In China, A Bet on Tariffs

Several news stories are breaking today about President Trump’s anticipated tariffs on scores of goods from China. On the list of items that will see new import duties is consumer electronics.

The effects of this move have the potential to go far beyond the administration’s stifling of a series of high-profile acquisition attempts, including Singapore-based Broadcom’s attempted not-so-friendly takeover of Qualcomm, or that of a Chinese investment firm’s deal for Lattice Semiconductor. One wonders, if the TTM-Meadville deal were in play today, what the ruling from the feds would have been.

China has successfully reached its goal of the “world’s factory,” but is it good for the US — or the world, for that matter — to have so much critical manufacturing concentrated in one place? I would argue no. Foreign companies get a raw deal trying to access the China market. The rules are set up to favor domestic companies, the government’s reach extends into all levels of private businesses, and the judicial system is weak, at best. As we have noted before, in China, “copyright” means “the right to copy.”

The US is the only economic body, except perhaps the European Union, capable of forcing China’s hand. China will not change on its own.

It would take a better fortune teller than me to predict how this will play out. On principle, some critics are primed to dismiss the administration’s move. But governments interfere in economic systems all the time. The entire US import system is one giant hurdle. So is Europe’s. It says here the risk is worth taking.

 

TTM Again?

Not quite 18 years ago, a pair of venture capital firms bought a small Washington fab shop named Power Circuits. The following year those two firms, Thayer Capital Partners and Brockway Moran & Partners, added Power Circuits in Santa Ana, CA, to its stable. It renamed the fabricators TTM Technologies.

Today TTM is one of the largest PCB fabricators in the world, with revenues of around $2.5 billion across 25 facilities and 30,000 employees. It made some of the largest acquisitions in industry history, and unlike some of its competitors, made those acquisitions work.

It’s not without some irony, then, that one of the former directors of Power Circuits has teamed with a venture capital fund to acquire a pair of Southern California fabricators this week. 

History repeating?

Shane Whiteside, who was general manager and director of operations at Power Circuits, rose with TTM, eventually becoming executive vice president and COO before departing the firm in 2013.

With his background, Whiteside certainly would know which plants to target on the West Coast of the US. I haven’t been through KCA Electronics, but Marcel Electronics is one of the finest shops PCD&F has had the pleasure of visiting. I’m eager to see how this evolves.

The End of the Viasystems Era

At long last, the hunter became the hunted.

TTM Technologies today announced its pending acquisition of Viasystems. The deal, expected to close in early 2015, will vault TTM to second place among the world’s largest PCB fabricators.

No matter how the deal turns out for TTM, Viasystems will remain one of the most talked about PCB companies in the industry’s history, held in awe for its audacity and blamed on multiple continents for nearly single-handedly devastating local supply chains.

For the entirety of its 18 years, Viasystems was worth 10 times its revenue in industry controversy and chatter. It sprung on the scene in fall 1996, the brainchild of New York investment firm Hicks, Muse, which in quick order bought up AT&T’s board shop in Virginia, Circo Craft, Kalex, Forward Group, ISL, Mommers and Zinocelere, plus several EMS and peripheral businesses. They were the Yankees of the PCB world, albeit without the same level of success.

Then came the Tech Recession of 2001, and Viasystems’ debt ballooned to over $1 billion. Two Chapter 11 restructurings and countless lawsuits later, the company stabilized and managed to spend the better part of the rest of the decade simply managing the business.

In 2010 the veil was lifted. Viasystems resumed its buying ways, snatching up Merix and then, two years later acquiring DDi (which in turn had gobbled up Coretec). Yet consolidation didn’t bring happiness. Over the years Viasystems found it nearly impossible to turn a consistent profit. Debt, a persistent problem dating to its Hicks, Muse days, now sits at $561 million.

TTM is getting Viasystems for $16.46 per share, or about 6.8 times adjusted EBITDA. You tell me if that’s worth it.

I would expect TTM will sell off Viasystems’ wire harness business, which is small ($174.6 million in 2013) relative to the rest of the business and has shown operating losses in five of the past seven quarters. Viasystems has already consolidated its China manufacturing base, so I would not expect much change there. TTM is running at 75% capacity in China but only 60% in North America. TTM has seven sites in North America and Viasystems has nine, including a combined three in the Silicon Valley and two in Orange County. Perhaps they will seek to consolidate here in order to boost rates.

Viasystems changed the way the world viewed the industry. It forced Wall Street to take notice. It laid waste to the regional landscape, ultimately closing millions of sq. ft. of some of the once-best shops in the world. Some will say this was inevitable. Viasystems bought plants that were obsolete or quickly headed that way, whose workforces could not change even while the technology was quickly shifting away from them. And the firm tied up enormous amounts of capital in dubious debt deals that may have enriched a few but certainly did not leave their business units with the balance sheets necessary to operate in such a cyclical market.

There’s still time for the deal to fall through, and it took about 18 seconds before shareholder lawsuits began piling up. No matter what happens on the ground, come next spring, Viasystems will again occupy the rarest air of the PCB world. It just won’t be as Viasystems.

Alder’s Quiet Retirement

In the quiet of the post-Christmas vacation break Kent Alder officially retired as CEO of TTM.

The news should be bigger than it is. It’s been years since the head of a $1 billion a year US-based PCB manufacturer stepped down. In fact, there probably have been only two: Andy Leitz, who left Hadco following its acquisition in 2000 by Sanmina, and James Mills, who was ousted from Viasystems after the tech recession in 2001.

Alder rose to prominence on the wave of the massive influx of outside investment groups that circled the industry in the late 1990s and early 2000. He was president of Pacific Circuits, a Redmond, WA-based board shop owned by Thayer Capital Partners and Brockway Moran, which then acquired Power Circuits in Santa Ana, CA, and renamed the merged entities TTM, with Alder as the head. On Alder’s watch, TTM grew from $125 million in 1999 to about $1.35 million in 2013. Along the way, TTM acquired Merix and OPC, and extending its offerings from that of a traditional regional quickturn PCB supplier to a full-service multinational production house with nearly 20,000 employees. And he did so because TTM managed to consistently do that one thing that has been so difficult for some many of its competitors: turn consistent profits.

It remains to be seen what kind of leader Tom Edman, Alder’s successor, will be. He has an impeccable resume: Yale, Wharton Business School, and 17 years of executive experience at Applied Materials before being tapped for the TTM job. He showed his chops by beating out at least one longtime internal candidate for the post.

But for now, we acknowledge Alder’s role as the preeminent PCB executive of the past decade, and wish him the best in his retirement.