Tag Archives: Jabil

Is the Supply Chain Holding On, or Holding Out?

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Foxconn, for once, was probably the first company in the electronics manufacturing sector to acknowledge the looming financial hit from the coronavirus. Apple, which relies on the Taiwanese ODM for the majority (?) of its production, was naturally forced to follow.

Speak no evil?

Jabil and Plexus have now lowered near-term estimates, and market research firms are piling on, with IDC downgrading its outlook for smartphones and PCs and DigiTimes Research slashing its notebook shipment forecast by a third or more.

In a timely column on CIRCUITS ASSEMBLY, EMS expert Sue Mucha lays out a strategy for handling sharing bad news with suppliers and customers. “Transparency matters,” she says. “The goal shouldn’t be to paint a rosier picture than the situation dictates. The goal is to fill the communications void and establish trust that your company will provide news as the situation evolves.”

That begs the question, why haven’t more firms come forth with sales or profit warnings? Are Apple, Foxconn, Jabil and Plexus the only ones that will be affected? Or are they simply the vanguard?

Silicon Valley Not Paved with Gold

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Is the bloom off the rose in the Silicon Valley?

For years, manufacturers have insisted on putting factories in the greater San Jose area. The CIRCUITS ASSEMBLY Directory of EMS Companies lists hundreds of entries with Silicon Valley zip codes. Damn the costs — siting near customers — actual or desired — takes precedence!

In the first quarter, the most up-to-date data available, industrial space vacancy rates were 2.7%, near an 18-year low. That’s despite more than 200,000 sq. ft. of new industrial space coming online in the period, on top of about 3 million sq. ft. of new industrial space that came online last year.

Ironically, industrial space rents, while climbing, are a relative bargain. The average rent was $1.27 per sq. ft. in the March period, more than twice that in 2010 ($0.60 per sq. ft.), but well below the national average. That comes to more than $381,000 in rent a year for a modest 25,000 sq. ft. factory. But tack on energy, and labor costs — unemployment rates are not only lower than the national average, but workers earn a small fortune — and it all adds up to a very expensive enterprise.

Today the pendulum is shifting, if only bit by bit. We are seeing furloughs, layoffs and even some big names starting to blink. Jabil, Creation Technologies,
and this week, Benchmark are among those closing factories in Silicon Valley.

Will more follow? In an industry where margin and cash flow often make all the difference, it won’t be a surprise if more players head for lower-cost pastures.

Poison Apple?

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Move over, Foxconn. First Pegatron and now Jabil have joined you on the Apple-watcher hit list.

In June, the New York-based employee rights group known as China Labor Watch singled out three Pegatron sites for worker abuse. The alleged violations are now like a refrain: excessive overtime, harsh working conditions and employment of underage workers.

Today it was Jabil’s turn, as its Green Point unit in Wuxi drew CLW’s ire. Perhaps most concerning is the accusation that Jabil workers must agree to a “list of punishments.” That sounds sickening and demeaning.

The common thread, of course, is Apple, whose corporate standards are apparently more for show than practice.

Chinese law prohibits more than 49 hours of work per week. Yet the CLW report shows 80% of the 80 Jabil workers interviewed put in more than that. While both Apple and many workers claim they want the overtime, the sad truth is they need to work the extra hours in order to make sufficient wages. Yet with Apple sitting on more than $100 billion in cash, it’s illogical to argue that company needs to suppress wages in order to make its iPhones and related products affordable to Western consumers.

Just 18 months ago, then Jabil CEO (and now chairman) Tim Main excoriated Foxconn for its “very abusive policies, employment policies.”

“I think their business will begin to suffer because of the way they treated their employees,” Main told Jabil shareholders. “And you can all be quite comfortable and proud that, you know, that’s not your company. We treat people like human beings like we want to … treat our own kids. So you don’t have to worry about that with us.”

Sadly, CLW’s report says something very different.

At the time of Main’s comments, Apple had just become a 10% customer of Jabil. Now, Apple is estimated to make up 13%, or $2.23 billion, of Jabil’s annual revenue. So like Foxconn and Pegatron, does serving Apple necessarily cost a company its soul?

Correlation is not causation, but the circumstantial evidence is getting mighty difficult to ignore. Will any EMS company be able to resist the temptation of Apple’s poisonous riches?

 

Change Coming to Jabil, But Where?

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Jabil is cutting staff, but where?

The EMS company’s management this week acknowledged an ongoing restructuring — to the tune of $188 million in charges — but declined to address specific actions. “We intend to realign our manufacturing capacity and cost base to appropriately size our manufacturing footprint with current market conditions and our customers’ geographic needs. We have begun consultation with employees during the third fiscal quarter and out of respect for those employees, we shall not be providing details as to specific sites or locations under consideration at this time.”

Under repeated questioning from analysts on a conference call, CFO Forbes Alexandar did suggest that the restructuring would include plant closures. Discussing when the charges would hit, he said, “[I]t’s really to do with the timing of when we can, essentially, start closing sites or releasing employees and transferring business.”

Obviously, this information will come out, likely sooner rather than later. But it can’t help that while Jabil is trimming, Flextronics’ shuttering of several sites this year has been effectively drowned out by the announcement of a massive new operation outside of Dallas, where it will build the new Moto X smartphone. Jabil also does business with Google (which owns the former Motorola handset business), but my understanding is these tend to be prototypes, while Google performs the volume and final assembly in Fremont, CA.

 

 

 

EMS Q3: Cloudy, with a Chance of Pitfalls

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Checking our pool of 30 or so publicly traded EMS companies that have thus far reported third-quarter earnings, we see an industry that is decidedly mixed.

Exactly half of those in our pool reported net income rose over last year. And 16 said sales are higher.

Of the Tier 1s, Foxconn and Jabil said sales were up, and Foxconn and Flextronics saw higher profits. Celestica and Sanmina-SCI saw revenues fall while Plexus’ and Benchmark’s rose. However, all but Sanmina took profit hits.

Confused yet?

The mid tier EMS groups were no easier to divine. On the larger side, Nam Tai and IMI had great quarters all around, Kimball saw operating profits and sales climb, and Venture’s sales ticked up too (it hasn’t reported profits yet), but Fabrinet (whose recovery continues) saw both figures slip. Key Tronic was up, CTS was down. Scanfil was up, Note was down. Neways was up, PartnerTech was down.

You get the idea.

The good news is, most companies, especially the larger ones, saw higher revenues in the third quarter than they did in the first. This could be another sign that the traditional seasonality has returned, which would be welcome at least because it makes things a little more predictable.

In listening to the various analyst calls and poring over the quarterly reports, it seems many companies reaped the benefit of existing programs in the September period, while those who didn’t were plagued mostly by new product starts, which are a drag on earnings. The former could hide some deeper some concerns, because all programs eventually come to an end, and if overall launches are on the decline, it could spell trouble down the road. This could be why several EMS companies, which collectively tend to be a bit gunshy bunch anyway, warned that the December quarter might be slower than the last.

Check out Board Talk, our new bulletin board: theprintedcircuitboard.com


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.

Pay to Work

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Here’s fodder for those who believe government should stay out of the “job creation” business. In the past few years one Florida county gave tens of millions in direct funding and tax breaks to a series of companies that are now accused of not having delivered on their employment promises. It’s not clear from the news item, but it appears one of the companies — Jabil — never lived up to its job guarantees and the state is now trying to renegotiate the contract.

 

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.

Predictions, Revisited

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In mid July, I made five predictions for the second half of this year.

Here’s how I fared:

Prediction 1. All of 2009’s 10 largest EMS companies – Foxconn, Flextronics, Jabil, Celestica Sanmina, Cal-Comp, Elcoteq, Venture, Benchmark and Plexus – will be intact at year end, and with the exception of Elcoteq, will finish 2010 in the same order. Outcome: Fourth quarter sales remain to be reported, but given their outlooks, I nailed it.
Prediction 2. One of the mid-tier publicly traded EMS companies will be acquired, however. Outcome: Nope. After the Sanmina-SCI bought Breconridge (announced in late April), things became awfully quiet, especially given the amount of cash many top tier EMS players have on hand. I’m guessing concerns over end-market visibility coupled with tight external financing are keeping the major players on the sidelines.
Prediction 3. Component availability issues will not ease until mid 2011. Outcome: TBD, but parts are becoming somewhat easier — but not easy — to get.
Prediction 4. Foxconn’s many employee problems will blow over as the media tires of the story. Outcome: Got this right.
Prediction 5. “Computer-aided innovation” will become the big buzzword in software. Outcome: Wrong.
So for those scoring at home, that’s two right, two wrong, and one partial.

5 Predictions for the Second Half

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Here’s my 5 predictions for the second half of 2010.

  1. All of 2009’s 10 largest EMS companies – Foxconn, Flextronics, Jabil, Celestica Sanmina, Cal-Comp, Elcoteq, Venture, Benchmark and Plexus – will be intact at year end, and with the exception of Elcoteq, will finish 2010 in the same order.
  2. One of the mid-tier publicly traded EMS companies will be acquired, however.
  3. Component availability issues will not ease until mid 2011.
  4. Foxconn’s many employee problems will blow over as the media tires of the story.
  5. “Computer-aided innovation” will become the big buzzword in software.