Focus? Who Needs It?

From Jim Collins to Michael Porter, the latest generation of management gurus argued companies must focus on core competencies and shed all other activities.

Just what makes a “core competency,” however, is always in flux. And as electronics companies see sales plunging like cliff divers, they are quickly redefining the terms.

With today’s launch of Nokia Booklet 3G,Nokia, long synonymous with mobile phones, has now officially entered the netbook market.

But Nokia is just the latest in a string of high-profile OEMs that are seemingly trying to jump-start their revenues by going after what are increasingly commodity markets.

Dell, in conjunction with China Mobile, is said to be looking at jumping in the mobile phone wars. In doing so, the world’s No. 2 computer maker would join Hewlett-Packard, Acer and Asustek as PC OEMs that either have launched or are planning to debut smartphones.

Meanwhile, China Mobile, AT&T and Far EasTone Telecommunications are among the mobile providers now pitching netbooks.

In today’s Wall Street Journal, Roger Yuen, Acer’s vice president of Asia-Pacific smart handheld business group, is quoted as saying “it is relatively easy for PC makers to make smartphones because the two devices share similar components and software.”

Which makes sense to analysts, I suppose, but is something of an insider’s joke in electronics manufacturing. After all, what doesn’t have Intel Inside?

The moves are highly questionable. As this article today in the Wall Street Journal notes, “Analysts say PC makers are unlikely to reap significant benefits in the near term as they need to develop better relationships with mobile operators to sell their products. It will also take time to develop differentiated products and market their own brands in a segment where consumers already have many choices.”

The WSJ hedges, adding, “[M]any agree that longer-term, PC makers have a chance to gain share which would generate a new source of revenue growth and improve overall profitability.”

I don’t see it. These are extraordinarily competitive markets, flush with big-name brands with deep pockets. IBM. Nokia. Samsung. Dell. H-P. The list goes on. None is going to give in without a (very expensive) fight.

Meanwhile, the broader markets are showing some signs of leveling: Worldwide mobile phone sales fell 6.1% year-over-year to 286.1 million units during the second quarter. And the battle for the niche markets – like smartphones – may already be over. Nokia holds a 47% share of that market, and RIM has been entrenched in second place.

New players have found the going bumpy. Take for example, Apple’s much-ballyhooed entry, the iPhone. Measured in terms of style and pizzazz, it has performed exceedingly well. In terms of units sold, it’s another story. Apple shipped 5.4 million units in the second quarter, Gartner says, good for 2.4% market share. Very likely, Apple makes the equipment as a medium to sell its highly profitable catalog of digital music.

Given that, and given that few companies boast Apple’s marketing and design savvy, it’s hard to fathom why a company would risk dominance in one market to attempt to conquer such foreboding – and possibly worthless – terrain.

It brings to mind one more business truism: That the grass – and the profits – is always greener on the other side of the fence.

6,500 EMS Companies? That’s Inflation!

How many EMS companies are there in the US?

Key Tronic president and chief executive Craig Gates says he read “there are something like 6,500 different EMS companies.”

I’m not sure where he read that, but it certainly wasn’t in CIRCUITS ASSEMBLY. Best we can tell — and we have a directory that lists every company we know of — there are something less than 1,300 in North America.

Now, I’m willing to acknowledge we might be missing a few sites. But we’re certainly not off by 5,200. Perhaps the count Gates saw included all assembly operations — including those of OEMs. Even so, that’s some fuzzy math.

When It Comes to Capacity, There’s Never Enough

Most industry observers believe the EMS industry suffers from overcapacity. When it’s difficult to make money in an upcycle, yet the majority of risk is shouldered by the manufacturer, it stands to reason that’s a fair assessment.

Which is why this exchange between an analyst and Flextronics’ CEO Mike McNamara during last night’s quarterly conference call was so interesting:

Matt Sheerin (Thomas Weisel Partners)

Could you let us know what the capacity utilization rate is right now? We’ve seen at least one of your competitors [Ed.: Celestica] decide that the utilization is too low and got another round of cost cutting. It looks like you’re keeping to your schedule and not increasing that cost restructuring, but could you tell us what it is and are you comfortable with that and growing into that number?

Mike McNamara

The activities that we’ve taken to-date and kind of the expected seasonal upside that we would anticipate even in a muted economic environment get us close to our near term target levels. As far as taking any more actions, we don’t think we need to do that. So when it comes to utilization levels, it’s just complicated. I think I saw the other competitor, in terms of what they say. Perhaps we look at utilization a little bit differently and may be I’ll go through it. I’ve done it in the past. We just look at it in three different ways. There’s people, which is the highest cost, and we believe that’s rationalized exactly to what we need today. There’s equipment, which we have access to. We probably have about 25% too much, which is the second largest element. Then the third largest element is facilities themselves, which is almost modest level, to be honest with you.

So we just look at capacity along each of those three different dimensions and we’ve taken the activities that we need to from the people standpoint. We’ve rationalized as much of the useless equipment as we can, but we’re not going to write off perfectly good equipment that has the ability to generate revenue in the future. We would rather go book some more business and take more market share. So, we just don’t look at utilization quite the same way and don’t have the same benchmark I think for you, because it’s just a little bit different how we do it.

Flextronics will take $250 million in restructuring charges this fiscal year, and has net debt of $1.07 billion, and its adjusted operating margin is 1.6%. But rather than acknowledge excess capacity, it “would rather go book some more business and take more market share.”

Even if it’s not profitable business?

The Street Loves Chips

Some good news from TheStreet.com today, and it’s based not on recent activity but on data from 2008.

Semiconductor equipment sales will grow 20% in 2010 and 49% in 2011, the financial news site forecast today, citing (several times!) “proprietary leading indicators.”

In doing so, the site acknowledged recent announcements of sequential gains by semi gear makers. More interesting, however, was its reliance on data from three quarters ago, which show “turning points in semiconductor equipment sales.”

“Both our long and short indicators turned up in late 2008, pointing to a business recovery cycle and giving visibility that the days of the recession are numbered,” analyst Robert Castellano wrote.

Since chip sales are a leading indicator for electronics assembly, that’s certainly good to hear.

Tea Party Time?

Jeff Cosman, president of EMS provider QCircuits, has an interesting take on the proposed corporate tax changes winding their way through Washington and their potential effects on the EMS industry. In one instances, he compares the economic plans of the US and Germany, and concludes, “The ultimate result may be a reduction in vertical integration in the electronics business. This is good for overseas CMs and possibly some in the US as the horizon for economical offshore operations comes in a bit. It’s not as good for OEMs because they won’t be able to take advantage of their own offshore investments as much as before.”

Agree? Disagree? Let’s hear it.

Red Over Greenpeace

Another day, another whine from Greenpeace.

This time, the would-be environmental group complains that several large PC makers are “backtracking” on promises to eliminate certain chemicals from their computers.

In a press release issued today, Greenpeace cites Hewlett Packard, Dell and Lenovo – for “failing to improve their low scores.”

Dell and Lenovo are called out for delaying their migraton to non-PVC and BFR materials, while HP is cited for “[postponing] its 2007 commitment to phase out PVC and BFRs from its computer products from 2009 to 2011. [I]t is not even putting PVC and BFR-reduced products on the market.”

“Greenpeace takes voluntary commitments very seriously and holds companies accountable for their promises. There are no excuses for backtracking, and no reason for these companies not to have PCs free of PVC and BFRs now,” said Greenpeace International Toxics Campaigner Tom Dowdall in the statement.

Which is great, except it’s also wrong.

Keep in mind those scores are set and tabulated by Greenpeace. And note that those targets are constantly moving. Greenpeace exists only to wag its finger at large corporations. It needs enemies in order to survive, even if that means conjuring up ghosts and bogeymen.

Meanwhile, Greenpeace also ignores that the science does not yet support the elimination of BFRs, and in fact, may suggest otherwise. As Dr. Arlene Blum, executive director of the Green Science Policy Institute and a member of Chemists Without Borders noted in her blog in May, “it is difficult to make a causal connection between chemical exposure and health impacts.”

And it ignores that all the major PC vendors now have significant takeback programs in place, providing some level of protection against these chemicals entering the waste stream.

While it pats Apple on the back, claiming its new PC lines “virtually free of PVC and completely BFR-free,” Greenpeace misses that Apple is perhaps the worst of the bunch when it comes to auditing and ensuring its vendors — which include Foxconn — follow acceptable labor practices.

BFRs may be bad, but what’s the alternative? Remind me: Does fire cause pollution?

No Main Point

Check out this exchange from Jabil’s recent quarterly conference call:

Alexander Blanton (Ingalls & Snyder analyst): Okay, second question is you mentioned earlier the possibility that some manufacturers initially might decide to move some things in-house. Do you have any examples of that in your business?

Timothy L. Main (Jabil CEO): I think the one that’s been well-publicized is the Nokia announcement three, four months ago. … Other than that, we don’t have any significant customer accounts that [inaudible] that type of move.

Blanton: Because recently NCR announced that they would in-source some ATM manufacturing and as I can determine, the reason they are doing that is so they can get some tax incentives from the State of Georgia that require a certain number of jobs to be created in the State of Georgia. And it really has nothing to do with the economics actually of in-sourcing. But there was some comment accompanying that in some of the local press that oh, there’s a trend toward in-sourcing. But from what you can tell, is there any such thing?

Main: I don’t think there’s any such thing. I might have mentioned NCR but I’m glad you brought it up. I forgot that that was a public statement that they made, so — you know, these OEMs will have certain drivers, different personalities, and opportunities like NCR has to receive significant tax benefits for an activity that maybe they think can be supported domestically within their own site. [If you take] a couple of data points, a $1 trillion dollar industry and say that’s a trend, I don’t think so.

Blanton: Yes, well, there was a bill in the State of Georgia that if you can create 1800 jobs or more, you can get some tax incentives. Well, the only way they could do that was to in-source this ATM manufacturing because they didn’t have enough people coming from Dayton to meet the 1800 bogey. This is not the way the press presented it but it’s obviously the case, so it had really nothing to do with lowering costs or anything like that.

Main: Right, well, the politics that we are in today are going to really be very negative towards outsourcing and that type of thing. I mean, that’s — let’s just accept that but recognize that the trend to out-source and the cost benefit of out-sourcing are so compelling that these temporary political statements I think will impact the temporary and the broader economic force of what compels OEMs to do what they do will prevail.

Blanton: Well, you are absolutely right. The CEO of NCR bragged that oh, we’re bringing jobs back from overseas when in reality, they are coming from South Carolina.

Egged on by a so-called analyst, Main essentially discounted any trend toward insourcing. But both men completely ignored the recent decision by Alcatel-Lucent to insource an estimated $2 billion worth of assembly. And it misses Ericsson’s announced purchase of certain Elcoteq operations. Moreover, it dismisses the role governments play not just in convincing OEMs to locate operations in their jurisdictions, but EMS companies as well.

In fact, just last year, the state of Florida, along with various local governments, granted almost $35 million in tax incentives to keep Jabil in St. Petersburg. How, exactly, is that any different than what Georgia is doing for NCR?

If Main has a point, it must be hidden under his hat.

90K and Counting

During iSuppli’s EMS webinar yesterday, an interesting data point was revealed: 90,000.

That’s the number of workers the EMS/ODM sector has laid off during the current recession. That’s an astounding figure (and assuredly does not include the reported 100,000 Hon Hai purportedly was letting go).

Even scarier than the number itself is the unmeasurable amount of experience and brain power that has been drained away, much of it likely for good. Talented engineers and technicians don’t stay on the sidelines long; they find other jobs — often in other industries.

When all is said and done, that may be a legacy we as an industry will be coming to grips with long after the order books have filled again.

Capacity Constraints in a Recovery

My friend Dominique Numakura writes from Japan that consumer electronics is rebounding in Taiwan, Korea, China and Japan. But, that bit of good news is tempered, he says, by constrained capacity — so many companies cut inventories and took down production lines, they now face material, component and labor shortages, he says.

“Everyone’s warehouses are almost empty! Distributors and suppliers can’t feed the manufacturing houses fast enough. Manufacturing companies have secured large orders for products, but materials are back-ordered, and there are not enough workers to accommodate these new sales.

The result, he notes, is material price spikes.

In Southern China, he adds, things are more grim, with reportedly more than 200 area EMS companies unable to obtain sufficient materials for production, and caught between the higher materials prices and lower end-product margins. Many will close.

This is not unusual. Several case studies have shown as many companies exit an industry in recovery
as do leave during a downturn. They get caught in the cash flow trap, where the upfront costs and associated risk to running the business outweigh the margin.

Not unusual, but unfortunate nonetheless.

The Price of ‘Faking It’

Counterfeit electronics components supposedly are destroying the integrity of our hardware.

One estimate holds that “five to 20% of electronic components in distributors’ chains are probably counterfeit” at a cost to industry of some $100 billion a year.

In response, several organizations (not to mention a cottage industry of consultants) have jumped on the bandwagon, launching programs to warn of the hazards (death! destruction! locusts!).

Let’s put aside, for the moment, the obviously inflated numbers ($100 billion, after all, is more than the sum of all the semiconductor revenues of Intel, Samsung, Toshiba, TI, STMicroelectronics, Infineon and Renesas — in other words, the world’s top 7 semiconductor OEMs — in 2007.

The SIA, for example, now has an anti-counterfeiting task force, and is working in concert with SEMI to combat the problem. “Counterfeiting is a serious and growing problem in the worldwide electronics industry,” says SIA president George Scalise. “Counterfeit products pose a significant risk to consumers as well as to the manufacturers of semiconductors and electronic products.

In the UK, something called the Component Obsolescence Group published a list of best practices said to help minimize the risks associated with the growing supply of faked parts.

And of course, makers of traceability software, XRF and other gear have ramped up marketing efforts to pitch their solutions.

But…in all the hue and cry, one thing is missing: The guilty users. Over the past few companies, I’ve asked at least two dozen EMS companies if they’ve seen any counterfeit components. None would admit to it.

Now, we estimate that there are at least 1300 EMS sites in the US, so my sample is hardly representative. Still, is the problem overblown? Or are my contacts – gasp! – lying?

And if they are fibbing, in the end, who gets hurt? (Answer: The customer.) Is it worth it?