Tag Archives: EMS

M&A is Here to Stay

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There’s been a flurry of EMS acquisition activity of late, with Natel’s acquisition of EPIC Technologies and Benchmark’s pickup of Suntron and CTS among the larger deals. Lincoln International, an M&A advisor, counts nine transactions in the fourth quarter alone, out of 24 total for the year. While Lincoln’s numbers shouldn’t be considered absolute – my guess is that worldwide they are off by well over 50% – they do provide a reasonable snapshot of the industry at a given time.

While I dare say Nam Tai will be the largest EMS company to close its doors in 2014, when all is said and done, I predict we will see a record number of shops close or be bought out in asset deals.

Benchmark’s Latest Acquisition

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Is Benchmark’s acquisition of CTS a good move?

Yes, it says here, and for multiple reasons. In no particular order:

1. Profits. Benchmark says the acquisition will be accretive starting in fiscal 2014, which suggests they think they can make it profitable in short order (Bench’s fiscal year ends Dec. 31.) Before reporting successive losses in the first and second quarters of 2013, CTS had turned in 10 straight quarters of operating profits.

2. Integration. It’s true CTS’s first-half revenue ($97 million) was down from 2012 ($148 million) and 2011 ($158.4 million). For that matter, it’s down versus 2008 ($197 million, ’09 ($146.6 million), and ’10, too. It compares most closely to 2010 ($122.6 million). But to be fair, CTS has been closing plants, which in part drives the revenue loss. (Of course, had those sites been profitable, perhaps they’d still be open.) This may play in Benchmark’s favor in that the organization as currently sized should be fairly easy to integrate.

3. The better mix will help margins. IBM was 21% of Benchmark’s revenue in 2012, more than twice the percentage in 2010. Benchmark has been looking to balance its (over)dependence on the computing segment. CTS is focused on industrial, automotive, aerospace and defense. This pickup will definitely help.

4. CTS’s footprint is in areas where Benchmark is strong. The deal includes five sites, four in North America (two in California, one in New Hampshire and one in Mexico) and one in Asia (Thailand). (While CTS still lists two EMS sites in Scotland and one in China on its website, these have either are already closed or are now being shut down.) As for the acquired sites, CTS will shut down the sites that they can’t fill, and move production to existing plants. They might lose a few customers along the way, but probably not so much that it will hurt them. Moreover, the deal doesn’t force Benchmark to learn a new region on the fly.

5, Benchmark’s track record with acquisitions is good. That’s not to say every site remains open. Far from it. But Benchmark doesn’t bite off more than it can chew, and that’s improvement in industries as cyclical and cash-intensive as EMS.

Since CTS is losing money, good luck calculating the valuation as a multiple of earnings. In that regard, the $75 million price tag seems a big high. By comparison, Benchmark paid $19 million in June for Suntron, which had sales of about $70 million. Given that CTS is more expensive, I’m guessing it is operating closer to breakeven than Suntron was.

 

Wistron On the Move

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We’ve said it before, we’ll say it again: EMS companies don’t sit still.

Notebook ODMs, faced with falling demand and profits, are not going gently into the good night. Flextronics dumped the PC ODM business a couple years ago to concentrate on higher margin, higher growth markets. Sanmina did the same. Now Wistron is pushing into medical as well. Others are sure to follow.

 

Slowdown at Foxconn

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Could PCs do what the rest of the EMS industry could not — derail the Foxconn train?

Over the past decade, Foxconn has been practically unstoppable. Not a backlash against China, outrage over dozens of worker suicides, at least two plant explosions, campus riots, or other pressures could stop the Taiwanese manufacturing titan.

But as Apple goes, so does Foxconn. And nowhere are the reverberations from the occasional Apple hiccup felt more than at Foxconn, where sales dropped nearly 20% both year-over-year and sequentially during the recent March quarter. While Apple also uses other big and small name suppliers, and is a 10% customer of Jabil, Foxconn’s sales to Apple could be in the range of $60 billion to $70 billion (although I tend to doubt they are quite that high, as Apple’s cost of goods sold for 2012, less depreciation and amortization expenses, were $84.5 billion, and Apple buys its own components).

Worse, however, is that the main market Foxconn plays in — PCs — continues to shrink, with no obvious signs in sight of turning around. So as HP, Dell and other key Foxconn accounts experience double-digit declines, the near-term outlook at the world’s largest electronics contract assembler has suddenly dulled.

Could the PC (as in personal computer) customers do what the PC (as in politically correct) crowd couldn’t? Finally fell Foxconn?

The Top 50 EMS Companies Chat

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The electronics manufacturing services industry in 2012 saw something of a changing of the guard as major European players like Elcoteq, ElectronicNetwork and SRI Radio Systems dropped off the map, and dependable stalwart industries like military and PCs experienced slow growth.

What did we learn from the events of last year, and what will the future of the EMS industry look like? Come chat with me on April 23 over at PCB Chat from 12 noon to 1 pm (Eastern). I will also discuss the annual CIRCUITS ASSEMBLY Top 50, which was released in April.

(Membership in PCB Chat is free, but you do need to register first.)

 

Nam Tai Joins $1B Club

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It’s flown way under the radar but Nam Tai just became the newest member of the EMS $1 billion club, joining 13 other companies (not including the major Taiwanese ODMs like Quanta, Wistron and Compal).

The company crossed the threshold thanks to a spectacular fourth quarter in which sales jumped more than 250% year-over-year. Nam Tai, which ranked 22d on the CIRCUITS ASSEMBLY Top 50 in 2011, will certainly move into the Top 15 when all the 2012 list comes out in April. Nam Tai’s fourth quarter sales alone would be enough to place the company in the top 30.

What drove the upswing? The company finally saw its investments in LCD modules for smartphones and tablets pay off.It was also boosted by sales of LCDs to the automotive industry, particularly US OEMs.

But can this last? Nam Tai has invested heavily in capacity in southern China, and has another 1.2 million sq. ft. “parcel” of land that it plans to develop — twice the amount of its present Shenzhen campus. This is all the more amazing because Nam Tai’s two existing factories are capable of about $150 million in revenue per month each, meaning its current capacity utilization is around 30%. Yet its stated operating margins are a healthy 8.2% and the gross margin as a percent of net sales was 10.5% for the quarter.

Chairman Ming Kown Koo humbly suggests Nam Tai was “lucky” to see gross margins top 10% last quarter, but thinks they will stabilize around 6% to 7% in the coming quarters, even though the company plans to hire 43% more staff — 3,000 workers — this year.

This is a story worth watching. Either Nam Tai will push forward into the next EMS tiers, or it will come crashing down, another victim of over-expansion and unpredictable end-markets.

 

Mid Tier EMS Firms Have Top Tier Managers

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Lincoln International today published its quarterly EMS stock index and, as usual, there are several interesting nuggets to be gleaned. One thing that stands out is how well Celestica has been managed over the past several years. It’s the only one of the four top tier companies that is currently net positive in cash. Given that the sector historically offers little or no dividends to shareholders, that tells me Celestica is really ahead of the pack when it comes to creating a profitable business, regardless of whether this is reflected in its share price.

What also stands out is how much better overall the mid tier EMS companies have been at managing their debt loads. Four of the six mid tier companies tracked have no debt, and the other two have net debt of 2% or less of their annual revenues.

 

Public Data

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I was pleasantly surprised this morning to receive a note from IPC indicating a change to its data collection methods.

In an announcement touting its new market research subscription series, IPC said it would use aggregate company data along with “carefully vetted secondary research.”

That sounded like IPC would now use data from the publicly traded EMS companies to help flesh out numbers its participating members report. A quick inquiry to IPC director of market research Sharon Starr confirmed as much.

“The growth rates reported each month will be based on IPC’s survey sample, but we will be looking at published data from the publicly traded EMS companies as a cross-check and may also use this data in our market-size calculations. If growth rates from the publicly-traded companies differ significantly from what our survey participants are telling us, we will address that in the reports,” Sharon told me.

This represents a departure from the past 20 years, where IPC would rely only on the data directly reported by survey participants. For years, report after report showing various manufacturers’ monthly sales numbers would arrive on an unsecure fax machine in the IPC office. Eventually, that fax was moved to someone’s office, but there was little in the way of confidentiality offered, and even if the the reporting company used a unique code, its name on the top of the fax always gave it away. As companies went public and disclosures became more scrutinized, there was a real disincentive for manufacturers to submit monthly data. Over the years, this trend undermined the usefulness of the IPC data: if larger companies weren’t reporting, were the figures as published truly representative?

Parsing the publicly traded firm’s quarterly numbers will go a long way toward ensuring that the data reflect the macro industry trends.

 

Foxconn Moves Intriguing

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There is a lot of speculation regarding Apple’s stated intent to build a manufacturing site in the US. This is not a major move. Only 200 jobs will be created. I cannot help but wonder if this is related to Foxconn’s (Apple’s major supply-chain device manufacturer) recent offer to help train Americans in manufacturing technologies. Is there a greater strategy about to be implemented? Is it the precursor to a potentially much larger move as costs continue to rise in China? America is still the major market for Apple where new products are introduced. Do Tim Cook and Terry Gou have a larger strategic plan? As Sherlock might say to Watson, “Methinks a new game is afoot.”

The November contraction of the US manufacturing sector does not bode well for the domestic electronics industry. According to the Institute for Supply Management (ISM), the index declined to the lowest level in three years, as national factory activity fell to 49.5% in November from 51.7% in October. Expectations had been for a level of 51.3%. Levels below 50% indicate a contraction. These figures are reflected in recent IPC book-to-bill ratios. The news in Japan is also discouraging for that nation’s interconnect industries. The Japanese Ministry of Economy, Trade and Industry showed negative growth for the country’s electronic industry in September. Not only is board production dropping, but so are board prices. Panasonic and Sharp have lost market share and are experiencing heavy losses, according to DKN Research. JX Nippon Oil & Energy (a major metal and oil supplier) has decided to close its PV silicon wafer business due to extreme global price competition. Uncertainty seems to reign everywhere. Many strategists are now working on improving efficiencies, finding new markets, and a resumption of growth in 2013.

For Americans, too? More cooperative activities reducing redundancy is needed between the IPC and the EIPC.

The EIPC made following announcement on Dec. 3: The EIPC has made an effort to provide the latest information on Standards for PCBs from Japan. The 4th edition was released at the JPCA Show in June 2011. The EIPC is encouraging the specialists in the European Electronic Industry to learn the knowledge that has been accumulated by the Japan Electronics Packaging and Circuits Association (JPCA) and documented in the Standard on Device Embedded Substrate Terminology Reliability Test/Design Guide Edition 4.0- JPCA-EB01 (2011) The English version of the document is on stock at the EIPC office in Maastricht, The Netherlands.