Mike,
Definitely need the bear! But...
To further examine Deswell's operation (beware, it's a long post):
If the customer has to pay an upfront charge on the plastic, wouldn't this also apply to set up costs for Kwanasia and Kwanta?
Kwanasia would have to design circuit board production and the machines that apply the components. They then would have to train employees and layout the assembly line for assembly of that product. This would entail a high initial cost followed by low production costs.
The same would apply for Kwanta and the stamping of metal parts for the product.
Each contract requires substantial upfront monies from the customer. With Deswell, they pay for the plastic, the metal, the boards, and the assembly to one customer instead of a variety of customers. Very few companies offer this combination without involving other suppliers. The only shipping involved prior to product delivery is for the board components, items shipped by thousands in a small package.
My point is that once they sign a contract with an OEM customer to produce a product, unless that product is discontinued, Deswell will have an ongoing relationship with that company.
If they had not gotten into assembly, they wouldn't have as strong a lock on the customer. By doing it all, with the exception of components on the board, they insure themselves of continued business providing they keep quality high and prices low enough that the customer won't look elsewhere.
While we might be concerned about the small list of customers, it appears to me that each added customer is not a one time contract. As the list grows, they aren't replacing business lost to former customers, but adding to existing and future. A contract for a 10% increase in revenue is very likely a contract that will be ongoing over a period of years. If that customer is satisfied, contracts for new product designs would result. In many cases, only slight modifications are made to a design and this would be far cheaper to do thru Deswell than to seek another supplier.
By the same token, a customer lost may be lost forever. They must have the capacity to insure delivery to existing customers and know that the capcity will be there when seeking future business. This may mean that the facilities recently acquired are not for existing contracts, but to enable them to take on more business.
Behringer and the other old accounts are stable (except Namtai), InterTel and Harmon are growing fast, but I think the V-Tech account may have the most potential as they market a large variety of products. So far, Deswell is producing telephone related, but there's a lot of opportunity with the V-Tech account.
Hate to do it, but (IMO) I'm adding reasons to be bullish.
For what it's worth,
Ron
PS. I'm applying a lot of this same thinking to HIHOF and AEHCF. |
