Tag Archives: EMS

Mike’s Main Man

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He wasn’t yesterday, and he might not be tomorrow, but for today, Tim Main is my hero.

The Jabil chief today became the first major electronics executive to publicly rebuke Foxconn, the world’s largest EMS company. At its annual shareholders meeting, Main asserted that Foxconn has “some very abusive policies, employment policies. And I think their business will begin to suffer because of the way they treated their employees.”

OK, so it doesn’t rise to the level of Occupy Shenzhen, but for our little tightly wound industry, this ranks as an outburst. And there is perhaps some risk involved in making such statements. Jabil has been taking on a bigger helping of Apple’s pie, with Main today suggesting the visionaries behind the iPad and iPhone now represent more than 10% of the contract assembler’s revenue. Foxconn’s success has been tied in so small part too that of Apple’s and vice versa. For Apple to cut the cord, or even let it fray a bit, would run directly against the many years of staunch support for its China CM.

Then again, perhaps Jabil’s gains are coming at Foxconn’s expense, and Apple is basing its procurement decisions not just on cost and execution but also other, more humane factors.

Or so we can hope.

Way to go, Tim.

The Media (Us) Gets Social

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Besides this blog, we at CIRCUITS ASSEMBLY are active in a number of other social media related forums.

You can follow Editor-in-Chief Mike Buetow’s steady stream of late-breaking news on Twitter (@mikebuetow).

Or join our LinkedIn groups: CIRCUITS ASSEMBLY, SMT Processing, PCB Test and Inspection, PCB Cleaning, and EMS — Electronics Manufacturing Services.

Finally, you could friend us on Facebook: search CIRCUITS ASSEMBLY.

Each vehicle is different, and each offers access to a somewhat different audience. Twitter tends to be a one-way, or two-way at most, type of communication. We use it more to relay important breaking stories, both reported by us and others. The LinkedIn groups, most of which are new, are more expansive, and intended to drive in-depth technical and market-related conversations. Facebook is less formal, in my opinion, than LinkedIn. The discussions there tend to be simpler in nature.

They all have their place, however, and we’d love to see you engaged in any one of them.

 

 

 

SMT’s Echoes of Elcoteq

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In Europe, Elcoteq teeters on bankruptcy. Three of its subsidiaries have already declared, and the corporate parent has seen its access to cash all but dry up.

In Asia, a smaller but still significant restructuring also is taking place, with the outcome just as uncertain. SMT Holdings, ranked 45th in last year’s CIRCUITS ASSEMBLY Top 50, missed a debt repayment in March, and is negotiating with its 11 top lenders to stave off a takeover. While 10 of the 11 have signed on, it’s a slippery slope: falling revenues and massive losses can be explained away in a down market. But the EMS sector has been in recovery mode and the hemorrhaging at SMT Holdings continues. An independent auditor, Deloitte & Touch, this week acknowledged SMT is working on a restructuring plan, but said the assumptions were so great that it couldn’t even issue an opinion on the EMS company’s chances as a “going concern.” Its report is basically accountant speak for, “We don’t like what we see.”

Echoes of Elcoteq abound. Customers can’t risk product delays because their EMS provider is out of cash, and tend to bolt at the first opportunity. Competitors smell blood in the water. The situation snowballs. As of this writing, the prognosis for SMT Holdings is grim.

Zollner Hits the ‘Valley’

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I’ve been anticipating for some time the influx of offshore EMS companies. There’s been the occasional deal, of course. Elcoteq jumped in, then out, then in again, then out again. IMI bought Saturn Engineering in 2005, and Asteel acquired FlashElectronics in 2008, but for the most part, the “outsiders” have stayed out.

It’s struck me as strange for many reasons, two big ones being the access to the lucrative US market (and the decision-makers at many of the world’s top OEMs), and the cost of acquisition, which with the depressed dollar means US firms could be bought relatively cheap.

Today, however, Thailand’s Cal-Comp, Singapore’s Venture Corp. and Japan’s SIIX are Top 10 EMS companies without US holdings.

But for Zollner Elektronik, No. 12 on the CIRCUITS ASSEMBLY Top 50, that’s no longer the case. Zollner has taken over and is remodeling a 52,000 sq. ft. site in Milpitas, a Silicon Valley town, where it will open its first wholly owned US factory. Zollner is Europe’s second-largest EMS company, although after this year it just might supplant Elcoteq for that honor.

Founded in 1965 by Manfred Zollner,  Zollner has become a leading supplier of industrial and automotive electronics. Today it has 13 plants in Europe and one each in China and Northern Africa. The company has more than 7,300 employees worldwide, and we estimate its annual sales at around $1.2 billion.

Zollner plans its new site to be a dedicated NPI center, which makes sense given the size of the US market today and the number of competitors (more than 250 alone in the Silicon Valley, according to the CIRCUITS ASSEMBLY Directory of EMS Companies).

Is Zollner’s move the first of many? Other major EMS companies abroad — Beyonics (which is made up of many former Flextronics executives), UMC and Sumitronics in Japan, GBM, 3CEMS and Nam Tai in China — generally do quite a bit of business with North American companies already. And US-based Fabrinet has all its plants in Thailand or China. A successful model does not mandate a US presence.

Still, growth in electronics outsourcing will be harder to come by. Most analysts believe all the low-hanging fruit is gone. Soon, EMS gains will be made primarily by grabbing market share, not tapping new markets. When that day comes, will those without a US facility find themselves shut out?

Elcoteq’s Basket Had Too Few Eggs

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Thanks to Europe’s fairly generous insolvency laws, Elcoteq will likely survive having run out of cash (which isn’t easy for a $1.5 billion company to do). But the industry will be reminded — again — of the danger of having too few eggs in a given basket.

Elcoteq fared beautifully for years as Nokia’s primary EMS supplier. At one point, Ericsson and Nokia made up 92% of Elcoteq’s annual sales. Revenues almost doubled in 1999, then tripled in 2000. As the saying goes, it seemed like a good idea at the time.

But Elcoteq did not anticipate that the 20-year relationship with Nokia might be undermined by emerging markets and their concurrent price pressures. Nokia, saddled with innovation-debt and fierce competition, fell victim to the market share chase and effectively bolted to Foxconn and Jabil. Years of acquisitions had taken their toll on Elcoteq’s cash, which ran frightfully low during the 2009 recession. A deal with Shenzhen Kaifa Technology, which would have brought in much-needed cash, failed to materialize.

Despite turning a profit last year — its first since 2006 — cash from operations was just 9.4 million euros. You know things are bad when you are left to asking Hungarian banks for money.

As of today, Elcoteq employs 7,000 workers across all major regions. A year from now, I’m guessing it will be half that. The company simply hasn’t proved it can build a sustainable business without the generosity of a major patron.

Where Design is King

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Just posted a profile of Automated Circuit Design, a Dallas-area electronics manufacturing services provider that I visited last week.

ACD started as a design bureau and VAR, and one of the interesting things I noticed was how it has stayed true to its designer roots: all its designers have their own offices (not cubicles), and seven of them are CID+.

The Free Flow of Fakes

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While it’s true that counterfeit parts are pervading all aspects of the electronics supply chain (not to mention consuming all amounts of oxygen from industry pundits such as yours truly), is it possible our sense of fear is overblown?

By fear, I don’t mean “risk” — that’s the inherent chance of failure taken by, knowingly or not, using a fraudulent part. Rather, I mean the “if I do this I might get someone hurt and/or lose my job” feeling.

Yesterday, the SMEMA Council, a group of electronics assembly equipment OEMs, admonished customers to use only authorized channels for replacement parts and service. By using fake parts, SMEMA said, the risk (there’s that word again) users take is that the assembly equipment OEM could void their warranty. That’s a tough nut to swallow, considering the price tag of new placement machines, testers and screen printers.

The question I have is, why would SMEMA even feel compelled to issue such a statement? Faked parts (one old friend says in China, copyright means the “right to copy”) are ubiquitous and systemic. Two US senators this week accused China of blocking a probe into counterfeit electronics by refusing visas to investigators, but it’s hard to know whether the US is truly wants to stop the flow of knockoffs goods or just put pressure on China in order to exact other reforms or negotiating leverage. Indeed, so-called fourth shifts are not only common, they have been for years. So forgive me for being cynical when a few bureaucrats say they want to do something about it now.

In my opinion, there’s no end in sight to the free flow of fakes because, in fact, America and Europe don’t really fear the potential outcome. For a decade, manufacturing programs have been shuttled en masse to China. And while OEMs pay lip service to the notion that their IP is their livelihood, they aggressively seek out the manufacturing partners of their competitors, thus simultaneously ensuring their IP will be shared and that their products will be commoditized.

Let’s put it another way. If company ABC contracts to China and learns a few months later that every Chang, Wang and Li is walking around with a cheap duplicate of their widget, ABC may snort and snarl a few times, but will it fire the folks involved in outsourcing? Highly unlikely. But if that widget never gets built, or ships late because a machine is down or an oscillator is unavailable, heads will roll. Supply chain employee is thus naturally emboldened to take risks that they otherwise might be unwilling to contemplate. The wheel is set in motion.

SMEMA is trying to reorient customers as part of a much-welcome attempt to demand accountability, and I wish them luck, but I don’t think it will make much difference. The corporate buyer culture has changed.

Don’t believe me? Just go to the EMSInsider group on LinkedIn and look at all the listings by members looking for spare parts. Utilizing only approved vendors is nice and all, but when product needs to be shipped before the quarter’s up, the AVL is an industry anachronism.

Inside EMS

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I attended a fascinating conference yesterday on the state of electronics outsourcing and supply chain management.

Set on the campus of Tellabs in the Chicago suburbs and produced by Charlie Barnhart Associates, speakers and attendees patiently dissected current trends and needs.

So as not to inhibit discussion, I promised not to reveal any specific remarks or details prior without getting the individual speaker’s signoff, so for now I will stick to generalities.

Attending were representatives from about 10 EMS companies and a like number of OEMs, some from Fortune 100 companies. There were also various analysts and other talking heads/pundits. I was the only media person in attendance.

Topics ranged from the concrete to the speculative. Tellabs spoke at length on how and why the telecom gear maker decided to outsource its electronics assembly, and was refreshingly upfront not only about the pros and cons but about the mistakes it made along the way.

Researcher Matt Chanoff noted the startling success of the Apple iPad and wondered whether the reason it has managed to capture a 95% share of the tablet market despite more than 80 competing products has to do more with the “ecology” of Apple vs. the form, fit or function of the iPad itself. He also pointed to a few distinct trends in the electronics design and manufacturing space, noting an unprecedented product platform commoditization is underway, while at the same time a newish breed of hobbyists (“prosumers”) has emerged and created a niche market for very expensive, semi-retro (read: electromechanical) products like cameras.

CEO Cary Wood laid out the turnaround of 118-year-old Sparton, which came thisclose to bankruptcy before righting the ship. The current metrics are an impressive display of refocusing and rebalancing. He said that the bulk of Sparton’s EMS customers two years ago were money losers, and Sparton had to either cancel the programs or renegotiate terms. But the bigger issue was convincing the sales team to jettison bad customers. Wood was forthcoming about the specific policies they put into place, including standardizing templates for pricing and quoting, and installing a sales and incentive program based on profits. He also noted that given Sparton’s exceptionally long history in Michigan, they effectively had to relocate the headquarters because they were the big fish in that small pond, and after all the local layoffs and shutdowns, they would have been tarred and feathered. He also said they made the decision to separate HQ from a manufacturing site so as not to get too emotionally attached to a particular business.

Time and again, OEMs and EMS companies said it was advantageous for competitors to place programs with a single EMS and that IP concerns didn’t really factor into the equation. The EMS companies said that OEM competitors are attracted by the knowledge that the EMS knows how to build products for the target market and that the EMS would also know what the appropriate prices would be. (That latter point was made several times.) In short, IP concerns take a backseat to the hope that the EMS would ensure the build price remained consistent with their competitors’ products (which also hints that OEMs accept the commodity nature of most of their products).

Another speaker asserted that no EMS is too big to fail, Flextronics and Foxconn included. He pointed to the disruption such an event would have on supply chains, pricing and capacity.

The good folks at CBA put me to work moderating a panel made up of two OEMs (Tellabs and Eaton) and three EMS companies of varying size and geographical reach (Plexus, Morey and Creation Technologies). I’ll have more on that in a bit.

 

 

Sales Up, Profits Down

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Another round of EMS quarterly reports came out today, as LaBarge and SMTC provided their numbers. Now that the bulk of the major EMS companies have reported, the picture is pretty clear that first quarter revenues were up fairly broadly but profits took a hit.

This is unfortunate, of course, because the margin-sensitive EMS industry relies on leveraging higher sales to drive incremental profit gains.

Based on the consensus forecasts, expect second-quarter revenues to be generally flat, with pressure on margins because of higher component costs due to supply constraints.