Celestica seeks new customers for outsourcing
By SHOWWEI CHU / Toronto Globe and Mail / Nov 3
With their plants idling, Celestica Inc. and rivals are trying to drum up business from customers other than traditional makers of computers, laptops and telecommunications equipment.
Throughout the late 1990s, computer manufacturers and telecom network vendors outsourced the production of hardware to electronics manufacturing services (EMS) companies, such as Celestica, powering their growth, analysts said.
But as demand from those sectors has slumped, EMS vendors have had to intensify efforts to attract manufacturing business in the automobile, medical and consumer sectors to grow revenue and mitigate the effects of future dips.
"There's no question that EMS companies have seen their communications business collapse over the last couple of years and are looking for a more balanced business mix," said Todd Coupland, a technology analyst at CIBC World Markets Inc.
Automobile and medical equipment is expected to be worth $10.86-billion (U.S.), or about 12 per cent of the entire EMS market, at the end of 2002, about the same as last year, according to market research firm International Data Crop.
The market for consumer electronics is expected to grow to $16.29-billion and IDC projects the entire EMS market will reach $90.5-billion by the end of the year.
The new markets are "attractive" because their "degree of outsourcing is relatively light compared to IT and communications," said Mark Lucey, an analyst at TD Newcrest.
But they carry their own set of challenges, analysts said.
"The automobile and medical spaces are definitely areas of growth, but we expect to see slow growth through the period," said Kevin Kane, an IDC analyst. Also, just because EMS companies want to get into these areas doesn't mean their potential customers are going to outsource manufacturing to them, he said. Many consumer electronics firms are Japanese, and they've traditionally been slow to outsource.
"In this environment, I think everyone is striving for more diversity," said Eugene Polistuk, Celestica's chief executive officer.
Toronto-based Celestica's main business of supplying components or finished products for Sun Microsystems, IBM and Hewlett-Packard Co. accounted for nearly two-thirds of its $10-billion revenue last year, which has been shrinking because of the slowing economies in Europe and the United States.
To quell investor concerns, Mr. Polistuk said he felt compelled to emphasize during a conference call last month that about 20 per cent of Celestica's 100 customers now come from the automotive, industrial, medical, military and airspace segments. However, revenue as a percentage of total sales from those sectors is expected to be in the "low-single digits," he said.
Mr. Polistuk said that information technology and communications represent about 90 per cent of the EMS market today and that "there's still a lot of business that hasn't been outsourced."
Last month, rival Solectron Corp. formed a new automotive group "to diversify our portfolio," and capitalize on the growth opportunity in the sector that is expected to grow about 7 per cent a year, said spokeswoman Birgit Johnston.
Solectron's acquisitions of C-Mac Industries Inc. and NatSteel Electronics Ltd., and of facilities from Sony Corp., have helped pave the way into the automotive area, which is now approaching $500-million in annual sales for the company. C-Mac, which owned two subsidiaries, Kavlico Corp. and Invotronics, catered to automotive suppliers, Ms. Johnston said.
On the consumer electronics front, there has been a stream of deals announced recently by EMS companies, Mr. Coupland said. In September, Flextronics International Ltd. announced a supply agreement with Casio Computer Co., in which it will make a variety of products for the consumer electronics company.
In August, Jabil Circuit Inc. signed a four-year deal with Royal Philips Electronics to make a number of consumer products. Last week, Celestica said it will be handling warranty repairs for Palm Inc.'s handheld devices. |
