do. The other thing they do is crank sheet metal. Whether the contract manufacturers are going to crank sheet metal or not, I don’t know. We don’t particularly want to be in the sheet metal business, but maybe at some point that’s just a requirement in order to be a good enclosure supplier and a good integration supplier.

MMI: Regarding consolidation, you have used the analogy of the big-five accounting firms to predict what the industry will eventually look like.

Michael Marks: Anybody today between $200 million and $2 billion is ripe for consolidation one way or another. Below $200 million is not really on the radar screen because there are obviously hundreds of those companies. And I think they will continue to do well.

Very high growth rates for the top-tier companies mean there will be some spill over. There’s business we’re turning down that we would like to do. But we just can’t. Some of it is decent. So that will spill over to the next tier. It could be pretty good business for a while. For a while, I think this will be pretty robust for the top nine or ten players. I just don’t think that any industry likes to have that many. You look around and see how many industries as they mature have that many players — none. We’re a ways from maturity, no question about it. This is still a free-for-all for a while.

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Dii To Acquire HP Storage Assets

Also buys MQA div.of Stanford Telecom

The Dii Group (Niwot, CO) and Hewlett-Packard have signed a memorandum of understanding whereby Dii’s Dii-Dovatron division will purchase the manufacturing assets of HP’s Storage Systems Division in Greeley, CO. What’s more, Dii just completed the acquisition of the Manufacturing and Quality Assurance (MQA) division of Stanford Telecom.

The HP deal is much larger in revenue. It includes a long-term supply agreement expected to amount to nearly $200 million of revenue for Dii in the first 12 months and ramp to more than $500 million within five years. Dii-Dovatron will supply HP with tape libraries, used for mass storage, and optical libraries, used in imaging applications. This purchase includes a premium, and the amortization of intangible assets will amount to about $2 million a year. Closing is expected by the end of January 2000.

Dii-Dovatron will obtain from HP a complex systems assembly capability that can configure products to order and build them to order. So the deal gives Dii-Dovatron “the ability to instantly demonstrate build-to-order capability in the North American market where proximity to the market, i.e., the customer; shipping costs; and the length of the supply chain are key factors in providing a build-to-order, cost-effective solution,” said Dermott O’Flanagan, president of Dii-Dovatron, in a conference call. “The ability to demonstrate complex systems assembly capability in itself is a strategic benefit.”

Dii-Dovatron will also get “an engineering-rich pool of resources,” which the division will be able to use with similar opportunities in the future, according to O’Flanagan.

The Dii division plans to lease space initially from HP with the intent of combining the HP operation in Greeley and Dovatron’s existing Longmont, CO, operation into a new facility in northern Colorado. Dii said the new facility will be larger than the two existing operations and will probably be “pushing 250,000 ft2.” The company is looking for a site between Greeley and Longmont and expects the new facility to be operational in 12 to 18 months.

According to Dii, this acquisition is included its fiscal 2000 guidance of more than $2 billion in revenue and at least $2.30 for diluted EPS. The company is shooting for a $4-billion run rate in Q4 of 2001.

Dii-Dovatron is sole source for these HP storage products and already supplies them to the European market. For the HP Colorado operation, Dii-Dovatron plans to source raw boards from within Dii and take over board assembly from another CM as well as handle box build.

HP reports the optical segment of the storage market remains stable, while the DLT (digital linear tape) automation market is growing more than 30% a year.

The HP deal is not the only acquisition that Dii has in its sights. “We are pursuing an extremely full pipeline of acquisition possibilities now, which represent revenue opportunities of about $3 billion. Only time will tell how many of these we will be able to win. But I’d be very surprised and very disappointed if we didn’t make at least two or three acquisitions amounting to at least $500 million in revenue over the next six months,” said Ronald Budacz, Dii’s chairman and CEO, before the HP acquisition was announced.

While the HP deal is included in this $500-million estimate, Dii’s MQA acquisition is not. Dii bought Stanford Telecom’s MQA division in Sunnyvale, CA, for Dii’s technologies services business. As reported here last month, MQA had been for sale (Oct. p. 8). MQA specializes in assembly, box build and systems-level test of RF (radio frequency) products.

“Though small, this acquisition provides Dii with a new product introduction center in Silicon Valley, establishes Newbridge Networks as a new customer, and adds about $30 million in annualized revenue,” said Budacz.

This sale was required by Newbridge’s pending acquisition of Stanford Telecom. In anticipation of this deal, Newbridge has signed a supply agreement with Dii. MQA does both internal manufacturing for STel, which is part of the supply agreement, and contract manufacturing for Silicon Valley customers.

MQA operates in 70,000 ft2 of leased space with three SMT lines and test equipment, which includes RF test hardware. As a new product introduction center, MQA offers component engineering, design services, mechanical design and a full model shop.

“The acquisition significantly strengthens our technological capabilities in serving the wireless broadband and telecom sectors, including systems-level radio frequency test and box-build capabilities,” stated Ronald Snyder, president of Dii Technologies.

MQA’s management team and its 122 employees are expected to remain with Dii.

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Ericsson Continues To Restructure

Will sell two units to Solectron and outsource other work to Flextronics

Although Ericsson (Stockholm, Sweden) was the first major telecom company to outsource in a big way, it continues to find more work to farm out. Based on memoranda of understanding, Ericsson intends to sell its production units in Ostersund, Sweden, and Longuenesse, France, to Solectron (Milpitas, CA). Ericsson will also outsource certain production of its mobile telephone systems in Katrineholm, Sweden, to Flextronics International (San Jose, CA).

Solectron will acquire complex systems manufacturing assets of Ericsson’s telecom infrastructure equipment operations in Ostersund and Longuenesse. The provider intends to offer jobs to 1150 Ericsson employees, of which 670 work in Ostersund and 480 are in Longuenesse. Solectron will also take over production of Ericsson’s next generation of AXE switches. Financial details were not disclosed. The trans-action is expected to close by Q1 2000.

The asset purchase includes several SMT lines, specialized manufacturing and test equipment, and inventory. When the deal closes, Solectron will begin operations in Ericsson’s Longuenesse facility of 180,000-ft2 and in its Ostersund facility of 250,000 ft2. According to Ericsson, production in Longuenesse will be coordinated with Solectron’s operations in Bordeaux. Also, Solectron will take on slightly more than 30 people in Ericsson’s technical testing area in Stockholm.

Solectron will provide Ericsson with services including early prototyping, new product introduction management, complex PCB assembly, configure-to-order and build-to-order complex systems assembly, and after-sales services.

“This transaction will mark the next phase of our growing partnership with Ericsson, who remains one of Solectron’s largest customers,” states David Kynaston, president of Solectron Europe. “Our partnership with Ericsson began almost three years ago when they became the first major European telecommunications company to discover the advantages of outsourcing. This acquisition will enable Solectron to rapidly grow our full range of complex systems assembly offerings in Europe, enhancing our ability to respond to our customers’ needs for a complete end-to-end product delivery solution.”

The Longuenesse facility will offer CTO and BTO complex systems assembly. This capability, combined with Solectron’s Bordeaux facility, will enable Solectron to provide full supply-chain services in France, says the company. In Sweden, the Ostersund facility will give Solectron a complete manufacturing footprint, allowing it to offer a more complete array of services to customers in Scandinavia. The company started in Sweden in 1997 with an NPI center.

In Katrineholm, Flextronics will take over some 100 employees from Ericsson as a result of its outsourcing certain production of mobile telephone systems. Flextronics had previously acquired manufacturing operations from Ericsson in two Swedish locations, Karlskrona and Visby.

Also in Katrineholm, production of AXE switches carried out there will be gradually phased out in favor of Ostersund and Longuenesse. Ericsson has decided to concentrate its production of Internet-related products in Katrineholm.

Besides outsourcing production in Ostersund, Ericsson will hand over all software design-engineering activities there to AU-System, a Swedish IT consulting firm, of which Ericsson owns 25%. The company is also outsourcing its inventory and logistics functions in Ostersund to Caterpillar Logistics Services, a U.S. subsidiary of Caterpillar.

3Com Sells Utah Operation To MSL

3Com is selling its manufacturing operations in Salt Lake City, UT, to Manufacturers’ Services Ltd. (Concord, MA). These operations produce Palm handheld computers and 3Com’s mobile connectivity products. MSL will retain all 550 employees associated with the Salt Lake City manufacturing facility and continue production of these products for 3Com. MSL is expected to take over the 150,000-ft2 facility on Nov. 27.

This acquisition gives MSL its third manufacturing site in North America and establishes a significant presence for MSL in the Western U.S.

The Salt Lake facility manufactures the Palm III, IIIx and V, but not the new Palm VII.

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SCI To Produce For Marconi

SCI Systems (Huntsville, AL) has signed an agreement to produce SDH/DWDM (synchronous digital hierarchy/dense wave division multiplexing) telecom products for Marconi Communications. Marconi, a subsidiary of GEC, recently agreed to buy Nokia’s SDH/DWDM equipment business and to supply Nokia with SDH/DWDM products. SDH transmission systems, which can be reconfigured remotely, move data at high speeds over both copper and fiberoptic networks. DWDM is a photonics system that increases capacity of a fiberoptic cable.

Under a multiyear supply agreement, SCI will initially provide SDH/DWDM board assemblies to Marconi from SCI’s Oulu, Finland, facility. In support of this program, SCI is also buying certain SDH/DWDM manufacturing assets from Nokia and will be moving them from Nokia’s Haukipudas, Finland, facility to SCI’s Oulu facility.

The new relationship “provides SCI the opportunity to further support a longstanding customer in Nokia, and also provides our company with a springboard for additional opportunities with Marconi Communications on a worldwide basis,” states A. Eugene Sapp, SCI’s president and CEO.

Meanwhile, AMD (Sunnyvale, CA) has selected SCI to manufacture the new AMD Athlon processor module. SCI says this program requires the latest in high-speed component placement technology and a variety of custom assembly automation cells. Volume production is due to begin in Huntsville in the October-November time frame.

More new programs…Integral Access (Chelmsford, MA), a provider of packet-based multiservice access equipment, has entered into turnkey manufacturing agreements with three different companies. Board assemblies will be produced by Sanmina in Manchester, NH, and by U.S. Assemblies New England, a MATCO Electronics company in Taunton, MA. Vulcan Industries will manufacture a chassis in Hudson, MA. Integral Access will retain final assembly and test for all multiservice access equipment….DataZONE Corp. (San Jose, CA), a developer of ruggedized storage peripherals, has chosen Solectron as a manufacturing partner to build both branded and private-label products….Under a new product development contract, Flextronics International (San Jose, CA) will provide prototyping and pilot production of a new set-top box, called the Intelligent Network Interface, as well as central office equipment for the Digital Video and Data Delivery System from mPhase Technologies (Norwalk, CT). This system, dubbed Traverser, permits simultaneous broadcast of digital TV, high-speed Internet access and voice over existing copper telephone wires. Under the contract, Flextronics will produce the mPhase units in its Product Introduction Center in Westford, MA (see box on p. 4) and provide board layout, test development, and plastics tooling and molding. Full production is due to begin in April 2000….OnLine Entertainment (Englewood, CO) has selected Saturn Electronics & Engineering (Auburn Hills, MI) to turnkey manufacture all of OnLine’s power supply products. A newly released Power Factor Correction Module is expected to ship in late Q1 or early Q2 2000. Saturn has agreed to support OnLine during ramp-up and front-end procurement for mass production. According to OnLine, privately held Saturn is projecting it will be a $500-million company next year. To strengthen the EMS side of its business, Saturn, known as an automotive supplier, recently acquired SmartFlex Systems and took the company private (July, p. 2)….The Dii Group has identified Sagem, a French telecom company, as a new customer for whom Dii-Dovatron will supply a cell phone product out of Ireland.

Packard Bell NEC To Outsource

As part of a global reorganization, Packard Bell NEC will outsource its manufacturing and essentially close its Sacramento, CA, operations. Negotiations are underway to identify a manufacturing partner.

NEC Corp. is consolidating all PC/server business outside of Japan and China under a new entity, NEC Computers International B.V. (NEC-CI). North American operations will then fall under an NEC-CI sub-sidiary called NEC Computers Inc.

Packard Bell NEC has tried to turn around its business and has reduced losses from 1998 levels. Still, the company is on track to lose $150 million, placing it in a cash shortage. Restructuring will reduce the size of the company to less than 20% of its current work force of 2600 employees. This process is expected to be largely complete by year end. The Sacramento site is in the process of being sold to a developer.

Also, Packard Bell NEC is negotiating to sell its call center operations in Magna, UT, with the idea that existing jobs would be transferred to another party.

Global restructuring at NEC has already resulted in the decision to sell the NEC America plant in Hillsboro, OR (Oct., p. 8).

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EPIC Acquired By Investor Group

EPIC Technologies (Norwalk, OH), a $40-million regional CM, has been acquired by two private equity firms, TMW Enterprises and Crawford-Greene L.L.C., who have formed Electronic Product Integration Co. (EPI) as the holding company.

Besides EPIC, EPI also owns Cirmount Circuits, Inc. (CCI), a CM in Farmington Hills, MI. TMW acquired CCI in 1998 and merged it with another operation (Oct. ’98, p. 5). With EPIC and CCI forming a cornerstone in the Midwest, EPI plans to make additional acquisitions in key North American locations. Targeted locations are Research Triangle Park in North Carolina, Texas, Georgia, the Northeast and Mexico. The blueprint for this regional network is to offer one-stop shopping for prototypes, low volumes with high mix and high complexity as well as medium volumes with low mix. This offering includes design services from product concept.

Crawford-Greene and TMW have joint equity positions in EPI. The two firms decided to team up rather than compete for EMS acquisitions.

EPI is also associated with SMTEK International (Thousand Oaks, CA), a publicly held EMS provider, through common ownership. Thomas Wheeler of TMW Enterprises is also SMTEK’s largest shareholder.

“We felt EPIC would be a strong addition to our contract manufacturing investment strategy because they have excellent manufacturing capability with continuous flow lines and have a high quality reputation throughout the industry with ISO and QS certifications,” says John Sammut, president of EPI.

EPIC operates in a 50,000-ft2 facility with three doubled-sided Fuji lines and about 100 employees. The CM focuses on medium to somewhat higher volume work and serves the automotive, industrial, telecom, consumer and medical markets. For example, EPIC produces a tire pressure monitoring system for the automotive after market. CCI, on the other hand, targets low to medium volumes in its 25,000-ft2 facility.

Sammut says the acquisition of EPIC broadens the capabilities of the EPI group as well as its customer base and industry coverage.

EPIC had been resource constrained and unable to sustain its very rapid growth into the next century. “We felt we would be in a position to sustain that growth through additional investment, resources and management direction,” says Sammut.

EPIC’s executive management will stay on including CEO Ron Skarupa.

The CM was originally part of Clevite Industries, which was acquired by Pullman Corp. in 1987. The next year Pullman sold EPIC to a management group.

More deals done…Sanmina (San Jose, CA) has completed its acquisition of Nortel Networks’ Wireless Electro-Mechanical Subsystem Assembly operations in Chateaudun, France. This is one of two electromechanical operations that Nortel recently divested as part of a larger outsourcing effort (Aug., p. 3 and Oct. p. 1). Sanmina says this acquisition will expand its international business opportunities by providing a flexible assembly operation in Western Europe….Solectron (Milpitas, CA) has closed its acquisition of NULOGIX Technical Services (Vaughan, Ontario, Canada), an IBM Canada subsidiary in the business of repair, remanufacturing and refurbishment. This deal was reported earlier (Oct., p. 2-3)….Deal not done…Pen Interconnect (Irvine, CA), and The Gammon Group (Dallas, TX) have called off Pen’s intended purchase of Gammon, which consists of a CM and two other companies owned by Crossroads Capital (Oct., p. 8). This decision came after significant due diligence was performed.

Another alliance …Sparton Corp. (Jackson, MI) has signed yet another alliance partner in Texatronics, a CM in Richardson, TX. This move is the latest result of Sparton’s alliance strategy to expand its geographic coverage through partners in regional markets.

Facilities opened…Last month, Solectron held the grand opening of a 200,000-ft2 facility in Timisoara, Romania. The new facility has begun operations on a 40-acre campus with 1000 employees and seven SMT lines. Solectron projects that it will add 1000 jobs there within the next two years. Also, the company says it will establish another NPI center in Europe, which will be operational before the year’s end in Port Glasgow, Scotland….Dii-Dovatron has officially opened a 128,000-ft2 facility in Palm Harbor, FL. The CM moved out of a smaller plant in Clearwater….Recent-ly, Pemstar (Rochester, MN) opened a 60,000-ft2 facility in Guadalajara, Mexico. The new plant replaces a small facility there. Also, the CM just opened its fourth Design Services Center, located in its San Jose, CA, facility. Bob Duncan, formerly in charge of Intel platform development at Sun, was hired as director of the center….LeeMAH Electronics (San Francisco, CA) recently celebrated the opening of a new plant in Richardson, TX, to serve the Dallas/Richardson telecom corridor. Services include telecom product assembly, cables and system assembly. SMT/PTH capability is planned for the near future. …Plexus (Neenah, WI) has opened its newest regional design center in the Boulder, CO, area.

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Some financial news…Celestica (Toronto, Canada) just completed a public offering of 8.05 million subordinate voting shares at a price of US$60.625 per share, amounting to gross proceeds of about $488.0 million. The offering included an overallotment option of 1.05 million shares. Lead managers were Morgan Stanley Dean Witter and RBC Dominion Securities. “The net proceeds will enhance Celestica’s financial strength and fund its continued growth, both organic and through acquisition,” states Eugene Polistuk, Celestica’s president and CEO. …Flextronics has also completed a public offering, which was increased from five million to six million common shares (Oct., p. 11). At a share price of $67.6875, the offering brought in gross proceeds of some $406.1 million….ACT Manufactur-ing’s (Hudson, MA) public offering also went through. This one consisted of 2.775 million shares of common stock from ACT and 250,000 shares from stockholders, priced at $26.0625 per share. Gross proceeds for the company were about $72.3 million. The offering was managed by Credit Suisse First Boston, CIBC World Markets, SG Cowen and J.C. Bradford & Co., which have an overallotment option of up to 453,750 additional shares….Standard & Poors has lowered its corporate credit and bank loan ratings of Benchmark Electronics (Angleton, TX) to single-B-plus from double-B-minus, and its subordinated note rating to single-B-minus from single-B. According to S&P, the downgrade reflects deteriorating operating performance as well as difficulties associated with integrating recently acquired AVEX Elec-tronics….For the quarter ended Oct. 2, Key Tronic (Spokane, WA) reported that its nonkeyboard original design manufacturing business was $19.2 million, or 46% of total revenue, up 190% year-over-year.

People on the move…SCI has appointed James Moylan as senior VP and CFO. He comes from Sonat, a NYSE listed energy company, where he served as senior VP and CFO. SCI needed a CFO after Olin King, who had performed CFO duties, stepped down as CEO at the close of SCI’s fiscal 1999….MCMS (Nampa, ID) has brought in a new CEO, Rick Rowe, who succeeds Robert Subia. Subia will become president and chief sales and marketing officer with responsibility for directing the company’s global sales and marketing strategy. He will continue to serve on MCMS’ board. Before joining MCMS, Rowe held a number of senior management positions at Honeywell, where his most recent job was as GM of Honeywell-Measurex global system business….Manufacturers’ Services Ltd. has named Eugene Bullis as CFO and executive VP. He joins the company after a series of interim CFO assignments. Bullis is a veteran of Ernst & Young, Wang Laboratories and Nynex. He takes over the CFO role from Robert Donahue, named MSL’s president earlier this year.

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Copyright 1999 JBT Communications

MMI October 1999 

MMI December 1999

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