Here's an article from Electronic Business News. Notice the comment about Solectron having $4.9 billion in inventory. Most of this is for Cisco.
BTW, Cisco wants us to take it back, the vendors <LOL>, We have some of chair after the music stopped.
EMS providers feel the pain of industry downturn
By Claire Serant
EBN
(03/26/01, 07:07:08 PM EST)
When Solectron Corp. released its quarterly results last week, Ko Nishimura dialed in from Europe.
The company's chief executive was meeting with key customers to gauge the climate there. He was wondering whether business conditions are as tough in Europe as they are in North America.
“The [overall] market visibility is poor and the business tone is negative,” Nishimura told analysts dur-ing a conference call.
The rapidity of the decline in the electronics industry came as a considerable surprise to Solectron, as well as to several EMS companies, which only a month ago boasted how their sector was immune to the latest downturn.
They are quickly learning that's not the case. Capacity utilization rates for the industry, which were in the 75% to 100% range before the crisis, have dwindled to less than 60% for most companies, according to analysts. Declining orders from OEMs have become EMS providers' worst nightmare as inventories rise along with escalating concerns that end-market visibility is out of sight.
However, most EMS providers believe the lucrative outsourcing wave has not dried up. So far this year, $5 billion in outsourcing deals have been generated by OEMs divesting assets to EMS companies, said Jim Savage, an analyst at Thomas Weisel Partners LLC in New York.
“We wouldn't be surprised to see an additional $20 billion for 2001,” Savage said.
Some of the new programs involve enhanced wireless communications devices that should translate into higher revenue for EMS providers. In addition, outsourcing for emerging technologies such as fiber optic equipment could increase along with smaller programs that could become sizable business within the next two or three years, according to analysts.
“The business up for grabs could be worth several billion dollars in new revenue over the next three years,” said William Cage, an analyst at First Union Securities Inc., Nashville, Tenn.
EMS providers are holding on to the fact that some OEMs without manufacturing facilities will continue to outsource. Other OEMs that have not outsourced in the past might hire contractors to wring out costs and maintain their competitive edge with peers.
“I don't see OEMs deciding to build their own plants or hiring extra labor when the EMS industry has proven to be the best manufacturing solution from a cost, time-to-market, and global solution standpoint,” First Union's Cage said.
But lackluster consumer demand across many markets, especially the PC and telecom sectors, has caused fixed costs for OEMs and their EMS partners to float to the top.
Last week, Solectron, Milpitas, Calif., and two other EMS companies, APW Ltd. and Jabil Circuit Inc., reported second-quarter results that included plans to streamline their organizations through a slew of employee layoffs, plant consolidations, and one-time pretax restructuring charges that could total more than $550 million in the third quarter.
“Those charges demonstrate that some of the EMS acquisitions were done [in the past] without much thought to pricing but to keep momentum at full pace,” said Michael Schneider, an analyst at Robert W. Baird & Co., Milwaukee. “Now, with a slower economy in hand, the flaws in that strategy are becoming readily apparent.”
To preserve its business, Solectron has laid off 8,200 workers and will absorb into its global operations two plants from its recent purchase of NatSteel Electronics Ltd., a Singapore EMS provider. The plants are located in Budapest, Hungary, and Guadalajara, Mexico. The company expects its third-quarter restructuring charge to fall between $300 million and $400 million.
Jabil has laid off 300 workers at its St. Petersburg, Fla., headquarters because of declining PC and communications orders. Jabil expects to take a one-time charge between $20 million and $25 million over the next two quarters. Those charges will offset the company's workforce reductions and acquisition costs tied to its purchase of several plants from Marconi Communications that are expected to close in August.
“We wish the market was better, but until then we have to run a tight ship,” Tim Main, Jabil's president and chief executive, told analysts.
Meanwhile, APW handed out pink slips to 1,400 employees, said Dick Sim, chairman, president, and chief executive of the Waukesha, Wis.-based company. APW will take a one-time restructuring charge of $30 million to $35 million in the third quarter.
“The next six months are going to be difficult,” Sim said. “We're rebalancing our cost structure to fit adjusted sales forecasts and generate positive cash flow.”
Rebalancing for Solectron includes working through $4.9 billion worth of inventory that appeared on its books in the second quarter. Solectron plans to push excess orders back to one of its major customers, networking giant Cisco Systems Inc., within the next six to 12 months, according to industry observers.
However, the current market could yield opportunities for the EMS industry. Companies that survive this downturn will emerge as leaders. Some analysts believe Celestica, Flextronics, Jabil, and Solectron are strong enough to navigate through the current storm.
“Certainly, as 2002 enters and the strongest companies emerge from this economic slowdown and the weaker players are further weakened, we could see some consolidation,” First Union's Cage said. |
