MMI September 1998
EMS Companies Re-Engineer the Supply Chain
Three ways to hook up a supply chain
If there is a single, overarching issue among OEMs and their suppliers, it has to be optimizing the supply-chain. What quality was to late ’80s and early ’90s, the supply chain is to the late ’90s and the new millennium. It’s simple: if the supply chain is not configured properly, it creates time and inventory penalties. Increasingly, OEMs are unwilling to live with those penalties.
But building products to order isn’t the complete answer if it forces suppliers into carrying extra inventory to make the BTO process work. Somebody still has to pay. And that supplier inventory likely depends on questionable forecasts. So there’s lots of activity among suppliers and their customers to improve communications, develop closer relationships, share MRP data, try new software and pursue other such tactics.
Tactical approaches to optimizing the supply chain certainly have their place. But supply chain tactics are not the subject of this article because strategic steps are also being taken. Now operating at the top of the supply chain, EMS providers are in a position to reconfigure it. And some have. This month MMI looks at three supply-chain strategies that have emerged within the EMS industry. They are vertical integration, colocation and corporate affiliation. While differing in implementation, each strategy is aimed at supplying materials to manufacturing in a more integrated, responsive manner.
The EMS providers that have adopted one of these strategies also create a means for separating themselves from the rest of the industry.
Vertical Integration Is Back
Over the last few years, EMS companies in general have become more vertically integrated as they have moved into box-build work. But some EMS providers have consciously gone further with vertical integration by internally producing more of the material they use. Although no provider produces everything it needs for manufacturing — those days are long gone — some providers have vertically integrated large portions of the supply chain.
For a conspicuous example of a vertical integration strategy at work, take Sanmina. The company has long adhered to a strategy of producing the raw boards and backplanes it uses in contract manufacturing. Indeed, it is no accident that Sanmina’s intends to acquire a company with basically the same strategy — Altron. (See p. 4.)
Sanmina believes its vertical integration strategy “is a critical factor to our success and certainly looks for businesses that support that strategy,” says Bern Whitney, Sanmina’s CFO.
Still, the purest example of vertical integration in the EMS industry may very well be K*TEC Electronics, the contract manufacturing subsidiary of distributor Kent Electronics. At K*TEC in Sugar Land, TX, not only do board assembly and box build take place under the same roof, but also cable assembly, plastics injection molding, battery pack production, sheet metal fabrication and powder painting.
Why would a CM integrate to this extent? K*TEC can cite at least four reasons. The first is flexibility, which can be illustrated by way of example. K*TEC has project where the customer is outsourcing plastics to a Taiwanese source because of lower labor rates. “But suddenly they said we need 3000 a day instead of 1000. Now the constraint of that source being halfway around the world is causing a problem,” says Mike Gibbons, executive VP and GM of K*TEC. “We’re having to air freight material in here, which cancels out all of the landed cost advantages. That customer, as so many customers have done, is transferring the tools here so that we can shoot the plastics here.”
Secondly, vertical integration eliminates nonvalue-added steps such purchasing, shipping, incoming inspection and warehousing that are associated with buying materials on the outside. Otherwise, these steps appear in the total landed cost to the customer.
Since K*TEC is not buying the parts, its does not pay for a parts supplier’s margin. “All that margin stacking gets taken out,” says Gibbons.
The fourth reason stems from doing build-to-order work, where a base unit may take different colors, labeling, firmware, software and documentation. “Because we control all those pieces, it allows us not to build a lot of excess inventory, which is the name of the game in this business,” says Gibbons. For instance, K*TEC can change color on its powder paint line in 30 minutes so there’s no need to source enclosures in different colors. “We can shoot exactly what we need in small quantities and go straight to the line literally with no logistics,” he adds.
K*TEC points to still other benefits of vertical integration. The customer deals with a single supplier rather than multiple sources. And if there is a problem with a part, a vertically integrated manufacturer can take care of it right away, rather than having to go through an outside supplier.
Finally, vertical integration gives K*TEC pricing latitude. Gibbons can offer insignificant items in a BOM at or below cost, if it means the difference between winning and losing a contract.
Vertical integration also appeals to Photomatrix, which combines a Manufacturing Group offering EMS and a Products Group that makes scanners. The Carlsbad, CA, company intends to vertically integrate the Manufacturing Group by adding capability in plastic injection molding, PCB fabrication and metal fabrication. Photomatrix says this plan will increase the range of value-added services and products that can be sold by the Manufacturing Group, and should also result in better operating margins for the Products Group as their manufacturing requirements can increasingly be met in-house.
Offering a different spin on vertical integration is box builder Electronic Manufacturing Systems of Longmont, CO. Although the company does not handle board assembly for its box build programs, it does manufacture the cable assemblies and metal enclosures that go into those boxes. “It’s a different approach to vertical integration, depending on where you want to end up,” says Dick Grieve, executive VP of customer management at EMS. And this company wants to end up with business like large servers and big storage boxes, “where other things besides the board contribute to a high percentage of the bill of material and the complexity of the program,” he explains.
Vertical integration also comes into play when companies that already build products for OEM or retail channels decide to enter the contract manufacturing business. Both Key Tronic, which is branching out from the keyboard business (Aug., p. 2), and VTech, which manufactures telecom and electronic learning products in China, have entered the EMS business with vertically integrated capabilities such as injection molding. Indeed, as a supply-chain strategy vertical integration tends to arise with CMs that did not start out in the classic fashion as board assemblers.
But like any strategy, vertical integration is not without risk. Equipment such as injection molding machines must be paid for, both in terms of purchase price and start-up costs, and then kept at or near full utilization. A sudden downturn in demand from customers that are heavy users of the equipment can hurt utilization and drive up costs. A vertically integrated CM must also maintain a broader set of competencies, including technical staff, than required for a typical CM.
Aren’t these risks precisely what drove OEMs to outsourcing in the first place? K*TEC believes its situation is different. “We balance our capital utilization across the technical industries of 30 customers,” responds K*TEC’s Gibbons. “That’s how we stay fully absorbed and how we get the maximum utilization out of the equipment.”
Colocation Catching On
Bringing suppliers on campus or within a facility — also known as colocation — becomes a second EMS strategy for improving the supply chain. Like vertical integration, this strategy is designed to integrate the supply chain, eliminate unnecessary activities and make it more responsive. Colocation has gained popularity especially in emerging markets that lack local suppliers.
Perhaps the leading proponent of a campus strategy for colocation is Flextronics, which has applied this strategy to its industrial parks in Hungary, China and Mexico. Offering one of the most extensive uses of colocation, the campus in Sarvar, Hungary, obtains plastics on site from Ecoplast, metal stamping from Pressmatik/Itochu, polystyrene packaging from Hirsch, cartons from SCA Packaging and discrete components from Philips. This list may not be complete as the site has been working to bring on capabilities in cables and printing of color packaging and manuals.
In Guadalajara, Mexico, where Flextronics just added 190,000 ft2, the company has expanded its group of onsite suppliers. In addition to plastics supplier DTM and distributor Insight, Flextronics has brought in Bermo, a sheet-metal house and Cookson Speedline, an equipment supplier. According to Flextronics, Mexico needs a stronger supply base in order to compete more effectively against Asian sources. “To the extent that you can fix that supply base, you’re just going to have more and more things going to Mexico,” says Mike McNamara, Flextronics’ president of operations for the Americas.
A campus partner comes in handy especially when you’re moving large quantities of material into manufacturing. McNamara recalls one project that required 300 skids of plastics per day. A remote supplier even if it were just five miles away would have added lots of unnecessary activities. “Think about the coordination, the activity tracking, moving trucks back and forth, loading them, unloading them, and providing warehouse space as opposed to having a real JIT kanban operation out of a campus partner,” he points out.
Flextronics has taken its colocation strategy a step further in that it owns the plastics suppliers on its Mexico and Hungary campuses as well as holding a 40% stake in FICO, a plastics company with an operation on Flextronics’ Doumen, China, site. The EMS company also owns Astron, a PCB fabricator that is colocated on that site. “Printed circuit boards and plastics tend to be very important in terms of the whole front end design of the product,” explains McNamara. Owning those two commodities gives Flextronics an edge in understanding how to manage and design them, he adds.
“If you look across those subsidiaries, I suspect that no more than 20 to 30% of the overall production of those factories is going into Flextronics facilities,” says McNamara. Flextronics believes the diversified base of outside customers in its subsidiaries acts to mitigate the downside risk often associated with vertically integrated companies.
Flextronics is not the only EMS provider in Mexico or China with a colocation strategy. WKK’s complex in Changping, Guangdong, China, contains a plastics factory, which operates as a joint venture with Nissin Plastics of Japan. Also in China, The Surface Mount Technology Centre, a Canadian CM, has announced a new facility outside of Shanghai where plastics and cables will be supplied on site by SMTC’s joint venture partner, Nadfinlo Plastics (see p. 4).
Mexico is also seeing more colocation. In February, NatSteel Electronics set up a metal stamping operation to operate as new business division on the company’s Guadalajara site. What’s more, Pemstar expects to begin colocation as part of its expansion there. “We’re in the process right now of pulling the trigger on 55,000 ft2 in Guadalajara, of which the plan will be to add sheet metal bending and plastics injection molding by putting that into the facility with a relationship with other component suppliers,” says Gary Lingbeck, executive VP of sales for the Minnesota-based CM.
Still, colocation can be practiced elsewhere. Puget Plastics, an injection molder, has an operation on Solectron’s box-build site in Newark, CA, while Hadco, the raw board supplier, maintains a cage there.
But no strategy is without risk. So what are the concerns with colocation? For one thing, the strategy is not cost-free. Even though a CM might lease space to its colocated suppliers, there is still an initial investment in land. And someone has to pay for brick and mortar. Secondly, supplier selection becomes critical. “When you do this, you have to pick the right partner the first time out because it’s very expensive to switch over,” says Pemstar’s Lingbeck.
Affiliated Companies Can Act As One
An EMS provider can also gain more control over the supply chain even when suppliers are not located next door. In this third strategy, which MMI calls corporate affiliation, a provider sources materials and services from companies that are affiliated with it through common ownership but located in different places.
Perhaps the most visible example of corporate affiliation can be seen in The DII Group’s well-publicized strategy of linked marketing. Seven DII companies can supply services or materials. An EMS customer can get contract manufacturing from Dovatron, design services from Design Solutions, raw boards from Multek, ASICs from Orbit, stencils from IRI, test fixtures from TTI Testron, and test programming from Functional Test Solutions. DII also adds two assembly equipment companies to the mix.
Mark Herbst, DII senior VP of corporate sales and marketing, says the companies “are horizontally integrated. It’s not true vertical integration because all the companies stand alone.” So there’s no force fitting of customers into a vertically integrated solution. “Combinations [of companies] are brought together that make sense for the customer’s solution,” he explains.
With this approach, DII is selling time savings as a primary benefit. DII companies can be brought together early in the design phase to perform design for board technology, design for manufacturing and design for test, all in a closed-loop fashion. The company recently won over a customer when it demonstrated the ability to produce working prototypes from scratch in seven weeks.
This year, DII expects about 40% of its business to come from linked marketing.
The MATCO Electronics Group, also practices corporate affiliation. Based in Vestal, NY, MATCO Electronics operates 13 companies, located in eight states and Mexico, that provide contract manufacturing and associated services including design, board fabrication, cable assembly, and demanufacturing.
Still other EMS operations are affiliated with companies that can supply them. Take Mack Technologies of Marlborough, MA. Its parent company, Vermont-based Mack Molding, is also one of its plastics suppliers. Then there’s Elamex. Last year, the Mexico-based CM acquired Eurotec, a supplier of plastics and stamped metal also located in Mexico.
One of the advantages of Mack Technologies’ affiliation is that it can call upon the technical resources of its parent. And the availability of those resources is not contingent upon Mack Molding receiving an order. “If we run into [tooling] issues on the floor or with another plastics supplier, we can utilize Mack’s expertise in terms of helping to identify the issues,” says Ron Jellison, president of Mack Technologies.
Here’s another example of that advantage. Mack Molding helped direct the basic enclosure design for a Mack Technologies customer even though Mack Molding did not get the business. “What ultimately was designed in as best for the customer and their requirements really did not fit Mack Molding’s model going forward. Now we could not have done that with an outside supplier because the outside supplier would have been heavily influenced to ultimately end up with a design that utilized their capability,” Jellison points out.
Working with an affiliate like Mack Molding also means communications are well established. “It’s easier for us to manage Mack Molding than any other supplier we have, just from a communication side of it,” he says.
But like the other supply-chain strategies, corporate affiliation has its drawbacks. Unless companies are colocated, there still is distance to overcome between supplier and CM. And distance generally creates logistics costs.
With a network of affiliated companies, another issue arises. “Our strategy is only as good as the weakest link in the chain,” says DII’s Herbst. “Where one company has a solid relationship with a customer, it can be put at risk if one of the sister companies fails to perform.”
Moreover, supplier performance is key to all three supply chain strategies. In return for certain benefits, each strategy relies on using pre-existing sources. If these sources continue to meet requirements, both technical and economic, into the future, then you’ll be hearing a lot more about supply chain integration in the EMS industry.
Sanmina and Altron To Merge
Through a merger agreement, Sanmina (San Jose, CA) intends to acquire Altron (Wilmington, MA), a direct EMS competitor in the backplane side of the business, in a stock swap worth about $219 million. Altron will become a wholly owned subsidiary of Sanmina. The companies plan to close the deal by the end of November, but the merger is subject to government review and other conditions.
Each share of Altron stock will be converted into 0.4545 share of Sanmina stock subject to a minimum share value of $13.635, and the exchange ratio will be adjusted, if necessary, to achieve this minimum value. If Sanmina’s stock price goes below $24, then both parties have the right to reconsider the deal.
This deal is being presented as a merger between Altron, which is strong on the East Coast of the U.S., and Sanmina, which is strong on the West Coast. Altron operates three plants in Massachusetts and one in California.
Sanmina does not know yet whether any consolidation of plants will take place. “Management is reviewing the organization of both companies to determine the best manufacturing strategy going forward,” says Bern Whitney, Sanmina’s CFO.
But Sanmina does intend to go through with Altron’s deal to purchase equipment and hire people from Hewlett-Packard’s Richardson, TX, facility (August, p. 5).
SMT Centre To Open in China
The Surface Mount Technology Centre (SMTC), a private CM based in Toronto, Canada, is expanding into Asia through a joint venture to set up a new facility in Kunshan, China. Located just outside of Shanghai, the facility is due to be operational by Q4 and will start out with two high-speed SMT lines.
SMTC and Nadfinlo Plastics (Hong Kong), a supplier of plastics and cable assemblies, have formed the joint venture, known as SMTC Asia. The Canadian CM will hold a majority ownership in the venture. Nadfinlo, which has operated in China for many years, has facilities in Kunshan as well as Shenzhen. SMTC plans to take advantage of Nadfinlo’s experience in China in such areas as importing, exporting, human resources, facility management and government relations. “We’re also planning to leverage off their plastics capability and cable assembly as well,” says Paul Walker, president of SMTC.
Nadfinlo will provide the new facility with plastics and cables in a colocated arrangement. “China manufacturing tends to be a campus-type approach,” Walker points out. “Cables and plastics will be on the same campus.” (See article on p. 1).
Since SMTC already operates in North America and Europe, the new Asian facility will complete a triangular strategy to span the world’s three major markets. “In the tier-two space, not that many companies can say they have the triangle covered,” Walker remarks. “It should end up being another differentiator for us.”
SMTC reported sales of $189 million last year and ranked 30th on the MMI Top 50.
The CM is treating its joint venture as strictly a greenfield operation. “We have existing customers who have talked about wanting a facility there as we go forward. It’s kind of a chicken-and-egg thing. You must have a facility in place before you can market it,” explains Walker.
Initially, the new facility will only export from China. But Walker expects that customers will ask for shipment into China, a change that must be approved by Chinese authorities. “I believe within six to nine months we will be shipping to customer facilities in China,” he says.
“The management of Nadfinlo and SMTC have known each other for seven years. This relationship combined with Nadinflo’s experience in operating facilities in China and SMTC’s expertise in high-volume assembly will prove to be the drivers of success in this joint venture,” states Wally Sze, VP of operations at Nadfinlo.
Indeed, Sze at one time worked for SMTC in Toronto and is familiar with SMTC’s team-based model that will be replicated in China. This prior relationship “gave us the confidence to expand into this new marketplace,” Walker reports.
Through the joint venture, Nadfinlo not only will get to supply the new facility, but also will gain opportunities to sell elsewhere. According to Walker, Nadfinlo does not have a sales presence in the electronics markets of North America and Europe. “They’re looking to leverage off our contacts and markets in the electronics sector,” he reports.
Did the Asian financial crisis play a role in this deal? No, says Walker. “We’ve been investigating China for the better part of two years now.”
DII Group Lands in China
Late last month, The DII Group (Niwot, CO), whose holdings include both a bare board fabricator and a contract manufacturer, acquired Greatsino Electronic Technology, whose operations in China combine both activities. DII paid an initial amount of $44 million, and the total price could go up to $84 million based on a one-year earnout.
Greatsino’s sales are running at an annual rate of about $40 million, of which $35 million comes from board fab. Contract manufacturing accounts for just $5 million. But DII says this number is misleading because all of this contract manufacturing consists of consignment work.
According to DII, Greatsino is in a ramping mode and crossed into profitability earlier this year. The target for the earnout is about $13 million, which is both a pretax and aftertax number. The China operation pays no tax in 1999. Based on a maximum price of $84 million and an earnings target of $13 million, one can calculate a price-to-earnings ratio of 6.5. “That’s a very good price,” says Alexander Blanton, an analyst at Ingalls & Snyder (New York, NY). He adds, “Very few growing companies [like Greatsino] would be available for that price.”
The Greatsino operation gives DII a 76,000-ft2 SMT assembly building with six SMT lines and a 144,000-ft2 raw board facility on a campus in Zhuhai, which sits in China’s Guangdong Province. While current employment is 900 people, the two-year-old campus contains dormitories and ancillary buildings that can house 6000 employees. In addition, DII is negotiating to buy a 360,000-ft2 expansion building, currently under construction, for about $10 million. The company is planning to lease half of the building back to the seller for three years with a one-year option.
DII’s contract manufacturing subsidiary, Dovatron International, will operate the contract assembly side of the acquisition under the name Dovatron China. “Although the current level of CEM business at Dovatron China is modest, this new site fills a significant geographical need in our worldwide supply strategy. This has been our highest expansion priority,” states Dermott O’Flanagan, DII Group senior VP and president of Dovatron.
The deal comes with a two-year agreement by which Dovatron China will supply the prior owner on a consignment basis. Counting the seller, Dovatron China will start with four customers. About 25% of its output will be targeted for consumption in China. On the export side, board assemblies from Dovatron China go into Bell South cordless telephones and other consumer products.
As for the acquired board fab unit, it will fall under the control of Multilayer Technology, DII’s raw board subsidiary, and take the name Multek China. “We’ve never had high-volume, low-cost manufacturing like this facility presents,” declares Sharon Sweet, VP of DII investor relations. She adds, “We think there will be a big value add there.” DII reports that Multek China can supply a “significant portion” of Dovatron’s worldwide PCB requirements.
Unlike SMTC’s China deal, the financial troubles in Asia did figure in this transaction. “It was available to them [DII] just because of the Asian crisis,” says Blanton, the analyst. “It’s a good example of why the Asian crisis is not all negative.” He adds, “There are lots of properties available in Asia now at distressed prices to U.S. companies that want to expand over there.”
Economic problems had put the seller in need of cash, which presented DII with a buying opportunity. Greatsino was part of Universal Appliances Ltd., a public company in Hong Kong and a maker of consumer, household electrical and telecom products.
Following this deal, DII plans to relocate its Asia-Pacific headquarters from Singapore to Hong Kong.
Another CM bound for China...Pemstar (Rochester, MN) expects to occupy a new 40,000-ft2 facility in Tainjin, China, on Oct. 1. Expandable to 120,000 ft2, the new plant is somewhat larger than originally planned (June, p. 6). In addition, Pemstar is going ahead with a new 55,000-ft2 facility in Guadalajara, Mexico, to replace 15,000 ft2 of space currently in use there. Also expandable to 120,000 ft2, the new Guadalajara plant is being earmarked for colocation of suppliers (see article on p. 1). Pemstar anticipates that sales this year will reach $210 million, up from $164.7 million last year.
CM expands into Silicon Valley...Practical Technologies, Inc. (PTI), a quick-turn house based in Baltimore, MD, has opened a 30,000-ft2 facility in Sunnyvale, CA. The company had considered enlarging its existing Baltimore facility, but decided in favor of geographic expansion. “I want PTI to react quickly to our customers’ constantly changing requirements,” states Dilip Dalvi, PTI president and CEO. “And for that reason, I chose a growth strategy that will keep PTI facilities small and close to our customers.” Besides this expansion, PTI is also broadening its service menu by adding design capabilities. The CM’s strategy is to offer smaller companies a one-stop solution from design through final assembly and pack-out. Annual sales of privately-held PTI are between $15 and 20 million. Most of PTI’s business is coming from customers in telecom, networking and point-of-sale terminals. The company employs about 125 people.
Elcoteq To Acquire Elevator Works Bolsters R&D
Elcoteq Network Corp., a public EMS company based in Lohja, Finland, and Kone Corp., also based in Finland, have signed a preliminary agreement for the transfer of Kone’s elevator electronics manufacturing operations to Elcoteq on Oct. 1. Located in Hyvinkää, Finland, these operations supply Kone’s worldwide requirements for elevator electronics. The Kone unit has an annual manufacturing value of FIM 100 million and employs roughly 50 people, who will be transferred to Elcoteq.
Under the agreement, Elcoteq will take over electronics manufacturing at Hyvinkää and operate alongside Kone’s elevator factory. But the EMS provider will evaluate the possibility of transferring production to its Helsinki plant, which specializes in industrial electronics. The two companies also intend to conclude a long-term delivery agreement.
This agreement signifies a closer relationship with Kone, covering the entire product cycle. Kone is a longtime customer of Elcoteq, whose contract work for Kone includes remote monitoring systems for elevators.
Kone says it is concentrating on its core expertise — its elevator operations. According to the company, this asset transfer to Elcoteq will ensure competitive cost and quality levels and the continued development of the manufacturing unit. Reportedly, Kone is the world’s largest escalator company and the third largest elevator company.
Elcoteq points out that this agreement supports its strategy to boost its industrial electronics manufacturing capacity.
Earlier, Elcoteq signed a joint technology development agreement with Elektrobit, a Finnish company involved in research and design for datacom and industrial electronics. Elcoteq also acquired a 10% stake in Elektrobit’s subsidiary Extrabit, which has mechanical and layout expertise and can produce prototypes and small runs for R&D. These capabilities will strengthen Elcoteq’s product development services unit set up in February, says the company.
Q2 sales for Elcoteq totaled FIM 465.5 million, up by 39% from the prior Q2. For the first six months, net income was FIM 8.3 million on sales of FIM 918.1 million. In that period, the mobile-phone sector accounted for 71% of sales.
What’s more, in June Elcoteq landed two contracts, each from a different customer, to manufacture GSM mobile phones. Volume production is expected to start in Q4.
The company’s new factory in Pécs, Hungary, will start production in October with about 200 people, while its facility in Monterrey, Mexico, is now scheduled to begin manufacturing in Q1 1999 (see June, p. 5). Also, the factory in Vaasa, Finland, has received ISO 14001, the environmental certification.
SCI To Buy Mexican Assets from Ericsson
Also finishes Monterrey plant
SCI Systems (Huntsville, AL) is gaining capacity in two locations in Mexico. SCI and the Mexican subsidiary of Ericsson Telecom, AB (Stockholm, Sweden) have agreed that SCI will purchase from Ericsson certain manufacturing assets in Mexico City. In addition, SCI has completed a new greenfield facility in a Monterrey suburb called Apodaca.
In the Ericsson deal, SCI will provide manufacturing services to Ericsson under a multiyear supply agreement and has offered employment to affected Ericsson workers. Acquired activities will be consolidated into SCI’s existing Mexico City operations.
This announcement follows from a March 1997 agreement in which Ericsson selected SCI as one of Ericsson’s primary manufacturing partners. The 1997 pact was expected to lead to a series of definitive agreements under which SCI would purchase certain Ericsson assets and in turn provide manufacturing services to Ericsson (April ’97, p. 1). Primarily being outsourced were board assemblies for a family of telecom network switches. SCI transferred work from Ericsson’s site in Norrkoping, Sweden, to SCI plants in Scotland and Hungary.
In addition, SCI announced last year an agreement whereby SCI intended to take over Ericsson’s board assembly operation in Leganis, Spain (July, p. 3). The two companies are still operating under a letter of intent regarding that operation.
At 100,000 ft2, the new plant outside Monterrey represents the first phase in a series of planned expansions on the site and will employ several hundred people. The facility will primarily serve multinational OEMs and their end markets in the U.S. Initial production will include direct broadcast satellite receivers for a large European multinational and subassemblies for a family of medical products for a large U.S. multinational. SCI says the plant will complement its facilities in Guadalajara and Mexico City.
Already supporting SCI’s Mexican operations, the SCI Logistics Center in San Antonio, TX, will also serve the Monterrey plant.
Another divestiture in the works…Hayes Corp. (Norcross, GA) has said that as part of its restructuring program it intends to sell its Norcross, GA, manufacturing operation to a contract manufacturer during Q3. The company believes that substantial capital and expense reductions can result from such a transaction. P.K. Chan has been leading the effort to sell the operation. Hayes, which markets modem products and remote access servers, was formed from the December 1997 merger of Hayes Microcomputer Products and Access Beyond.
Celestica Adds Accu-Tronics in NC
Celestica (Toronto, Canada) has acquired Accu-Tronics of Raleigh, NC, a CM specializing in quick-turn prototyping and high-complexity work. According to Celestica, the acquisition enhances its capability to provide seamless design, prototyping and global manufacturing services.
This acquisition is an integral part of Celestica’s Customer Gateway Centre strategy, about which details have not yet been released. But a recent industry trend has emerged with EMS providers locating centers near customers to provide them with front-end services during new product development (June p. 1). These centers can act as a point of entry for new programs, which later on can be transferred to remote sites for volume production.
Founded in 1990, Accu-Tronics is a full-service CM operating from a 25,000-ft2 facility. Offerings include prototyping; high-complexity, low-to-medium volume assembly; and rework and repair. All Accu-Tronics employees have been retained by Celestica.
“Accu-Tronics is a perfect fit for Celestica as they share a similar commitment to customer satisfaction and technology leadership,” states Eugene Polistuk, president and CEO of Celestica.
“Celestica has the global reach, state-of-the-art systems, engineering resources and worldwide purchasing leverage — everything that our customers demand,” states Scott Brown, president of Accu-Tronics. “Combining forces with Celestica will enhance our ability to better serve our customers’ needs.”
More quick-turn prototyping centers…EA Industries (West Long Branch, NJ) has opened its second Tanon EXPRESS center, located in Fremont, CA, and its third EXPRESS center, located in Methuen, MA.
Other deals done…EFTC (Denver, CO) has closed the previously announced acquisition of the Wilmington, MA, card assembly operation of Bayer Corporation’s Agfa Division (Aug., p. 5). Besides supplying card assemblies for Agfa’s electronic prepress systems, EFTC will also provide cards to be used by Bayer’s Diagnostic Division, which produces medical diagnostic equipment. The EMS company has entered into three-year supply agreements with both divisions….Electronic Components & Systems (ECS) of Tucson, AZ, the contract manufacturing subsidiary of The Hartcourt Companies (Los Angeles, CA), has acquired Elan Manufacturing, a competitor in Fremont, CA, with a 15,000-ft2 facility. The purchase price was $1.2 million, which was paid in stock and notes. With facilities in Arizona and Mexico, ECS will now have a presence in Northern California. Including Elan’s sales, ECS projects that total revenue should increase to $22 million for the next 12 months, and the melding of Elan into ECS will result in an overhead reduction of about $800,000. “This is but the first step in our campaign to roll up competitors in this industry. We presently are holding talks with two other acquisition candidates and hope to be able to complete these acquisitions by year end,” states Jim Pruzin, president of ECS. Dr. Alan Phan, chairman and CEO of parent company Hartcourt, comments, “With one more major acquisition, ECS will be ready for an IPO.” ECS reports that results for the first half of the year were not typical because of a delay from General Instruments, a major customer.
Deal falls through…Last month, Pen Interconnect (Salt Lake City, UT), an interconnect product provider, and TMCI Electronics (San Jose, CA), a supplier of enclosures, cable harnesses and other products, have called off their merger because of market conditions (July, p. 7). TMCI had intended to subsume Pen through a stock swap, with the aim of creating a complete outsourcing solution for finished products. Pen says it will “continue to interact” with TMCI through an existing sales and manufacturing agreement.
EMS alliance…Michael Carr Enterprises of Salem, OR, and CEI of Singapore have entered into a sales and manufacturing alliance. This collaboration will require MCE to develop North American customers that will use its 20,000-ft2 operation for new product development and introduction. Production will then be shifted to CEI’s 30,000-ft2 facility in Batam, Indonesia. CEI will send a high-volume SMT line to MCE to facilitate the transfer of products from Oregon to Indonesia. This alliance results from the desire of Planar Systems (Beaverton, OR) to have a domestic source to launch new products and assist in their development. Chuck Logie, director of materials for Planar, initiated talks between the two companies and pledged Planar’s support of the partnership.
New programs…Ericsson Infocom has chosen Manufacturers’ Services Ltd. (Concord, MA) to provide PCA repair services for select products for Europe, the Middle East and Asia….Hitachi Semiconductor, America has selected Celestica to provide manufacturing services for memory module products. Celestica will start production during Q4….SMTEK (Newbury Park, CA), a subsidiary of publicly-held DDL Electronics, has won a long-term contract to manufacture customized electronic assemblies for Haas Automation (Oxnard, CA), a CNC machine tool company. The annualized value of this contract is expected to grow to more than $10 million. SMTEK offers cradle-to-grave services for low-to-medium-volume products of high complexity….Pantronix of Fremont, CA, an IC packaging house, and NovaWeb Technologies, also based in Fremont, have formed a strategic alliance calling for Pantronix to serve as the primary manufacturer of NovaWeb’s computer networking products. NovaWeb designs products that allow multiple users to connect to the Internet over a single phone line. In addition to manufacturing PC cards on a turnkey basis, Pantronix will offer logistics and fulfillment services….Direct marketer Insight will sell Monorail’s business and consumer PCs, which SCI will build to Insight’s orders and ship directly to its custom-ers….ZEVEX International (Salt Lake City, UT) has entered into an agreement to manufacture an automatic defibrillator called the Powerheart from Cardiac Science (Irvine, CA). Earlier, the company had contracted with another medical CM to complete development and begin production of this device (Dec.’97, p. 7).
SigmaTron Facilities Damaged by Flood
Last month, a flash flood caused by tropical storm Charley hit Del Rio, TX, and Acuna, Mexico, where SigmaTron International (Elk Grove Village, IL) maintains manufacturing and warehousing operations. Machinery, equipment and inventory sustained severe damage at one of SigmaTron’s three manufacturing locations in Acuna. The flood also resulted in significant damage to raw material and finished goods inventory in the CM’s warehouse in Del Rio.
Manufacturing operations in Mexico were shut down on Aug. 25, but by the next day had resumed at about 50% of prior levels. SigmaTron is evaluating production alternatives, including using its operations at other sites. Besides manufacturing in Mexico, the company operates facilities in Elk Grove Village, IL, and Las Vegas, NV, and has an EMS affiliate, SMT Unlimited L.P., in Fremont, CA.
SigmaTron intends to take the necessary short-term steps to support customer requirements without suffering a significant financial impact in the long term. Management believes that losses are substantially covered by the company’s general insurance, including its business interruption coverage. The company has pledged all of its resources to rebuild as soon as possible.
IEC To Close Alabama Plant
Completes Irish acquisition
IEC Electronics (Newark, NY) will shut down its Arab, AL, plant within 90 days. Yet the CM is expanding into Europe with its acquisition of a contract manufacturing operation in Ireland.
The 104,000-ft2 plant in Alabama employs about 230 people, nearly all of whom will be laid off. A few employees will be relocated. IEC will transfer a majority of the plant’s equipment to other locations.
“Primarily what happened was we made a lot of operational improvements at the facility. We really were not able to build the customer base to turn it into a profitable operation in that location,” explains Diana Kurty, IEC’s CFO.
“We see the closing of our Alabama facility, which has significantly contributed to the recent losses, as an important step in returning IEC to profitability over the next few quarters,” states Russell Stingel, chairman and CEO. “This closure will result in a one-time restructuring charge in the range of $2 to $5 million on a pretax basis.” He says IEC will then be in a better position to utilize the capacity at its facilities in Newark, NY, and Edinburg, TX, as well as the recently acquired operation in Ireland.
The company obtained its Alabama operation in 1994 through the acquisition of Accutek.
IEC expects that Alabama customers for the most part will let IEC move their work to other IEC locations. “We think many of the customers will transfer, not all, but many,” says Kurty.
On Aug. 31, IEC reported it purchased selected assets of Ohshima Electronics Manufacturing Ltd., a board assembler with a 37,000-ft2 facility in Longford, Ireland. The deal was announced earlier (August, p. 4).
IEC says this acquisition opens up many opportunities that were not available to it as a U.S.-based supplier and is optimistic about growing this business quickly.
“Our strategy of customer portfolio diversification will be enhanced by our new Irish operation, since its important customer base is complementary to the customers we now serve in the U.S.,” states Stingel.
IEC has renamed the operation IEC-Ireland.
Meanwhile, Stingel warns, “As a result of industry-wide weakness in demand for manufacturing services, our fourth quarter revenues may not equal the revenues of our third quarter. The resulting underutilization of capacity is affecting our margins, so that the company’s fourth quarter operating loss will be significantly greater than that of the third quarter.”
The layoff in Alabama will not be IEC’s first. The CM has undergone several work-force reductions, particularly in Newark, NY. Current employment totals slightly more than 1800, down from about 3100 at the end of last year.
More softness reported…Altron, which intends to merge with Sanmina (see p. 4), anticipates that financial results for its Q3 ending Oct. 3 will come in below analysts’ estimates. The CM expects Q3 revenue of $47 to $49 million, compared with $41.5 million in the prior Q3, and diluted EPS of $0.17 to $0.18, versus $0.22 a year earlier. Altron says the lower-than-expected results reflect overall weakness in the PCB industry and cited lower margins due to product mix and pricing pressure….Likewise, Sanmina expects that its Q4 results ending Sept. 30 will be lower than previous estimates due to shipment delays. The CM anticipates Q4 revenue of $190 to $195 million, compared with $160.6 million in the prior Q4. Diluted EPS are expected to be $0.38 to $0.39, versus a year-earlier $0.31 excluding one-time charges. These preliminary results are about 10% below analysts’ expectations. Sanmina still expects year-over-year growth of about 30% for fiscal 1999 sales and earnings….EFTC expects Q3 sales to fall short of analysts’ estimates of $60 to $61 million by about 10 to 12%. The company cited softness in the EMS industry in general and specifically, schedule changes for avionics-related products and a greater than expected decline in products related to semiconductor manufacturing equipment. While EFTC expects to have Q3 profits from operations with modest improvement in Q4, the company is evaluating cost reduction alternatives….Kent Electronics (Houston, TX) stated that in the first two months of its Q2 for fiscal 1999, it has seen lower sales and orders from its contract manufacturing business than had been previously expected. The fall-off in Kent’s cable assembly business, which serves computer and semiconductor equipment customers, has been greater than projected, but sales and orders from contract manufacturing customers in other industries are expected to increase on a sequential basis. The company is expecting Q2 gross margin from contract manufacturing to be significantly penalized by factors including ramp-up costs for new customers, underutilization of plant and equipment, and a change in product mix.
More financial news…NatSteel Electronics (Singapore) has privately placed 39.1 million new shares at a price of S$3.10. Net proceeds amount to about S$118.8 million ($67.9 million), of which about S$100 million will go toward the purchase of new plant and equipment and the expansion of facilities. The balance will be used for working capital. Placement shares represent 10% of the issued share capital in the company….SCI’s board has authorized the company to buy back up to 2 million shares of common stock and up to $100 million in principal amount on 5% convertible subordinated notes, due 2006….Last month, Sanmina was scheduled to retire 5 1/2% convertible subordinated notes, due 2002 and amounting to $86.3 million in principal outstanding. Note holders had the option of converting their notes into common stock at a price of $14.096 per share or having them redeemed automatically….EA Industries, whose stock is being delisted from the New York Stock Exchange, has arranged for its stock to be traded on the OTC Bulletin Board. The company says a convertible debenture offering will provide financing for start-up costs associated with new customers.
Some financial results…In fiscal 1998 ended Aug. 28, Solectron (Milpitas, CA) reported that sales grew 43% from the previous fiscal year to $5.29 billion. Net income for fiscal 1998 rose 26% to $198.8 million, while diluted EPS increased 20%. (See also table.)…For the fiscal year ended July 31, CMC Industries (Santa Clara, CA) posted sales of $302.0 million, up 41% over fiscal 1997. Net income came to $3.1 million, an increase of 95% over the prior year, while diluted EPS grew 91%….For fiscal Q3 ended June 30, Primetech Electronics (Dollard-des-Ormeaux, Quebec, Canada) recorded sales of $21.9 million Cdn, versus $20.1 million Cdn in the prior Q3. Net income from continuing operations rose 28% from a year earlier to $1.8 million Cdn….DDL Electronics reported that revenue for fiscal 1998 that ended June 30 increased to $53.3 million from $51.6 million in fiscal 1997. Net income totaled $1.1 million, excluding one-time expenses related to the acquisition of Jolt Technology. After these charges, net income amounted to $493,000, compared with a net loss of $868,000 in the previous fiscal year. (See also table.)… SeaMED (Redmond, WA), a medical CM, earned net income of $4.1 million on sales of $70.0 million for fiscal 1998 ended June 30. Sales and net income were up 34% and 52% respectively from fiscal 1997….The K-Byte Manufacturing Division (Tampa, FL) of distributor Reptron Electronics posted Q2 sales of $32.7 million, up 9% from a year earlier, while K-Byte’s gross profit declined to $3.1 million from $5.2 million in Q2 1997.
Nam Tai Makes Changes at the Top
Takes stake in Hong Kong firm
Nam Tai Electronics (Vancouver, Canada), which provides contract manufacturing in China, has hired Shigeru Takizawa as its new president and CEO and has promoted Tadao Murakami, former vice chairman and CEO, to chairman.
Takizawa joins Nam Tai in Hong Kong after spending 40 years at Toshiba Corp., where he was in charge of the engineering department. Besides serving in various senior management and executive positions at Toshiba, Takizawa has held senior posts at a number of Japanese industrial, technological and research organizations. Nam Tai expects that his connections can be utilized to its advantage.
The new CEO has had an ongoing relationship with Nam Tai for the last 20 years, since the company’s inception. In the past, Nam Tai has often sought Takizawa’s advice on engineering and product development processes.
Tadao Murakami, the new chairman, has replaced M.K. Koo, the founder of Nam Tai. Koo will assume the newly created position of senior executive officer, corporate strategy, finance and administration and will remain a director.
Nam Tai says it made these changes in recognition that it should be run by a strong team of professional managers to achieve growth and expansion. The company also points out that it has been training a second generation of management.
In other news, Nam Tai has agreed to pay about $10 million in cash for slightly more than 50% of the stock in Albatronics (Far East) Company Ltd., a manufacturer and distributor publicly traded in Hong Kong. Albatronics is mainly engaged in the trade and distribution of Sony semiconductors and CD mechanisms as well as OEM and ODM development, manufacturing and trade of consumer electronics. Manufactured products include CD and video CD players, digital cameras and audio amplifiers, which are sold to customers such as Sony, Aiwa, Panasonic and Fuji Film. Albatronics also carries out various R&D activities in Japan, holds an interest of about 20% in a consumer electronics company in China and has invested in joint ventures there including plastics and metal manufacturing, telecom products and wire bonding.
“Nam Tai and Albatronics are both involved in the distribution of electronics products and contract manufacturing employing similar production techniques,” states Tadao Murakami, the new chairman of Nam Tai. “With the exchange of technologies and research, mutual financial support, sharing of market intelligence and combined management expertise, there are tremendous synergies and opportunities for improved operating performance for the consolidated entity.”
Hong Kong-based Albatronics employs about 2100 people, and its principal factory is located in Dongguan, Guangdong, China, within a 312,700-ft2 complex. In fiscal 1998 ended Mar. 31, Albatronics reported net income of $2.9 million on sales of $353 million.
Closing of this deal is subject to conditions including completion of due diligence and approval by Albatronics’ shareholders and Hong Kong authorities. The transaction is expected to go through by the end of this year.
Meanwhile, Nam Tai will pay a Q3 dividend of $0.07 per share, based on an annual dividend of $0.28 per share for 1998.
GET brings in new management…GET Manufacturing (Mountain View, CA) recently hired Richard Gourley as VP of worldwide sales and marketing, Roger Mitri as corporate VP and GM for its Mexican subsidiary, and James Patty as corporate VP of quality. Gourley was formerly corporate VP of worldwide sales at Adaptec. Mitri is a former executive at Packard Bell NEC, where GET president and CEO Roger Nordby had served as vice chairman. And Patty most recently held the job of executive VP/COO at ATP Technology, an international CM, and before that was senior VP of operations for AlphaSource Manufacturing Solutions, a CM in Thailand.
A change of CEOs at Newport… Newport Technology, which provides contract design and manufacturing services in Raleigh, NC, has undergone a change in leadership. Graham Frankland has replaced former CEO and president David Brown, who has stepped down to pursue a high-tech start-up on behalf of Newport’s British parent, Newport Technology Group Ltd. Frankland’s most recent job was managing director of the European subsidiary of Sequel, which does laptop and peripheral repair. Spun out from SunTechnologies Group in 1996, Newport Technology employs 100+ people in a 35,000-ft2 facility on the edge of Research Triangle Park. Annual sales are about $15 million..
Other EMS management moves… Iris Grable, a former member of MMI’s board of advisors, has resigned from International Manufacturing Services (IMS), where she served as VP of marketing and business development. She will pursue other opportunities in the EMS industry and aims to focus on international business….Manufacturers’ Services Ltd. (Concord, MA) has promoted Johnny Chan to the newly created position of president of Asian operations. After joining the EMS company in 1997 from Thomson Multimedia, Chan was senior VP of Manufacturers’ Services’ Asian operations. Established in 1995, these operations offer facilities in Singapore, Malaysia, Indonesia and the Philippines and employ more than 1300 people. The EMS company has also named Jeff Kennedy as its first director of advanced manufacturing engineering. He joins the company from Johnson Matthey Semiconductor Packages, and his expertise includes SMT manufacturing, MCM/COB and laminate-based packaging. Kennedy will be based at Manufacturers’ Services’ site in Arden Hills, MN….Mack Technologies (Marlborough, MA) has named David Autrey as VP of business development. His former position was VP of business development for VALiiANT, Data General’s EMS operation….R. Thomas Tropea, the new senior VP of marketing and business development at Celestica (Aug., p. 8), has replaced Doug McDougall, who now serves as senior VP of the U.S./Mexico….Solectron has appointed Julio Leung as corporate VP of finance. He comes with 23 years of experience at Citicorp/Citibank of New York…Roland Pampel, former president and CEO of Microcom, has joined the Operating Board of AVEX Electronics (Huntsville, AL). This board is guiding AVEX toward a possible IPO….XeTel (Austin, TX) has named Al Schuele, president and COO of Unitrode Corp., to XeTel’s board of directors…Anja Rouhiainen was named VP of production development at Elcoteq. She is responsible for start-up and production at the CM’s new factory being built in Monterrey, Mexico….Tim Mullennix has joined Photomatrix (Carlsbad, CA) as VP and GM of its EMS subsidiary I-PAC Manufacturing. At one time, he was president of a rep firm that Photomatrix intends to acquire, and his resume includes a stint at SCI as senior program manager….LaBarge (St. Louis, MO) has hired Weems Turner as GM of its Houston, TX, operation and has promoted James Morton to GM of its Tulsa, OK, operation. Turner comes with oil and gas experience.
Other CMs in the news…Among the recent winners of the annual Service Excellence Awards are MCMS (Nampa, ID) for technology in the large CM category, Plexus (Neenah, WI) for quality in the large category, Sparton Corp. (Jackson, MI) for the highest overall rating in the large category, and Jolt Technology (Ft. Lauderdale, FL) for quality and overall rating in the small-company category. Jolt is now a subsidiary of DDL Electronics….Micro Industries (Westerville, OH) has achieved certification to ISO 14001 for environmental management….Fortune magazine ranked Jabil Circuit (St. Petersburg, FL) and Sanmina (San Jose, CA) as the sixth and tenth fastest-growing U.S. companies respectively, based on EPS growth over the past three years….Smartflex Systems (Tustin, CA) has qualified a flip-chip-on-flex line in its Monterrey, Mexico, facility.
Correction: Due to a typo in last month’s issue on p. 6, the wrong company was associated with GET Manufacturing’s 1997 acquisition in Mexico. The correct company name is Proxima Corporation.
Clarification: Included in Celestica’s Q2 net loss of $19.2 million, listed last month on p. 7, were unusual charges of $17.8 million related to the write-off of fees and financing expenses associated with the prepayment of debt. Unusual charges for six months totaled $52.8 million.
Online readers note: a chart showing the MMI index through Sept. 11 is not included in the on-line version of this issue. At present, that chart is not available as an electronic file.