Vol. 15, No. 10: October 2005

Small Providers Seeing Plenty of Work

Reports from different parts of the US and Canada show that more than a few small providers are busy. Several small EMS providers tell MMI that not only are they seeing lots of work, but their peers are as well. While these anecdotal reports cannot be extrapolated to represent all or even most of the small-provider segment, they do lead to a conclusion. Offshoring has not dried up the need for small providers and the services that they offer. In some areas at least, just the opposite is happening.

At Veris Manufacturing, a Fullerton, CA-based provider projected to do $10 to $12 million this year, business is good. But the good fortune is not limited to Veris. “In Southern California, all of our competition is doing well,” said Bill McIlvene, president of Veris. While McIlvene is not sure about the rest of the country, he finds reason to believe that others are also enjoying an influx of business. “I attend some of the meetings that IPC puts on. It seems like everybody is doing well in the companies that are our size.” He added, “I got an email from a peer of mine in San Jose who’s just going crazy right now.”

For Veris and its competitors, this activity stems from the demand for short runs and rapid changeover. “In talking to my peers, anybody that’s running flex lines with quick changeover that can do 25, 50 pieces in five days is busy. But we don’t see any volume work coming our way at all,” said McIlvene.

Another EMS source finds that small providers are busy in and around New England. “I see it in New England, and I see it in adjacent states,” said Sam Jabbawy, president of EMS provider NES Technologies in South Easton, MA.

Although NES has a full range of capabilities, the bulk of its business is coming from prototypes and low-volume work. “What is coming here is old-life product, prototypes, new-generation before it goes to millions of boards,” said Jabbawy.

Dorian Barrs, founder and principal of strategic sourcing firm Leantronics (Toronto, Canada, and Lake Worth, FL), echoes these observations. “My target is small to medium-sized both OEMs and EMS companies. And from the different EMS companies I’m dealing with, the general consensus is that they’re all busy, and they’re all looking to grow,” said Barrs. “It’s almost a surprising dichotomy where a number of the tier-one providers are continuing to go through restructuring in North America to move business to low-cost geographies,” he added.

As examples, Barrs cites a contract manufacturer in Montreal and a medical CM in North Carolina. New business wins and increased ramps of existing programs at the Canadian provider have created a need for more workers. In the other case, the medical CM is looking to continue to grow at an aggressive rate.

Another Canadian provider, Artaflex of Markham, Ontario, Canada, has a business that is booming. “Our business is continuing to go through the roof. We’re having a tough time keeping up,” said Gerry Iuliano, president of Artaflex. This design services and manufacturing company is seeing a lot of front-end opportunities with customers requesting its NPI, quick-turn prototype, layout and schematic design services.

“Tier-two [providers] don’t have the ability to do what we do for our customers,” said Iuliano. He made the case that these larger providers cannot be as flexible as Artaflex. “That’s where the spike is coming from,” said Iuliano.

But the opportunities are not limited to Artaflex. “There’s no lack of business in the marketplace,” he said.

Michael Thompson, chairman and CEO of I. Technical Services, agreed that small EMS providers like his company are busy. [He is also on MMI’s board of advisers.] ITS is a fast-growing EMS provider that recently moved into a new 22,000-ft2 facility in Alpharetta, GA.

According to Thompson, there are several reasons why small providers are doing well. “Smaller OEMs need local support, quick response to ECOs, service, flexibility and responsiveness. They cannot get it from offshore and/or large-tier EMS companies,” he said. Other factors favoring local or regional providers in the US include higher freight costs, IP concerns about China and the threat of terrorism abroad. Yet another opportunity lies in repair, “my biggest demand growth from all over. No one wants to pay the freight to ship product back to Asia, Mexico, Europe, etc., particularly with the increased cost of freight,” said Thompson.

These aren’t the only reasons that have been cited. NES’s Jabbawy attributes the small-provider activity that he sees to two things: increases in R&D and repeat orders for old product.

Veris’ McIlvene has his theory: “There are a lot of OEMs that couldn’t go to Mexico or China and got left out of the loop or that tried to go to Mexico or China and came back.”

Barrs of Leantronics wondered whether the tier-one focus on large OEMs and the transfer of programs from high- to low-cost locations has left an opening in small- to medium-sized opportunities for tier-3 and -4 players. He also pointed out that a lot of OEMs have had trouble sourcing offshore.

As business increases, small providers at some point must start hiring. For some, this is not a piece of cake when competitors are also busy. “We’re all fighting over the same group of people. It’s hard getting manufacturing people right now,” said McIlvene.

The downturn in 2001 created an exodus of qualified assembly workers. “In 2001, a lot of people left manufacturing. A lot of assemblers got different jobs. It’s a whole different marketplace out there right now, and the costs are prohibitive,” he said. “It costs a lot of money to hire somebody who can solder nowadays. So that’s really a big reason we went to Mexico.” (See Sept., p. 5.)

“We hired 50 new employees in the last four months, and it was really hard. I had to relocate some,” said Thompson of ITS. “The big voids are experienced SMT operators, debug/repair technicians, test technicians, and really high-skilled solderers.” Like McIlvene, Thompson learned that many assembly workers changed careers after 2001.

Hiring will continue to be difficult, Thompson added. “I had to compete with many smaller OEMs. The good news is the available talent would rather be with a smaller firm where they can make a difference or have more recognition and/or impact. We have heard that over and over,” he said.

But not everyone is having trouble finding people, and there may be some differences in worker availability from one region to another. In New England, Jabbawy reported that if a company is established, hiring is not difficult.

Sometimes, a small provider can take advantage of restructuring at a large player. Canada-based Artaflex has gained people from layoffs at Celestica. “I’ve been able to pick up technical staff that I’ve never been able to in the past,” said Artaflex’s Iuliano.

Conventional wisdom says there will be a place for small providers as the industry consolidates. The foregoing shows that not only have small providers created a niche for themselves, but a number of them are growing.

Clearly, they are providing NPI and low-volume services that their customers cannot do without. The need for these services is probably driven by a number of factors, as indicated here.

Several tier-one providers have initiated dedicated efforts to capture low-volume, high-mix business (July, p. 8). So far, the small providers represented here are winning their share of that business.

Market Data

New Industry Forecast

Technology Forecasters, Inc. (Alameda, CA), an industry market research and consulting firm, has issued its latest five-year forecast, and EMS providers looking for higher projected growth next year will be disappointed. The new forecast predicts that EMS revenue worldwide will increase by 9.7% in 2006, compared with anticipated growth of 9.9% in 2005. Next year, the EMS market will amount to $132.2 billion, projects TFI, up from an estimated $120.5 billion in 2005 (see table, below). These projections are below TFI’s previous forecast of $123.4 billion for 2005 and $140.2 billion for 2006 (Jan., p. 4).

In the new forecast, ODM revenue will grow consistently faster than EMS sales, a disparity that has appeared before in market research, whether by TFI or others (Jan., p. 4-5; Dec. 2004, p. 2-3). Over the forecast period from 2004 to 2009, TFI projects a CAGR (compound annual growth rate) of 16.3% for the ODM segment versus 11.4% for the EMS space. By 2009, global EMS sales will have reached $187.6 billion, while the ODM business will have grown to $148 billion, or 79% of EMS sales.

TFI estimates that ODM revenue in 2005 will total $81.9 billion, an increase of 17.8% from last year. For 2006, projected ODM growth will be nearly as high at 16.2%, bringing ODM sales to $95.2 billion. In the last two years of the five-year forecast, ODM growth (year to year) tails off a bit, but remains above 15%.

Forecasted EMS growth will hit double digits in 2007 with 12.0% growth over the prior year. Annual growth will then rise slightly over the next two years, ending the period at 12.9% in 2009.

According to the forecast, the penetration rate of outsourcing [(EMS + ODM revenue)/TAM revenue] is a surprisingly low 18.8% for 2005 and won’t exceed 20% until 2007 when the rate goes to 21.1% (table). If these projected rates hold up, outsourcing still has long way to go before saturation sets in. Even at the end of the forecast period, outsourcing will have penetrated just 23.7% of the total available market (TAM).

The TFI forecast puts the TAM value at $1.01 trillion in 2004, increasing at a CAGR of 7.1% to $1.42 trillion in 2009.

This forecast appears in a TFI report entitled “Electronic Manufacturing Outsourcing Report: Five-Year Forecast of EMS and ODM Industries by Market Sectors and Geographies.” The report was presented at TFI’s Q3 2005 Quarterly Forum.

For more information, contact emiscoll@techforecasters.com.

World Markets

More Action in India

India continues to attract investment from global EMS providers who want to manufacture for OEMs selling into the fast-growing Indian market for telecom and other electronic products. (See also Aug., p. 2-3). Not all of this money is going into initial sites. Flextronics, which has already made India its center for software engineering, plans to expand manufacturing operations there. And Jabil Circuit, which recently opened its second plant in India, has disclosed another investment in the country.

Last month, two separate reports from India asserted that Flextronics has selected a site in India’s Tamil Nadu state for a new plant (Sept., p. 4-5). A statement from the company confirmed that Flextronics has signed a memorandum of understanding with the Government of Tamil Nadu to build an industrial park in Chennai. Actually, the site is located near Chennai in Sriperumbudur, according to Indian sources. A number of these sources put the facility investment at Rs 4.3 billion (close to $100 million) over five years.

The new industrial park will offer Flextronics’ vertically integrated services including plastic injection molding, PCB assembly, metal fabrication and enclosure integration, distribution, logistics and repair services. For the Chennai campus, Flextronics will follow its industrial park formula of bringing strategic suppliers onsite to minimize logistics costs and improve manufacturing cycle times. The Chennai operation will provide manufacturing for Flextronics’ local and global OEM customers, such as Nortel. Flextronics expects the operation to begin production in June 2006.

As reported in The Hindu Business Line, Peter Tan, president and managing director of Flextronics’ Asia operations, said the Chennai operation would have about 2,000 employees in the first year and half of production.

This project will result in Flextronics’ third manufacturing facility in India, not its second as was reported here last month. The company has a manufacturing facility in Bangalore and Pondicherry, while software and hardware design centers are located in Bangalore, Chennai and Gurgaon. Having been in India for over five years, Flextronics currently employs some 5,000 people in the country.

Flextronics stated that it selected Chennai, capital of Tamil Nadu, for this expansion based on the area’s supply of technical talent and its infrastructure.

The company also has a back office operation in Chennai, which it plans to expand, according to reports in two Indian publications.

Like Flextronics, Jabil operates two manufacturing facilities in India, including a newly opened 175,000-ft2 plant in Ranjangaon. But Jabil’s recent investments in India are not confined to the new plant. During a conference call last month, the company revealed that it has an investment in an unidentified EMS provider based in India. When asked about this investment, the company would not comment. One can speculate, however, that by investing in this provider, Jabil probably formed some sort of alliance with the Indian company. In such alliances, the smaller partner typically agrees to transfer programs to the larger provider when customer requirements outstrip the smaller company’s capabilities. Whether or not Jabil has formed a relationship of this type, it is likely that this investment is intended to give Jabil greater penetration of the Indian market. That market consists of both multinational and indigenous OEMs, both of which are important sources of business for the new plant. One can further speculate that the unnamed Indian provider would have customers, including domestic OEMs, that would appeal to Jabil as potential sources of new business.

Five global providers, including four out of the six tier-one players, now have plants in India (Aug., p. 2). A report from Reuters, if true, signals the near-term entry of another tier-one provider. In a September interview with Reuters, CT Chua, senior VP of South Asia Pacific operations at Sanmina-SCI, reportedly said the company intends to open a facility in India within a year.

That leaves Taiwan’s Foxconn (the trade name for Hon Hai Precision Industry) as the only tier-one provider that has not revealed whether it has a strategy for manufacturing in India. All that Foxconn has said is what it has not done. In September, the company denied for the second time that it has acquired an India factory from HP.

Lest anyone doubt the importance of India to global OEMs in the communications space, consider that Cisco just announced that it will invest a total of $1.1 billion in India over the next three years.

For OEMs like Cisco, there is a new incentive to have telecom products manufactured in India. Two large telecom operators in India, government-owned BSNL and government-controlled MTNL, have decided that telecom equipment suppliers bidding on BSNL/MTNL projects must manufacture directly or through contract manufacturers in India. The Indian Ministry of Communications and Information Technology proposes to request that private operators also adopt this requirement.


Flextronics in Camera Module Deal

Flextronics (Singapore) is making a deal that will increase the capacity of its camera module business. Under a newly signed asset purchase agreement, ASE Test Limited, a subsidiary of Taiwan’s Advanced Semiconductor Engineering (ASE), will sell ASE Test’s camera module assembly operation in Penang, Malaysia, to Flex-tronics for around $18.7 million. Flextronics will acquire the assets and inventory of the operation and assume its employees. In addition, Flextronics will lease from ASE Test the factory floor space occupied by the camera module operation.

The purchase price is expected to cover the book value of the equipment and inventory to be transferred plus a premium that reflects certain intangibles.

Currently, Flextronics is the only customer of this camera module operation as a result of Flextronics’ acquisition of Agilent’s camera module business in February 2005. Before the transaction, Agilent was the sole customer of the Malaysia-based operation.

Revenue from ASE’s camera module business in Malaysia amounted to NT$ 518 million (about $15.5 million) in Q3, down from NT$831 million (about $24.9 million) in Q2 and NT$1,750 million (about $52.6 million) in Q3 2004. Note that ASE did not claim any revenue for the camera module business in September because Flextronics is reimbursing ASE Test for the actual costs incurred in assembling modules shipped to Flextronics in September.

In Shanghai, China, ASE also has a smaller camera module operation, which was not part of this deal.

Teradyne to Sell TCS Business

Teradyne (Boston, MA) has agreed to sell its Connection Systems division, which includes a backplane assembly business, to Amphenol Corporation (Wallingford, CT), a manufacturer of interconnect products. Amphenol will pay about $390 million in cash, subject to a working capital adjustment, for the acquisition.

Based in Nashua, NH, Teradyne Connection Systems (TCS) is a supplier of high-speed, high-density connectors, backplane PCBs and backplane interconnection systems. TCS has annual sales of about $380 million, 97% of which is almost equally split between connector sales and backplane assembly sales. The remaining 2 to 3% comes from sales of pure backplanes.

Acquiring TCS will enable Amphenol to provide an integrated interconnect solution to the communication and IT markets, where the company already has a position. Amphenol supplies products “outside the box,” while TCS offers solutions “inside the box.”

In a conference call, Amphenol’s chairman and CEO Martin Loeffler described the TCS backplane assembly business as functioning as a contract manufacturer that essentially adds labor as opposed to Amphenol’s value-added approach. Amphenol plans to operate the backplane assembly business the way it manages its cable assembly business where the company adds value in the form of content, such as cables and connectors and technology. Loeffler said the company feels confident that the “backplane assembly business is not going to be a contract manufacturing business, but a value-added interconnect business and very core to our future.”

All of TCS’s component manufacturing is in North America. The unit has assembly operations in China, Malaysia and Mexico. In addition, low-volume, high-end assembly is done in New Hampshire.

The sale of TCS will allow Teradyne to focus entirely on its core test businesses.

New Provider Makes Design Acquisition

TES Electronics Solutions SA (Langon, France), a design and manufacturing company formed in December 2004 from the divestiture of a Thales unit (Dec. ’04, p. 4-5), has acquired Purple Vision Technologies, an electronic design services firm based in Bangalore, India. Purple Vision has a presence and customer base in Japan and the US in addition to India. The acquisition is in line with TES’s strategy to grow its business geographically and increase its design resources.

With this deal, TES increases its design resources to 500 design engineers in 16 design centers worldwide. Capabilities encompass IC, board, software and full-system design. TES also employs some 300 people in its manufacturing plant in Langon, France.

Purple Vision offers expertise in still and moving image processing algorithm development, MPEG-2 audio decoders, MPEG-2 and -4 decoders/encoders, speech codecs, and biometrics verification.

Financial details were not released.

Swedish provider sold…Midway Holding AB, a Swedish firm, has bought all the shares of Onrox AB (Malmö, Sweden), an industrial electronics manufacturer with both EMS and branded businesses.

Swedish provider buying…EDC AB, a Swedish contract manufacturer of industrial electronics, has entered into a tentative agreement with Lithuania’s ELSIS UAB to acquire the majority of ELSIS’ EMS subsidiary ELSIS GP UAB. The EMS unit operates a factory in Kaunas, Lithuania. Among its customers is Harris Communication RF in the US.

Incap Negotiates for Tellabs NPI Unit

Incap Corporation (Oulu, Finland) and Tellabs Oy have signed a memorandum of understanding that covers the transfer of Tellabs’ prototype fabrication and preproduction manufacturing in Espoo, Finland, to Incap. The goal is to sign a definitive agreement as soon as possible so that Incap would take over the operation by the end of November.

The proposed deal would extend Incap’s relationship with Tellabs to prototype work and preproduction. In addition, Incap believes that the deal would underpin the company’s position as a flexible and fast contract manufacturer.

Listed on the Helsinki Stock Exchange, Incap reported first-half 2005 sales of 41.4 million euros, up 11% from the year-earlier period. First-half operating profit was 1.6 million euros in 2005 versus 0.9 million euros in 2004. Established in 1992, Incap manufacturers in Finland and Estonia.

Merger approved…Shareholders of Speedy-Tech Electronics Ltd. (Singapore), an EMS provider and power electronics ODM, have approved its merger with another EMS provider, Integrated Microelectronics Inc. (Laguna, Philippines). This union of two Asia-based providers was reported earlier (see June, p. 7). Subject to final approval by the High Court of Singapore, the merger is expected to be completed in December 2005.

Deal not done…Sparton (Jackson, MI) will no longer pursue the acquisition of a Mount Pleasant, IA, plant that Celestica (Toronto, Canada) has slated for closure (Mar., p. 7). The effort to purchase the plant ended because there was too little time to secure enough new business to keep the plant running. From the outset, Sparton’s interest in starting operations at the Mount Pleasant facility depended on obtaining US Department of Defense contracts.

New programs…In an unusual move, Solectron (Milpitas, CA) paid a $20-million premium, recorded in the August quarter, to an unnamed customer for a recent contract win. No assets were transferred. During a conference call, Mike Cannon, president and CEO, said the exclusive contract “was one of the largest outsourcing deals of the year without a doubt.” He added, “If you were to look at a historical deal of this size there would have been a significant restructuring liability transferring to the company.” The provider also received significant follow-orders in the August quarter from Thomson to manufacture current- and next-generation set-top box designs. Under another contract, Wavecom (Issy-les-Moulineaux, France), a supplier of prepackaged wireless communication solutions, has named Solectron as primary supplier of integrated supply chain services. ACTMedia News Agency, which covers Romania, reported that Solectron’s plant in Timisoara, Romania, has launched a line for production of Ericsson broadband access equipment sold to wireline operators. In the after-market space, the provider extended its agreement with Verizon Wireless to provide technical services nation-wide….According to two reports out of Asia, Taiwan’s Asustek has formed an alliance with Flextronics. The China Economic News Service (CENS) and a Bloomberg report in the Taipei Times said Asustek will outsource production of some of its own-brand motherboards to Flextronics. The portion reported to be outsourced is 20% or about 20%, depending on the source. What’s more, CENS and the Chinese-language Economic Daily News said Asustek has outsourced desktop computer work to Flextronics. CENS also reported that the relationship would include molds and cases for desktop computers. Flextronics declined to comment….Lucent and Celestica (Toronto, Canada) have entered into an EMS agreement whereby Celestica has the exclusive right to provide Lucent’s manufacturing requirements for most of its existing wireless products, which Lucent integrates and tests before delivery to its customers. The agreement, which lasts for a minimum of three years, also applies to new wireless products, except in limited cases. MMI reported earlier that the two companies had signed a memorandum of understanding (July, p. 4). In addition, Celestica has landed a three-year contract to operate an automated line to assemble fuel cell Power Packs for Medis Technologies (Success, NY). Assembly will take place in Celestica’s Ireland facility, where the provider will also operate a fuel production facility for the devices. Ismeca, a Swiss equipment maker, has the contract to design and build the automated line, due for delivery in December 2006. Line capacity is 1.5 million units per month. Celestica’s Automated Manufacturing Services division was given the job of designing a semi-automated production line, planned to be operational in Israel by the end of the year. Earlier, Medis named Celestica its EMS provider of choice for the fuel cell products (June, p. 7)….Inventec Appliances has an exclusive contract to manufacture Apple’s new video iPod, according to a Commercial Times report in Chinese, picked up by DigiTimes.com. Also, DigiTimes.com identified Foxconn (the trade name for Hon Hai Precision Industry) as the EMS source for Apple’s iPod nano….COPAN Systems (Longmont, CO) has selected Sanmina-SCI (San Jose, CA) as the new contract manufacturer for COPAN’s Revolution 200T, a disk-based storage solution. Hitachi Computer Products (America) Inc. Oklahoma Manufacturing Division was originally chosen to manufacture the product. Also, Sanmina-SCI is one of the partners engaged by Northrup Grumman for its $400-million contract to build command post platforms for the US Army’s 1st Cavalry Division….The CXR Larus subsidiary of EMRISE (Rancho Cucamonga, CA) has signed a multiyear contract with Hitachi Computer Products (America), whose Oklahoma Manufacturing Division facility in Norman, OK, will produce all of CXR Larus’ domestic communications products on a turnkey basis….PacketFront of Sweden has awarded PartnerTech (Malmö, Sweden) a two-year contract with an estimated value of more than SEK 300 million ($38 million). Covering materials procurement, production and distribution, the order involves routers and other broadband equipment for operators that offer IP telephony, TV and high-speed Internet….Lockheed Martin Commercial Space Systems (Newtown, PA) has selected Sypris Electronics (Tampa, FL), a subsidiary of Sypris Solutions, to manufacture PCB assemblies for Lockheed Martin’s A2100 commercial satellites as well as for government satellites. Sypris Electronics recently opened a dedicated manufacturing operation for spaceflight electronics (Sept., p. 6).…LaBarge (St. Louis, MO) has won a $2.2-million contract from Kaman Aerospace to provide cockpit wiring harnesses for the Black Hawk helicopter program. This award is in addition to other Black Hawk contracts recently announced by LaBarge (Sept., p. 4) Also, LaBarge has received a $1.2-million contract from Bell Helicopter, a Textron company, to produce subassemblies for the de-icing system of the V-22 Osprey, a tilt-rotor military aircraft….Newonics (Salt Lake City, UT) will manufacture a new wireless router for Bountiful WiFi (Woods Cross, UT).

Flextronics to Expand in Mexico

Flextronics will expand operations in Mexico by building a new facility in Ciudad Juarez. The new facility will serve as a strategic location to North American markets for logistics and mechanical-type services and, said the company, will allow it to get the most out of its vertical integration model for customers serving this region. Flextronics expects this facility to be operational in the first half of 2006.

The service offering of this facility will include configure-to-order/build-to-order, product completion and pack-out, mechanical services, and logistics. The latter includes repair and distribution.

“Flextronics selected Ciudad Juarez as the location for this facility based on its strategic access to North American markets,” stated Mike McNamara, Flextronics COO. “Ciudad Juarez’s proximity to the United States offers flexible logistics options including next-day delivery advantages, shorter transit times and lower transportation costs. In addition, the supply base in this area of Mexico is well established, allowing for logistical cost savings and increased efficiencies.”

According to Flextronics, the Ciudad Juarez facility will complement the offering of the company’s Guadalajara industrial park, which will remain Flextronics’ PCB assembly center in Mexico. The company also operates a Mexico production site in Aguascalientes.

More expansion…Jabil Circuit recently added 10,000 m2 of production area to its plant in Meung-on-Loire, France. The new space will be used for customized automotive electronics. Jabil acquired the plant from Valeo in 2002, and Valeo remains the largest customer at the facility. Also, Jabil plans a 60,000-ft2 expansion of its new 160,000-ft2 facility in Szombathely, Hungary, which recently started repair and warranty operations. (MMI originally reported the facility size as larger; see June, p. 1.) The provider expects this additional capacity to be available by year end. What’s more, Jabil’s new plant in Wuxi, China, is expected to starting shipping in the November quarter….Incap (Oulu, Finland) plans to expand its operations in Kuressaare, Estonia, by leasing a new building with 3,700 m2 of floor space. The company will move its Kuressaare production into the new premises during spring of 2006.

Facility acquisition…MACK Technologies (Westford, MA) has purchased its previously leased facility in Melbourne, FL. The provider has utilized the 141,000-ft2 facility since October 2002 when it acquired Solectron’s EMS business located there. “MACK Technologies has been successful in expanding its customer base with large companies such as DRS Optronics, Athena Controls, Wayne Dresser, Checkpoint Systems and Northrup Grumman, while at the same time continuing to intensify the relationships with many of its existing customers, helping to make it an effortless decision to invest in Melbourne,” stated John Kovach, president of MACK Technologies. The company said its work force in Melbourne has grown by 30%.

Some financial news…Both Solectron and Celestica reported year-over-year declines in their most recent quarter. Solectron’s sales for its August 2005 quarter were down 21% from the year-earlier quarter, while Celestica’s Q3 sales decreased by 8%. For the August 2005 quarter, Solectron recorded net income of $10.0 million on sales of $2.40 billion. GAAP profit from continuing operations was $10.3 million versus a loss of $40.1 million a year earlier. Solectron’s non-GAAP profit for the August 2005 quarter came to $37.0 million. Celestica posted a Q3 net loss of $19.6 million on sales of $1.99 billion. Adjusted net earnings in Q3 2005 amounted to $27.1 million, compared with $25.3 million a year earlier….Benchmark Electronics (Angleton, TX) reported Q3 sales of $561.5 million, up 11% year over year. Net income of $20.3 million represented an increase of 13% from the year-ago quarter….SMTC (Markham, Ontario, Canada) has regained compliance with Nasdaq listing requirements (July, p. 7).

People on the move…Randy Furr, Sanmina-SCI’s president and COO, is leaving the company for personal and family reasons, according to a statement from the company. He will also resign from Sanmina-SCI’s board of directors. Furr and Jure Sola, CEO and chairman, jointly oversaw day-to-day management of the company. Sola will now handle this responsibility on his own, while some of Furr’s other duties will be parceled out to other senior staff members….Flextronics has added three directors to its board, as two members have resigned. The new directors are COO Michael McNamara, soon to be CEO; H. Raymond Bingham, former CEO of Cadence Design Systems; and Ajay Shah, managing partner of Shah Capital Partners, a private equity firm. At one time, Shah worked for archrival Solectron, where he ran its Technology Solutions business and eventually became a director. Shah co-founded SMART Modular Technologies, where he served as president and CEO until it was acquired by Solectron in late 1999. Leaving the Flextronics board are Michael Moritz and Patrick Foley.…Solectron has appointed Dr. Linda Capuano as senior VP of design and engineering, a new position created to enhance the company’s design and engineering offerings. Dr. Capuano joins Solectron from Advanced Energy Industries, where she was an executive VP for corporate marketing and global sales and services. Before that, she led worldwide engineering strategy at Honeywell….CIMTEK (Burlington, Canada), a functional test and design company, has named Stan Smith president and CEO. Most recently, Smith served as president and CEO of Open Ratings, a provider of supplier performance management services. Prior to that position, he was VP of worldwide field operations at Agile Systems….Peter Harper has resigned from his position as CFO of Suntron (Phoenix, AZ) to accept a job with another company. He said his departure should not be viewed as a negative reflection on the company. James Doran, controller and chief accounting officer of Suntron, has been named interim CFO….Tony Musto has left Reptron Electronics (Tampa, FL), where he served as VP of sales and marketing, to head up sales at Progeny International, an independent distribution and sourcing company with operations in the US and Asia. North American headquarters are in Tampa, FL….EMS provider Electronic Systems, Inc. (Sioux Falls, SD) has announced three promotions. Founder Leo Reynolds has moved up to vice chairman of the board. Gary Larson has succeeded Reynolds as president, while Steve Hillesheim has been promoted to director of program man-agement….Peter Schmidt has joined consulting firm Venture Outsource Group (San Jose, CA) as senior design consultant. President of a design firm bearing his name, Schmidt has worked in a number of electronics industry segments.

Restructuring continues…Celestica will close its Little Rock, AR, plant at the end of Q1 2006. This is one of six Celestica plants slated for closure in the Americas under the company’s current restructuring program. The provider also plans to cease operations at three plants in Europe.

Last Word

Back to the Old Ways…Almost

Time was when OEMs had design and manufacturing under one roof. You had design, prototyping, pilot production and production all together. But outsourcing changed all that. In fact, a case can be made that for all of the benefits of outsourcing, time to volume was not one of them. As outsourcing progressed, OEMs started using multiple providers, in some cases a low-volume house for prototypes and early production and a high-volume provider for mature designs. OEM supply chains became even more complicated and potentially harder to manage as outsourced production moved into low-cost geographies, while OEM design activities, NPI and early production remained near home. All of this complexity worked against time to volume.

A few years ago, when it was apparent that volume production in low-cost regions was winning the hearts of many OEMs, global providers began doing away with early production in high-cost locations. There was no more waiting six months for manufacturing to stabilize in the US before transferring production to a low-cost site. Increasingly, products went from OEM design to an NPI center in a high-cost location directly to volume production in a low-cost EMS site. As time went on, pilot runs in some cases were moved to low-cost facilities in order to reduce handoffs and capture more cost savings.

Still, OEM design and EMS NPI activities usually took place in one region, and production in another. From a time-to-volume standpoint, this arrangement was not ideal. OEM and EMS organizations were still passing design information back and forth, and handoffs had not disappeared.

More recently, two things have occurred to better integrate front end activities with manufacturing. First, more and more OEMs are amenable to outsourcing design activities. Second, global EMS providers are putting more and more design resources in low-cost regions where the bulk of their manufacturing is located. So now, when an OEM outsources design activities along with manufacturing, both functions can take place in the same region within the same organization. In effect, design and manufacturing are being reunited.

For example, Shanghai, China, has become the location of Jabil Circuit’s largest design site worldwide. The provider is doing new product development, design work and NPI in the China location. So Jabil is making it possible for customers to have their products designed and manufactured in a low-cost region. It’s an attractive proposition because handoffs are minimized, and costs can be lowered in both the design and manufacturing phases. The company says design changes are facilitated by having design located in the region of manufacturing. But OEMs still want local contact with their providers, and Jabil locates project managers and architects near customers.

The latest phase of outsourcing has made it possible to bring design and manufacturing back together, except that this union can now be made in a low-cost region. As a result, providers can streamline product launches while saving the customer engineering and production costs. Sounds like the OEM formula of old, but with a low-cost twist.

Copyright 2005 JBT Communications. Unauthorized distribution is prohibited.

MMI September 2005

MMI November 2005

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