Vol. 13, No. 10: October 2003


Cover story

Celestica to Add Diversity with MSL Deal


Buyers Warned


Hon Hai to Buy Handset Plant from Motorola

Elcoteq to Acquire Marconi Operation

Tellabs Examines Finnish Operation

Benchmark Inks Outsourcing LOI with ADIC

Corlund Assets Sold

Scanfil Buys Finnish CM

Solectron and Nortel Extend Relationship

European Alliance for Mechatronics

Flextronics Stunned By Verdict

Solectron Selling Businesses

SMTC Brings In New CEO

Last Word

More Integration Talk

Celestica to Add Diversity with MSL Deal

Celestica plans to further its diversification efforts by acquiring tier-two provider Manufacturers’ Services Limited (MSL) in stock-based deal announced this month.

The deal underscores an EMS industry trend of spreading risk across more market segments in the wake of a downturn that penalized providers who had relied too heavily on IT and communications customers. There is something else going on here as well. Celestica’s proposed acquisition of MSL is perhaps the most conspicuous example of industry consolidation since SCI Systems merged into Sanmina in 2001. Consolidation, which can be traced back to the mid 1990s, has continued quietly among smaller providers over the last few years. Now observers are wondering if a better business climate will spawn more consolidation deals similar to this one.

“With this transaction, a significant majority of MSL’s business would fall into our non-communications, non-IT categories, where we have less overall exposure but have been building steadily,” said Eugene Polistuk, Celestica’s chairman and CEO in a conference call to discuss the acquisition. About 80% of MSL’s business belongs in these categories.

One MSL business that Celestica has not touched is retail infrastructure. About 38% of MSL’s Q2 sales came from IBM, its largest customer whose work at MSL centers around point-of-sale terminals. MSL also manufacturers for HP in the supplies area, where Polistuk said Celestica does “a little bit.” Other MSL businesses new to Celestica include avionics, industrial and medical, where “we’re just growing,” said Polistuk. Honeywell, for example, is an MSL customer in the avionics space. On the industrial side, MSL recently announced a new win with France’s Imaje for industrial thermal printers. Also, both parties have targeted automotive for diversification, and MSL recently signed up two automotive customers, one of which is Lear.

But further diversification wasn’t Celestica’s only reason for making this deal. “MSL also has attractive capabilities in the areas of build to order, logistics and order fulfillment that will expand our own offerings in these areas,” said Polistuk. Although Celestica’s offering covers these areas, MSL adds capabilities for higher-volume products such as inkjet printers. MSL has been ramping build-to-order, configure-to-order fulfillment of inkjet printers for Lexmark in Mexico. The provider also recently won BTO business from Groupe Ingenico for electronic payment terminals (July, p. 5). Another capability MSL brings is high-speed automated manufacturing, which MSL has offered to the medical device and computer peripheral markets and extended to the pharmaceutical area.

Celestica also cited other reasons for making the deal. The company values MSL’s track record on the operations side and its approach to customers. “In addition, there will be cost synergies as we integrate the companies and optimize the network and total supply chain,” said Polistuk.

For MSL, the deal means that it can offer customers a broader set of capabilities, an increased global footprint and greater scale. “This type of scale represents an opportunity to better serve our customer base with even lower materials cost going forward,” said Bob Bradshaw, MSL’s chairman, CEO and president. Also note that Celestica’s low-cost footprint includes China, which MSL has been seeking to reenter, and Eastern Europe, where MSL does not have a site. About 25% of MSL’s capacity resides in low-cost regions, Bradshaw reported.

Under the proposed transaction, each outstanding share of MSL common stock will be exchanged for 0.375 subordinate voting share of Celestica. This offer represents an 18.5% premium over the MSL closing stock price on Oct. 14, the day before the deal was announced. In addition, holders of Series A and B preferred shares of MSL will have the option of receiving cash or subordinate voting shares of Celestica, the latter based on the 0.375 exchange ratio and the number of MSL shares into which the preferred stock may be converted. Series B shareholders are also entitled to a make-whole payment. There are upper and lower limits on the amount to be received for each MSL common share. Two news services reported the deal to be worth in the vicinity of $278 million.

Closing is expected to take place in December 2003 or January 2004. The merger agreement, which has been approved by the boards of both companies, is subject to MSL shareholder and government approvals. Certain institutional shareholders, identified as CSFB (Credit Suisse First Boston) entities, and officers of MSL, together controlling about 43.75% of the outstanding common shares on an as-converted basis, have agreed to vote in favor of the merger, according to SEC Schedule 13D filed by Celestica and related parties. Note Donaldson, Lufkin & Jenrette originally funded the start-up of MSL in 1994, and DLJ entities are among the above institutional shareholders. Credit Suisse Group acquired DLJ in 2000.

This deal comes at a time when both Celestica and MSL are restructuring. In June, MSL announced restructuring and other charges of about $8 to $10 million to be taken. The company has also said it is closing its facility in Athlone, Ireland. Celestica recently closed two sites in Europe and intends to cut 1000 more jobs. Polistuk said the deal “will include some level of restructuring,” but would not comment specifically until after the transaction closes.

Celestica expects the deal to be accretive to 2004 adjusted net earnings.

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Buyers Warned

Component buyers could face tougher market conditions in 2004, according to Purcon-iPro (Amersham, UK), a procurement services provider, in its recently published quarterly market report.

“The time may be right for buyers to start thinking about their supply strategies for a market that is almost certainly going to be tougher next year than it has been at any time in the past three years,” said iPro director Martin Deas.

After more than two years of falling prices and high availability of parts, high demand for PCs, digital cameras, DVDs and wireless products has brought the market downturn to a sharp halt. If the current level of demand is sustained through the year end, says iPro, buyers may well find that prices and lead times are very different next year. According to Deas, the market, which is in long-term recovery, is now experiencing a strong seasonal upturn.

Deas is warning buyers not to be complacent about changing market conditions. He said, “History shows that the market follows three- to four-year cycles, and current demand for PCs and other consumer products is driving the market quickly into recovery. There is strong evidence out there. Semiconductor sales in August were at their highest level since June 2001. A number of semiconductor producers have forecast up to 20% over booking of capacity in the fourth quarter. All 15 major bare board producers in Taiwan have reported levels of capacity utilization exceeding 90%. Coupled with rises in PCB raw material prices, there is even a threat that PCB prices could eventually push higher for the first time in three years.”

Indeed, Flextronics’ PCB business is “already getting some pretty substantial price increases in some categories of product,” said Flextronics CEO Michael Marks in a conference call this month.

Still, Deas does not expect the market to return to the problems of three years ago. “Passives, which had serious problems in the last industry boom, show few signs of being problematic in the coming 12 months,” he said.

For more information, email mdeas@purcon.co.uk.

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Hon Hai to Buy Handset Plant from Motorola

Through a Mexican subsidiary, Hon Hai Precision Industry Co. (Tu-Cheng, Taiwan), a tier-one EMS provider, has agreed to purchase Motorola’s mobile-phone operation in Chihuahua, Mexico, for $18 million. The deal also includes a multiyear manufacturing agreement with Motorola.

Hon Hai, also known as Foxconn, expects the purchase to be completed in about 90 days. In this transaction, Hon Hai will acquire one building and 123 acres of land. Closure of both the asset purchase and manufacturing agreements is subject to customary contractual and regulatory conditions.

According to a statement made to the Taiwan Stock Exchange, Hon Hai obtained an outside appraisal of $14.5 million for the operation.

The deal will obviously boost Hon Hai’s handset business as the company diversifies into markets outside its traditional customer base in the computer industry. What’s more, the Mexican acquisition will add to company’s low-cost footprint, which is largely based in China.

Also note that this is the second deal that Hon Hai has made in the cell-phone area. Through a tender offer, the company recently acquired 93.4% of the outstanding shares of Eimo (Lahti, Finland), a supplier of plastics to the mobile communications and health care industries (Aug., p. 5). Hon Hai paid 62.3 million euros for the stock.

Hon Hai stated that the deal will enhance the company’s vertical integration to further solidify its market position.

Motorola already uses archrival Flextronics to produce four to six million phones a year. In addition, it is well known that Motorola outsources to two Taiwanese manufacturers in the ODM space – BenQ and Compal. According to an unconfirmed report from the Taipei Times, another Taiwanese company, Chi Mei Communication Systems, has also started manufacturing handsets for Motorola.

Meanwhile, DigiTimes.com is reporting that Motorola plans to set up an ODM center in Taiwan. According to a Motorola spokesman, the company’s ODM strategy is primarily driven by niche opportunities or very specific regional market requirements.

Deal done…PEMSTAR (Rochester, MN) has closed on an asset purchase and supply agreement with what it describes as a major technology company (Aug., p. 5). According to an industry source, the customer is Applied Materials. Attempts to confirm the customer’s identity with PEMSTAR were unsuccessful.

Elcoteq to Acquire Marconi Operation

Lands Siemens as new customer

Elcoteq Network (Espoo, Finland), which focuses on the communications technology sector, has won business from two European OEMs in the sector. First, telecom supplier Marconi (London, UK) has agreed to sell a manufacturing unit in Offenburg, Germany, to Elcoteq and to make it the preferred manufacturing partner for Marconi’s fixed wireless access products and associated technologies. In the second case, Elcoteq has landed an EMS contract from the Networks division of Siemens Mobile.

For the Marconi transaction, Elcoteq will pay about 10 million euros ($11.8 million), subject to closing adjustments. The deal is expected to add roughly 70 million euros ($82.5 million) in 2004 sales to Elcoteq’s Communications Network Equipment (CNE) business and to have a positive impact on profitability. Elcoteq intends to take over the German unit on November 1.

As Elcoteq is a tier-two EMS provider, this is another instance of an OEM bypassing tier-one providers in order to sell manufacturing assets (Aug., p. 4-5). Indeed, Marconi originally planned to sell its Offenburg production site along with four other operations to Jabil Circuit through a divestiture deal announced in 2001. While Jabil acquired the other operations, it never reported closing on the German part of the deal. In 2002, Jabil said the parties were reassessing the German piece in light of economic conditions.

Under the new agreement with Marconi, the German operation will continue to produce digital microwave communications systems for Marconi, and 340 Marconi employees in Offenburg will be transferred to Elcoteq. Elcoteq will offer Marconi NPI, manufacturing, pre-field installation and repair services primarily for Marconi’s microwave communications systems business. Marconi is a new customer for Elcoteq.

In addition, Elcoteq will develop the Offenburg unit as an NPI center for its CNE business serving Marconi and other customers. The unit, which will be Elcoteq’s second facility in Germany, will work closely with Elcoteq’s other manufacturing units in Europe and elsewhere.

“This is an important step in the implementation of Elcoteq’s communications technology strategy [see June, p. 2]. The technically demanding products manufactured in Offenburg represent the company’s strategic core business. This acquisition further strengthens our radio frequency (RF), system integration and testing expertise,” stated Lasse Kurkilahti, president and CEO of Elcoteq.

Marconi will retain its mechanical engineering and logistics operations and some 100 people at the German site.

Under the manufacturing agreement with Siemens Mobile, Elcoteq will provide EMS for products that are part of Siemens’ GSM base stations. Production ramp-up is slated to start in November at Elcoteq’s plant in Pecs, Hungary. With this contract, Siemens becomes a new customer for Elcoteq, which hopes to expand the relationship to include other Siemens products.

Elcoteq has also announced three other new customers: Strix Systems (Westlake Village, CA), NEC in Japan, and Germany’s LANCOM.

Meanwhile, Elcoteq has recently been selected for the new Kempen/SNS Smaller SRI (Socially Responsible Investment) Index, slated for launch on Oct. 1. Membership in the index is based on business ethics, human resources and the environment.

Tellabs Examines Finnish Operation

Telecom equipment maker Tellabs (Naperville, OH) has confirmed that it is reviewing the viability of its manufacturing operation in Espoo, Finland. No decision has yet been reached. Tellabs has already decided to outsource PCB assembly and repair for North American products to Sanmina-SCI (Aug., p. 5).

A 154,000-ft2 facility in Espoo houses manufacturing operations in Finland and a portion of Tellabs’ product development and design organization.

Most recently, Tellabs announced a further reduction of about 370 jobs. It also plans to close its development center in St. Laurent, Quebec, Canada, by mid-2004.

Benchmark Inks Outsourcing LOI with ADIC

Advanced Digital Information Corp. (ADIC of Redmond, WA), a supplier of data storage products, and Benchmark Electronics (Angleton, TX) have signed a letter of intent to expand their outsourcing relationship to include a portion of ADIC’s entry-level and workgroup tape automation product line. As part of the agreement, Benchmark proposes to take on about 150 to 200 ADIC employees and take over a leased ADIC operation in Redmond, WA.

Like the case of Elcoteq on page 3, this proposed deal adds to a growing list of asset purchases recently announced by providers below the top tier. Under terms of the LOI, Benchmark intends to purchase certain assets, including inventory, and assume the lease related to ADIC’s Marymoor manufacturing facility in Redmond.

The LOI also calls for a master supply agreement, and Benchmark plans to provide manufacturing, configure-to-order and order fulfillment services for ADIC from Marymoor as well other Benchmark locations worldwide. Benchmark said the deal will significantly expand its current manufacturing relationship with ADIC. Master supply and asset purchase agreements must be approved by each company’s board.

ADIC said the move continues its ongoing strategy of using manufacturing partners to support the rapid growth of the high-volume, entry-level side of its product line. Development and design activities for entry-level and workgroup products will be consolidated in ADIC’s Redmond, WA headquarters facility. The design and manufacture of ADIC’s larger, enterprise library products – currently produced in Denver, CO, and Boehmenkirch, Germany – will not be affected by the agreement.

Benchmark said the deal is also valuable given the need to support its growing customer base in the Pacific Northwest.

Corlund Assets Sold

OSI Systems (Hawthorne, CA), a diversified maker of optoelectronic-based components and systems, has acquired EMS assets of Corlund Electronics, which had its remaining operation in Camarillo, CA, through an out-of-court liquidation process. OSI bought SMT lines and PCB assembly operations from the Credit Managers Association of California for about $4.4 million. CMA acted as assignee of the assets for the benefit of creditors.

This transaction marks the end of Corlund, which had attempted to restructure after selling assets and contracts of its Tustin, CA operation to Varian (Palo Alto, CA) earlier this year (May, p. 5).

The acquired operations employ about 150 people within a 60,000-ft2 facility in the Southern California city of Camarillo. As part of the deal, OSI also gained a backlog of about $10 million in manufacturing contracts, including customers in medical electronics, automotive diagnostic electronics, telecom equipment and digital audio systems.

“At OSI Systems, we have long maintained that vertical integration and continually improving our value-added manufacturing services are the two keys to our success,” stated Deepak Chopra, chairman and CEO of OSI Systems. “We seek to extract synergies by consolidating our two electronics manufacturing operations. Together we will provide our customers, as well as OSI Systems’ group of companies, a range of added services from rapid prototyping to turnkey box builds.”

The acquisition will become part of OSI’s wholly owned subsidiary, OSI Electronics, and Bruce MacDonald has joined OSI as president of the EMS subsidiary.

OSI through its subsidiaries competes in four areas: OEM manufacturing, security, medical and fiber optics. Sales for fiscal 2003 ended June 30 totaled $182.6 million, up 47% from a year earlier.

This deal positions OSI as one of a few OEMs with an EMS business. The transaction also runs counter to current thinking among OEMs who are moving away from vertical integration.

Scanfil Buys Finnish CM

Scanfil (Sievi, Finland), an MMI Top 50 EMS provider, has purchased contract manufacturer CPS Electronics (Tampere, Finland), a subsidiary of Metso Automation, which in turn is the automation and control technology unit of Metso Corporation (Helsinki, Finland). The transaction price was not disclosed.

Employing about 130 people, CPS specializes in low- and medium-volume production. About half of CPS’s sales comes from customers outside of Metso.

“Acquiring CPS Electronics will deepen and increase the cooperation between Scanfil and Metso Automation and is at the same time [a] consistent follow-up to Scanfil’s actions to develop its operations and expand the market share,” stated Jorma Takanen, president and CEO of Scanfil. The acquisition will also add to Scanfil’s know-how and strengthen its competitiveness in industrial electronics, he said.

But changes are planned for the CPS operation. CPS, now a subsidiary of Scanfil, has started negotiations, as required by law, concerning reorganizing and adjusting CPS’s operations.

Selling CPS is part of Metso’s efficiency improvement program, under which Metso divests its non-core functions and products.

Scanfil operates plants in Finland, China, Estonia, Hungary and Belgium and employed 1447 people on June 30. Sales for the first half of 2003 amounted to 121.8 million euros versus a pro forma 121.2 million euros in the year-earlier period, and the company earned net profit of 7.4 million euros for the 2003 period. Q2 sales totaled 74.2 million euros, up 27% year over year on a pro forma basis. Reported Scanfil customers include Nokia, Kone, ABB, Vaisala and Motorola (March, p. 3).

This is the second acquisition made by Scanfil in 2003. In April, the company took possession of Alcatel’s plant in Hoboken, Belgium, which expanded Scanfil’s customer base in both telecom and industrial electronics (March, p. 6). Communications and industrial electronics are the two segments that Scanfil has focused on.

Listed on the Helsinki and New York Stock Exchanges, Metso Corporation is a global supplier of process industry machinery and systems. Its core businesses consist of fiber and paper technology, mineral processing, and automation and control technology. Metso’s sales were 4.7 billion euros last year.

Solectron and Nortel Extend Relationship

Solectron (Milpitas, CA) and Nortel Networks have announced a new supply agreement that extends their relationship to 2009, but involves less revenue than the old agreement, a four-year pact signed in 2000 (April ’00, p. 1). The new agreement targets $7.5 billion in revenue from 2000 to 2009, rather than about $10.4 billion in revenue originally anticipated from the old 2000 contract. Solectron pointed out that industry conditions have changed since the old contract was signed.

The new supply agreement defines new terms and conditions under which Solectron will offer Nortel a full suite of supply chain services. Additional product-specific contracts will further specify terms as existing business is transitioned to the new contract and as new business is awarded. According to Solectron, the agreement positions the provider to compete for Nortel Networks business over a broad range of product offerings, with actual annual volumes subject to the economic environment and competitive terms and conditions.

In the August quarter, Nortel represented 12.5% of the sales of Solectron’s continuing operations.

More new programs…Solectron has also announced contract wins from IBM, NEC, Apple, Lucent, Marconi, Fujitsu Devices and Sumitomo Electric….Sierra Wireless (Richmond, BC, Canada) is partnering with Flextronics (Singapore) to manufacture Sierra’s Voq line of professional phones. These phone/messaging handhelds feature both a phone keypad and a flip-open QWERTY thumbpad….Candera (Milpitas, CA) is using Sanmina-SCI (San Jose, CA) to provide manufacturing for Candera’s enterprise-class network storage controller….Metretek Contract Manufacturing (Melbourne, FL) has received a multiyear contract as the primary manufacturer for a handheld digital imaging device developed by MaxxVision (Gainesville, FL). The device will be initially used to assist radiologists in improving their accuracy in reading mammograms….LMIC (Beltsville, MD) has won an engineering and EMS contract from TNCI UK for an information and entertainment system to be used on board UK commuter trains. Initial orders exceed $2 million….LaBarge (St. Louis, MO) has landed an add-on contract, worth about $5.8 million, for the manufacture of cable assemblies used in GE’s T700 engine for military helicopters.
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European Alliance for Mechatronics

Stork Industrial Components B.V. (SIC of Son, The Netherlands), the EMS group within the Dutch conglomerate Stork, and two other European companies, The Technology Partnership plc (TTP of Melbourn, UK) and Germany’s Electronic Network AG (EN), have formed a partnership to create a supply network for the design and manufacture of mechatronic products.

The Network Partnership is offering OEMs the ability to outsource product development, manufacturing and life-cycle management to a single entity. According to a statement from the three members, all three have found an increasing demand for such outsourcing.

They are promoting the partnership as a best-of-breed combination for all stages of the product life cycle. This alliance can draw upon TTP’s strength in technology and product development, SIC’s expertise in life-cycle management, and EN’s skills in both low- and high-volume manufacturing and supply-chain management.

The new pact, which is an extension of a partnership formed in July between SIC and product designer TTP, adds manufacturing capabilities and affords efficiencies from increased purchasing volume and related logistics.

SIC positions itself as a contract manufacturer for the high-mix, low-volume segment of the European market. The Stork group designs and produces electronic and mechanical components and systems, in many cases for industrial end-users. Core activities consist of PCB design, assembly and testing; design of custom electronic components; manufacture of precision metal products through electroforming and photo-etching; and assembly of frames and cabinets.

SIC’s sales amounted to 137 million euros in 2002, and employees totaled 1053 at year end. Markets served include semiconductor equipment, medical, trains and automotive, test and measurement, and traffic infrastructure. SIC also makes mechanical products such as sugar centrifuge sieves. Listed as customers are ASML, Oce, Philips Medical Systems, ASME, Siemens, Bombardier, Telefunken, Remington and ANWB en Heidelberg.

Investing in capacity…Nam Tai Electronics, which has set up a headquarters in Macau, China, is doubling its capacity to produce flex circuit subassemblies for cell phones. At the end of the month, the provider will install two additional production lines, giving the company a total of four lines for flex circuit assembly. According to Nam Tai, flex circuit subassemblies represent one of the fastest growing interconnect product segments in the industry. Nam Tai will also invest $3.5 million to expand capacity for production of color LCD modules for cell phones. Capacity will increase by 63% to 2.6 million units per month. The company cited strong demand for these cell-phone modules. …Universal Scientific Industrial Co. (USI of Nan-Tou, Taiwan) has added an SMT line in its Morgan Hill, CA factory. This addition brings the factory’s prototype/pilot production time under 24 hours, according to USI. The provider can transfer products from the California factory to its global manufacturing sites when mass production is needed….Mechanical Solutions Inc. (MSI of Albuquerque, NM), a mechanical design and manufacturing company, has recently doubled the size of its facility and added the capability to perform electronic design, engineering, manufacturing, and final product assembly and test. MSI can now offer the turnkey capability to convert product concepts and prototypes into market-ready products. Capabilities include SMT and through-hole assembly, machining services, and precision welding.

Flextronics Stunned By Verdict

Last month, a California Jury handed down a verdict of $934 million, including $931 million in punitive damages, against Flextronics in a lawsuit brought by Beckman Coulter (Fullerton, CA), a medical products company. Flextronics believes the award of punitive damages violates California and US Supreme Court rulings, and the company is prepared to appeal the verdict if necessary.

The case stemmed from a dispute between the two companies regarding Flextronics’ decision in 2000 to close the Anaheim, CA facility that produced PCB assemblies for Beckman Coulter. This facility had been operated by the Dovatron unit of the Dii Group prior to Flextronics’ acquisition of Dii in 2000 and had supplied Beckman Coulter under a five-year contract begun in 1997. With the loss of this PCBA source, Beckman Coulter brought the PCBA work back in house and set up its own production for these boards.

The Beckman Coulter complaint charged Flextronics with breach of contract and asked for damages including about $2.1 million to cover Beckman Coulter’s costs. The complaint also alleged that Beckman Coulter purchased unneeded inventory from Flextronics under economic duress. In addition, the complaint claimed that fraud and economic duress were committed in connection with surcharges that Dovatron imposed on Beckman Coulter.

Of the $931 million awarded in punitive damages, $930 million was associated with economic duress. Beckman Coulter allegedly made additional payments to Flextronics of $498,000 under duress.

Flextronics believes that this verdict should be overturned or substantially reduced. Among other things, Flextronics argues that the trial court erred by allowing the jury to apply a multiplier of four to potential damages that Beckman Coulter asserted it would have incurred had it not agreed to make the additional payments, according to a form 8-K filed by Flextronics. The company contends that case law only allows for actual damages to be used with the multiplier.

Last month, Flextronics CEO Michael Marks said the company believes that its liability in this case is no more than $10 million.

The court has stayed enforcement of the verdict, pending a decision on post-trial motions to correct the verdict, set it aside or order a new trial. These motions are scheduled to be heard on November 25.

Flextronics is prepared to enter into negotiations to settle the matter. As of this writing, no negotiations are underway, according to Marks speaking in an October conference call.

Solectron Selling Businesses

Offers view of its new strategy

Armed with a new strategy, Solectron is moving toward the sale of several noncore businesses. “We’re in advanced stages of discussions on these sales, and in several cases, prospective buyers have begun the due diligence process,” said company president and CEO Mike Cannon during a conference call last month. Solectron is withholding the names of the companies being divested until definitive sales agreements are finalized.

In April, Solectron had told investors that it was reviewing its portfolio of businesses, and MMI reported in July (p. 6) that the company had identified noncore businesses for divestiture.

The company anticipates that the sale of all companies to be divested will bring in cash proceeds in the range of $500 to $600 million. Solectron intends to use the proceeds to further reduce debt and strengthen its balance sheet.

In the September conference call, Cannon shed some light on the company’s long-term strategy. He said Solectron will build on its core strengths in supply chain services; high-quality, cost-competitive global manufacturing; extensive design resources; and long-term relationships with blue-chip customers.

In addition, Solectron is moving away from a strategy to build a complete end-to-end solution primarily through acquisitions. After a thorough review of the business, Cannon and his team have developed a more focused supply chain strategy. Cannon said, “We will focus our energy and resources on serving specific markets with a defined set of services in which our core strengths will give us the greatest competitive advantage.

“Therefore, we will concentrate on extending our leadership and capabilities in our core markets: communications, networking, and computing and storage. We will selectively participate in new growth markets: consumer, automotive, industrial and medical where we can leverage our core strengths and earn attractive returns.”

The service menu that Solectron will offer includes the usual elements from design through fulfillment and extends to “selected” after-sales services. The latter departs from Solectron’s previous goal of offering the industry’s most comprehensive set of after-sales services. Cannon pointed out that design will play a greater role in Solectron’s future (May, p. 3).

Solectron has also done away with a structure of multiple business units, which involved multiple points of contact for customers.

More restructuring…Flextronics is closing or has shut down operations in Kyroskoski, Finland; Visby, Sweden; and, as previously reported (Aug., p. 7), Solothurn, Switzerland. SMT lines from those operations are being redeployed to Asia….During the August quarter, Solectron closed six sites amounting to 450,000 ft2. The company eliminated 3700 jobs during the quarter, primarily in North America and Western Europe. These reductions were offset by new hires, primarily in Asia, to support increased demand. …During Q4, Benchmark Electronics (Angleton, TX) will be closing its facility in East Kilbride, Scotland.

SMTC Brings In New CEO

SMTC (Toronto, Canada) has named John Caldwell as interim president and CEO, replacing Paul Walker, a founding partner who had been chief executive.

Caldwell, a member of SMTC’s board, previously served as president and CEO of Geac Computer, an ERP software vendor with 2002 sales of about $537 million. Before that, he was president and CEO of CAE, known for flight simulation and training systems.

When asked about this management change, Caldwell would not comment.

SMTC also reported that it is continuing discussions with current and potential lenders and investors to address the pending maturity of its revolving credit facility due in July 2004 and to better position the company on a longer-term basis. A transaction resulting from these discussions is likely to involve significant dilution to existing shareholders, according to a statement from SMTC. The company cannot guarantee that it will be able to reach agreement with the relevant parties.

Should SMTC be unable to refinance its bank debt prior to July 30, 2004, the company expects that it will be unable to repay the full amount of the debt upon maturity, according to the latest form 10Q filed by SMTC. In that event, the company expects to initiate negotiations with its current lenders to modify the terms of the loan agreement. There can be no assurances that the company will be successful if this step proves necessary.

As of June 29, 2003, the company had borrowed $67.2 million under its credit facility.

Supply chain management software…Reportedly, Flextronics plans to deploy automated procurement software from RiverOne (Irvine, CA) at all of Flextronics’ major facilities worldwide. Also, Taiwan’s Universal Scientific Industrial Co. has selected RiverOne software to manage global supply chain programs, including vendor-managed inventory.

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Last Word

More Integration Talk

A few years ago, vertical integration was a defining strategy. Those who had it promoted it. Those who did not adopt it had to explain why not. Then the Internet bubble burst, followed by nearly three years of market weakness, which exposed the downside risk that comes with vertical integration. While vertically integrated activities can produce higher-than-normal margins during boom times, they can also exert a drag on financial performance during a downturn when there is overcapacity. With the restructuring of vertically integrated activities during the downturn, there was little talk of vertically integration as a winning strategy. But evidence is mounting that the downturn is over. And that sets the stage to resume the debate over vertical integration .

When demand picks up, vertically integrated providers will again espouse the merits of their position, MMI believes. If anything, the debate over vertical integration will be more intense than before. That’s because providers on each side of the debate have become more entrenched in their positions. Flextronics and Sanmina-SCI, two of the most well-known practitioners of vertical integration, have worked hard to restructure vertically integrated operations so that when an upturn does come, the two providers will be in a position to reap the benefits of the strategy.

What’s more, another factor – ODM – has emerged. A vertically integrated supply chain becomes an advantage for a company doing ODM work because it can design products to incorporate internally supplied items such as backplanes, printed circuit boards and enclosures. It is no coincidence then that both Flextronics and Sanmina-SCI utilize vertical integration and ODM.

On the other side of the vertical integration debate, providers who did not buy into the strategy were probably better off during the downturn. They were not faced with having to restructure any operations outside of their EMS activities. Nor did they have to worry about any losses from vertically integrated operations. As a result, they are even less likely now to invest in vertical integration.

Horizontal integration is a different story. More and more players are now offering an end-to-end solution, and one does not find people questioning the need for such an offering. It makes perfect sense to give a customer the option of having its product designed, manufactured, delivered and serviced by an EMS provider.

But like most things, the devil is in the details. Not everyone defines an end-to-end solution the same way. For example, Flextronics includes logistics and network installation services as part of its solution. Solectron has just announced that its offering on the back end will consist of selected after-sales services, without being any more specific.

On the front end, product design is not a generic activity. Being able to design cell phones, for example, does not give a provider the expertise to develop a server product.

So you’re likely to hear more talk about both vertical and horizontal integration. Ultimately, both will influence how players position themselves.

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MMI September 2003

MMI November 2003

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