SMT’s Echoes of Elcoteq

In Europe, Elcoteq teeters on bankruptcy. Three of its subsidiaries have already declared, and the corporate parent has seen its access to cash all but dry up.

In Asia, a smaller but still significant restructuring also is taking place, with the outcome just as uncertain. SMT Holdings, ranked 45th in last year’s CIRCUITS ASSEMBLY Top 50, missed a debt repayment in March, and is negotiating with its 11 top lenders to stave off a takeover. While 10 of the 11 have signed on, it’s a slippery slope: falling revenues and massive losses can be explained away in a down market. But the EMS sector has been in recovery mode and the hemorrhaging at SMT Holdings continues. An independent auditor, Deloitte & Touch, this week acknowledged SMT is working on a restructuring plan, but said the assumptions were so great that it couldn’t even issue an opinion on the EMS company’s chances as a “going concern.” Its report is basically accountant speak for, “We don’t like what we see.”

Echoes of Elcoteq abound. Customers can’t risk product delays because their EMS provider is out of cash, and tend to bolt at the first opportunity. Competitors smell blood in the water. The situation snowballs. As of this writing, the prognosis for SMT Holdings is grim.

Elcoteq’s Basket Had Too Few Eggs

Thanks to Europe’s fairly generous insolvency laws, Elcoteq will likely survive having run out of cash (which isn’t easy for a $1.5 billion company to do). But the industry will be reminded — again — of the danger of having too few eggs in a given basket.

Elcoteq fared beautifully for years as Nokia’s primary EMS supplier. At one point, Ericsson and Nokia made up 92% of Elcoteq’s annual sales. Revenues almost doubled in 1999, then tripled in 2000. As the saying goes, it seemed like a good idea at the time.

But Elcoteq did not anticipate that the 20-year relationship with Nokia might be undermined by emerging markets and their concurrent price pressures. Nokia, saddled with innovation-debt and fierce competition, fell victim to the market share chase and effectively bolted to Foxconn and Jabil. Years of acquisitions had taken their toll on Elcoteq’s cash, which ran frightfully low during the 2009 recession. A deal with Shenzhen Kaifa Technology, which would have brought in much-needed cash, failed to materialize.

Despite turning a profit last year — its first since 2006 — cash from operations was just 9.4 million euros. You know things are bad when you are left to asking Hungarian banks for money.

As of today, Elcoteq employs 7,000 workers across all major regions. A year from now, I’m guessing it will be half that. The company simply hasn’t proved it can build a sustainable business without the generosity of a major patron.

Predictions, Revisited

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.

Elcoteq-Nokia Speculation Off Hook

Here’s something that will never happen: Elcoteq buying Nokia’s handset manufacturing operations.

Regardless of whether Nokia would sell its production facilities — and it wouldn’t be a complete surprise if it did — Elcoteq won’t be the buyer. The EMS firm has neither the capital nor the inclination. Not only has Nokia pulled in most of its assembly from Elcoteq, but the latter made clear to this reporter earlier this month that it plans to focus on building its industrial electronics business. Moreover, the EMS firm has been scrounging up investments for much-needed operations funding. With the price tag for Nokia’s handset plants (and its ongoing assembly business, no doubt) likely in the hundreds of millions, if not $1 billion or more, Elcoteq simply lacks the funds — and capacity to raise them — to pull this off.