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?

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About Mike

Mike Buetow is editor-in-chief of Circuits Assembly magazine, the leading publication for electronics manufacturing, and PCD&F, the leading publication for printed circuit design and fabrication. He is also vice president and editorial director of UP Media Group, for which he oversees all editorial and production aspects. He has more than 20 years' experience in the electronics industry, including six years at IPC, an electronics trade association, at which he was a technical projects manager and communications director. He has also held editorial positions at SMT Magazine, community newspapers and in book publishing. He is a graduate of the University of Illinois. Follow Mike on Twitter: @mikebuetow