Tag Archives: Flextronics

Malaysia v. China

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Don’t laugh: When it comes to manufacturing competitiveness, the divide between the two nations is not so wide.

Flextronics, Celestica, Plexus, Beyonics and other major EMS companies are heavily invested in Malaysia. Plexus’ largest factories are there, and the company has expanded of late. Flextronics has 11 factories alone in the country. Four of Beyonics’ six plants are there.

As Flextronics’ VP of supply chain Mark Shandley explains in this article today, customers like Malaysia for its lower and less complicated tax structure, the superior IP protection, and competitive labor rates (although Malaysia, like China, is experiencing large hikes). Sharp differences in attrition are noted as well.

 

 

 

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.

 

 

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.

Flextronics Showing PC Muscle

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How can you not like what Flextronics is doing in the computing space right now?

The world’s second-largest EMS player just opened its fourth end-to-end computing campus in China, a one million sq. ft. behemoth that offers complete design and manufacturing services for desktop, computers, notebook products and tablets.

More significant, the move underscores that Flextronics is going right after Foxconn. Unlike some competitors that have chosen to cede entire industries to Foxconn, Flextronics is turning that approach on its head.

While most analysts see computing as a relatively flat industry over the next few years — a prediction that is complicated by the growth of 4G smartphones, which act like de facto PCs — Flextronics has grown its revenue in the segment by taking market share from the very players most saw as the entrenched winners. From practically non-existent a few years ago, Flextronics’ PC segment is expected to nearly double to $2 billion this year and is forecast to hit $4 billion in 2012.

American companies pioneered volume manufacturing. There’s no reason they should not compete in that domain anywhere in the world.

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.

Add Ons

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Now that the worst of the financial meltdown is (hopefully) behind us, one of the trends to watch will be how quickly EMS companies expand capacity.

Plexus, which has always been conservative in its approach, said this week it would first consider adding to its Penang, Malaysia, base, which is currently its largest campus, as well as alternatives in China and possibly Thailand. It said its next investment in Europe would likely be in Oradea, Romania, where the company already has two sites and feels “a more permanent location in very close proximity” would be in order.

Celestica, on the other hand, said it is looking to acquire fairly modest-sized health-care businesses, but hasn’t indicated plans to add capacity.

Flextronics and Jabil appear more set on building up manufacturing capabilities for alternative energy products. Foxconn, of course, looks like it might invest just about anywhere.

CEOs: Not Much EMS M&A Expected

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Earnings announcements came out this week for Flextronics, Sanmina-SCI, CTS, Celestica, Key Tronic, IEC and a few others.

I’ve been listening to the quarterly analyst briefings, and it would *appear* that most of the major EMS companies don’t plan any earth-shaking M&A activity.

Most are taking the approach of Celestica CEO Craig Muhlhauser, who said they would focus on areas like health care where they don’t have tremendous established depth. Flextronics CEO Mike McNamara didn’t even raise the subject. Neither did Sanmina chairman Jure Sola.

And congratulations to CIRCUITS ASSEMBLY EMS Company of the Year Key Tronic on yet another profitable quarter. That’s six straight years, and counting.

Unrest in Mexico

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Did you know the vast majority of workers at some major Mexico-based EMS companies are, in fact, contractors?

Reporting by Corporate Watch says the bulk of workers at plants owned by Foxconn, Flextronics, Jabil and others are, in fact, temps.

Here’s a quote regarding one (fairly recent) study:

A 2007 Cereal study found that approximately 60 percent of the 400,000 workers in Mexico’s electronics industry work for temporary agencies, with some companies employing as much as 90 percent of their workforce through sub-contractors.

The reason I bring this up is because most of these companies also are members of the EICC, a group of leading electronics companies that, among other things, have signed on to a “Code of Conduct” governing how they would treat workers, including temps. Yet that hasn’t stopped street demonstrations in Guadalajara, where a small group of workers has argued in favor of better employment conditions and severance payments.

I’m not willing to blow this out of proportion. But as a nation that aspires to be the benchmark for the world, we must take care to ensure our standards are consistent in all lands in which we work, not just our own.

When It Comes to Capacity, There’s Never Enough

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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?

Blue Sun

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IBM’s potential merger with Sun is hardly a done deal, and reporters at The Wall Street Journal and elsewhere now think the deal may be off. (For the record, neither OEM has yet commented on the deal.)

Which, for EMS companies, is probably just as well. Deutsche Bank estimates a merged IBM-Sun would be able to cut as much as $1 billion in costs from the bottom line. Some of that, no doubt, would come from deleting redundant product lines and even greater buying leverage with the companies’ respective suppliers.

Sales to Big Blue make up about 10% of the revenues at Celestica, Benchmark and Sanmina-SCI, five to 10% of Jabil’s revenue, and two to five percent of Flextronics’ sales. Several of those companies supply significant volumes to Sun as well.

Faced with the pullbacks of Nokia and Alcatel-Lucent, which took some $6 billion combined out of the EMS industry’s collective pockets, word that a deal is off should touch off industry rejoicing, even if just for a day.

If anyone has reason to be sad about the reported deal’s collapse, it would be Sun, which was already on shaky ground. Instead of Big Blue, Sun might turn out to be just blue.