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.
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?
I’m not one to make light of health epidemics, especially given that my college major was initially epidemiology. But the global slowdown in electronics demand — underscored by the earnings reports over the past couple months — is poised to worsen in the grip of the coronavirus outbreak, which started in China and has now reached more than a dozen more countries.
Among the electronics manufacturers affected at ground zero are Avnet, Siemens, and Foxconn. After Hubei issued a mandatory shutdown notice, Foxconn furloughed more than 13,000 workers at its campus there. (The plant generates an estimated $300 million in revenue per year.)
While electronics assembly plants can be brought back up to speed fairly quickly, the impact missing even a few days of revenues will be felt in the quarterly results. And here’s the possible silver lining.
Many companies have been reporting weaker results in the most recent quarter. For instance, Celestica’s revenues were down 14%, Amphenol’s dropped 3.3%, and Sanmina’s were off 16%. TTM went so far as to sell its entire mobility unit. Plexus saw sales rise, but is cutting an entire design unit. (UPDATE: Flex reported sales down 7%, adding to our picture of how widespread the weakness is.) Often the US-based firms see a slowdown in presidential election years as OEMs take conservative approaches to ordering ahead of potential administration changes. The outbreak, deadly and unwished for as it is, gives cover to management for any recurring revenue drops, at least for a quarter or two, and perhaps longer if the coronavirus gains a wider foothold. A cynical view, to be sure, but hardly an unrealistic one.
Already, airlines are bracing for lower capacity utilization and Asian firms are fearing the worst as businesses enact travel restrictions. Again as with SARS, the timing comes as Asia (and most of the world’s major economies) is experiencing tepid growth, and the best way to stop a recovery in its tracks is to sever the flow of goods and services.
For everyone’s sake, let’s hope this virus burns out fast.
Those who have been in the PCB industry since at least 2001 will likely remember the New York buyout firm known as Hicks, Muse, Tate & Furst. Better known as Hicks, Muse, they laid waste to the industry, buying up the largest fabrication shops like AT&T’s 400,000 sq. ft. plant in Richmond for dollars on the penny (you read that right), then attempting the same with EMS, before watching it all fall to pieces with multiple bankruptcies and revaluations. (The entity known as Viasystems eventually landed under the control of Tim Conlon, a highly capable executive who right-sized the company and made it profitable enough to sell to TTM in 2015.)
One of the beneficiaries of the merger mania in the late 1990s and early 2000s was Bob Herring.
Not once but twice, Herring built up and sold printed circuit board fabricators to larger bidders. The latter time, Herring sold Herco Technology and a second firm, Synthane Taylor, to Teradyne for about $122 million in stock.
You know how this ends. Teradyne’s stock collapsed, Herco was shuttered, and then came the lawsuits.
Herring later turned his sights to media, launching a news network that is popular in certain segments of the American public.
Tom Hicks of Hicks, Muse turned his sights on sports, buying — and bankrupting — the Dallas Stars hockey team and Texas Rangers baseball team, among others.
One of the first things I heard when I arrive at AltiumLive last week was was how much they loved the recap of the event my colleague Chelsey Drysdale wrote last year. They added that Chelsey truly captured what AltiumLive is about. Talk about pressure!
Let’s start at the beginning.
Drinks are on Them. The week (well, three days, but they really pack a lot in!) kicked off with a great reception on an outside terrace at the Loews Coronado Bay Resort. Dave Starkey, the engineer who designed and built the Piano Arc — the circular piano used by Lady Gaga’s pianist, among others — was there. So was the pianist. They displayed the unit, a 360-degree custom keyboard, with one of the panels removed, exposing the PCBs. Altium director of community engagement Judy Warner met Dave at a user group meeting in San Diego, heard his story and recruited him for the event. In case anyone wants to know the piano has 288 keys, a total of 12 circuit boards and only cost $57,000.
I saw our customary PCB West speakers Suzy Webb, Rick Hartley, Gary Ferrari and Eric Bogatin and met a lot of engineers.
Getting Younger. One of the things you note about AltiumLive is the demographics. It’s a younger crowd than you typically see at industry events. Eric Bogatin noted this in the first keynote (AltiumLive had not one, not two but three keynotes). He brought some of his students, had them stand up for recognition and encouraged hiring companies to talk to them. That drew a good laugh from the crowd. In his talk, he pointed out that while many designers will be retiring in the next 10 years, AltiumLive gives us reason to think a new generation is coming on strong.
Keynote #2 featured a celebrity from outside our industry. Jor Grand of Grand Idea Studio has a short-lived TV show called Prototype This! on the Discovery channel. The concept, which was similar to Mythbusters, was about the viability of gadgets and technology and how engineers feel a since of winning when a product doesn’t work the first time, but they don’t give up until their creation finally works successfully. While the show lasted only one season, Grand shared several clips and generated lots of laughs.
Finally, the main event: Altium rolled out its much-anticipated Altium Designer 20 ECAD. VP of marketing Lawrence Romine detailed the new “push and shove” capabilities that enable routing of complex HDI boards and ramp up design times over 20%. (For more on the tool, click here.)
Cloud in their Eyes. This was the third year of AltiumLive, and the multi-city event (another is being held in Frankfurt this week) draws 500 designers. The company grow is equally impressive. Last year 2018 Altium saw over 8,000 new users for its Designer PCB CAD tool, and on average Altium users do over 10 designs a year.
Looking ahead, Altium wants to move toward the cloud, something the industry has been avoiding for years. Its has added real-time collaboration, and hopes to bridge the gap between manufacturers and designers.
Not surprisingly then, AltiumLive focused as much on tomorrow as on today. The highlight of the event was the Robot Build and Battle. Attendees split into teams of six or more. Ours had nine; eight engineers, from all of the country, and me. I was cheerleader, motivator and general handyperson. (They said I sounded like each of their bosses … I beg to differ!) Team Sierra beat last year’s record, but we weren’t far behind. Amit Bahl of Sierra Circuits told me he didn’t realize just how geeky our industry was until the robot build. Such a fun and educational event!
Brooke Anglin is senior sales associate with PCD&F/CIRCUITS ASSEMBLY.
In his most recent monthly column my friend Gene Weiner pointed out the irony of calling a printed circuit board a commodity. “When did printed circuits become mass-produced unspecialized products?” he asks.
As I told Gene, it’s true PCBs are custom, but in some (many?) instances they are highly mass-produced. Think residential LED lighting, or game consoles or the most popular phones, etc. My sense is that calling them “commodity” or “custom” is a bit of a red herring. Large OEMs call PCBs commodities even though they know each is specific to a particular program. I think to most its a catchall word for “volume procurement.”
There is real tension on costs between customers and suppliers, and without artificial price bottoms I can see no reason that won’t continue. I think it’s highly unlikely sellers will be able to change the pricing model as long as the process technology remains essentially the same. It’s too entrenched, and often the buyers (which more and more often are EMS companies) have lower margins than the fabricators, so there’s no incentive for them to switch to a pricing model that will cost them more. A move to a different process technology (3-D/additive manufacturing) might well change the pricing curve.
It’s not that simple, of course. As double-Ph.D. and former CTO of Multek Craig Davidson once said, “Never underestimate the tenacity of incumbent technology.” It’s perhaps the best quote on technology adoption I’ve ever heard.
I used to think that with the many brilliant minds in our industry, we would successfully disrupt ourselves — in other words, the ideas that obsolete our current ways of doing things would be conceived and implemented by one of our own — maybe some genius in the basement of Apple or Intel or IBM. I’m less confident of that now.
I now lean toward the notion that the true disruptive change will come from someone outside our industry who has knowledge of both hardware and software and who uses a truly novel process to develop a widget that the public embraces. The mass appeal of the product (not the process, to which the general public is ambivalent) will be the proof of concept. And the investment money will follow.
It brings to a close one of the stranger stories in recent EMS memory. Cemtrex grew through acquisition, buying up a German EMS company, and later another, and green-fielded plants in Romania and India.
Then there was bewildering and lame hostile takeover attempt of Key Tronic, at the time a Top 50 EMS in terms of revenue. In offering a 1:1 stock swap, Cemtrex called out the larger EMS for its seemingly underwhelming profitability. Key Tronic’s response — at once clinical and dismissive — was one for the ages: “Our initial research shows [Cemtrex] reports approximately $45 million of EMS revenue. In our opinion, this does not qualify [Cemtrex] to make any statements as to how it might operate an EMS business like KeyTronic which is over 10 times [its] current size in terms of revenue.”
Cemtrex never filed the paperwork for a potential acquisition and the proposal quietly vaporized. And today, so did its aspirations of EMS supremacy.
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!
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.