Just a little imfo. Better Late Than Never -- Europe Embraces Contract Manufacturing
By Darrell Dunn
European OEMs may have been late to adopt the contract manufacturing model, but the
recent move of several major European telecom end-equipment suppliers to outsourcing
appears to have unleashed an avalanche of new growth opportunities.
North American contract electronics manufacturers (CEMs) have quickly capitalized on
this momentum, as plant acquisitions and construction projects are being announced on a
seemingly weekly basis.
"It's growing like crazy," said James Savage, a CEM industry analyst at BT Alex. Brown
Inc., New York. "It's really just a matter of OEMs trying to remain competitive in the
worldwide marketplace. They've seen what has been happening with contract manufacturing
in North America, and now they're saying, 'If you've got the assets for us in Europe, we're
going to take advantage of them.' "
Technology Forecasters Inc., Alameda, Calif., estimates that Western Europe will grow
from the third-largest contract manufacturing region in the world behind North America and
Japan to the second-largest region, trailing only North America. CEM sales in that region
are expected to grow from $10.5 billion in 1996 to nearly $30 billion by 2001.
In addition, markets in Central and Eastern Europe appear to be coming of age, providing
potential new markets and creating a center for low-cost manufacturing.
"Europe has lagged behind a bit in the whole outsourcing trend due to a variety of
governmental and economic issues, but that mold has been broken," said Dave Thielen, vice
president of worldwide sales at Dovatron International, Longmont, Colo., a division of DII
Group Inc., Niwot, Colo. Dovatron operates a manufacturing facility in Cork, Ireland, that
was recently expanded from 75,000 sq. ft. to 100,000 sq. ft.
"I think Europe in itself is economically challenged and under pressure to play in the world
arena," Thielen said. "When several major OEMs took a good, hard look at what their core
competencies were and made some big shifts to an outsourcing model, the rest of the
European companies started paying close attention."
Key OEMs open the door
Europe has long been home to several large North American CEMs such as SCI Systems
Inc., Huntsville, Ala.; a few second-tier European CEMs; and hundreds of small European
CEMs. Until recently, however, the bulk of the work performed by the large, multinational
CEMs in Europe was for North American OEMs seeking regional production for
distribution of end products in Europe.
Several of the largest OEMs in Europe have been credited with opening the outsourcing
floodgates, particularly Ericsson Telecom AB, the Nokia Group, and Siemens AG.
In February, Ericsson sold its manufacturing operations at two plants in Karlskrona,
Sweden, to Flextronics International Ltd., San Jose, and reached manufacturing agreements
with Flextronics, SCI, and Solectron Corp.
The Ericsson deal is a key ingredient in Flextronics' overall accelerated- growth plan, with
the plants expected to add as much as $350 million to the company's target of about $1
billion in revenue in 1998.
David Neston, vice president of Solectron and president of Solectron Europe in
Cambridge, England, said business derived from customers such as Ericsson is allowing
CEMs to create infrastructure that will fuel further penetration into European OEM
accounts.
Solectron has plants in France, Germany, Scotland, and Sweden. The Sweden plant will
primarily serve Ericsson in the short term, but will eventually be a center for serving all
telecommunications companies in that country, Neston said.
"Europe has been latent for some time," he said. "But today, almost all the major OEMs in
Europe are benchmarking. A lot of them are through with that process, are engaging in trials
with companies like ourselves, and a number are building up to some very big outsourcing
schemes. The process is inevitable. The game is on."
Scotland, Ireland provide operation base
According to Technology Forecasters, the five largest CEMs in the world, based on 1996
revenue, are SCI, Solectron, Celestica Inc., Jabil Circuit Inc., and Avex Electronics Inc., all
of which have established operations in Europe. Numerous other players bidding for a
position in the higher echelons of contract manufacturing have also recently moved to
establish a presence.
Traditionally, the two most significant centers for CEMs have been Ireland and Scotland.
In addition to a strong base of North American OEMs with operations in those two
countries, numerous indigenous CEMs are present.
Many non-European CEMs have found Ireland and Scotland an easier path for a first
foray into the European market. There is no language barrier, the time zone is the closest to
those of the United States, and political and social issues have been less troublesome. Strong
labor union rules governing the transfer of manufacturing operations in continental Europe
have also been a concern.
But with the emergence of a united European market, many of those concerns are
lessening, according to Dovatron's Thielen.
"There is a growing perception throughout Europe now that it is going to be easier to get
business done over there," he said. "The social, cultural, geographic, logistical, and even
wage-rate issues are becoming less of a concern."
But Alain Keryhuel, president of Bull Electronics Worldwide in Angers, France, said
cultural issues remain. The company's status as the largest remaining indigenous CEM
provides advantages for OEMs seeking manufacturing in Europe, he said. "Even with a
united Europe, we have multiple cultures and multiple practices, and it's easier for a
European-based company to complete the outsourcing in Europe, whether that be a North
American OEM or anyone in Europe."
On the acquisition trail
North American CEMs have been particularly active this past year as they seek to take
advantage of developments in Europe.
Beginning with Celestica's February acquisition of Europe's largest CEM operation, Design
to Distribution Ltd. (D2D), Stoke-on-Trent, England, the year has been marked by a
continuous stream of consolidation and construction activity.
D2D provided Celestica with multiple manufacturing plants in the Manchester, England,
area and enabled the company to secure a new base of business outside its traditional core
customer, former parent IBM Corp.
"It was, quite simply, a response to customer demand," said Paul Cohen, senior vice
president of corporate development at Celestica, Toronto. "For us to operate on a
worldwide scale, the European market is awfully important, and D2D filled a gap in our
service offerings."
Late in February, Flextronics completed its acquisition of Ericsson's Karlskrona plants. In
October, Mack Technologies Inc., Westford, Mass., announced plans to build a plant in
Larbert, Scotland, that is expected to be in operation by early next year.
In November, Flextronics agreed to acquire Neutronics Electronic Industries Holding AG,
a CEM with three manufacturing plants in Hungary.
Also last month, Micron Custom Manufacturing Services (MCMS), Nampa, Idaho,
announced its intention to acquire the manufacturing operations of Alcatel Bell in
Confontaine, Belgium.
"I view the Alcatel Bell acquisition as a first step into the region," said Rob Subia, chairman
and chief executive of MCMS. "Many of our customers have integration sites in Ireland or
the U.K., and I think we would be well served to see what opportunities present themselves
there."
The Eastern Europe equation
Just as Malaysia and Thailand have become low-cost manufacturing centers for Asia, and
Mexico has for North America, Eastern and Central Europe appear poised to emerge as
low-cost centers for the European market.
In addition to Flextronics' acquisition in Hungary, SCI in September began construction of
a plant in Tatabanya in that country. "Hungary does have lower labor costs than we find in
Western Europe," said Olin King, chairman and chief executive of SCI. "Labor costs are a
factor that need to be taken into account in Europe, just like we do in Asia or North
America. It helps fulfill our overall effort to build in the region, for the region."
Other CEMs are negotiating to acquire manufacturing operations in Central and Eastern
Europe and, to a lesser extent, are looking at greenfield operations in that region.
"I am certain that my customers want me to be there," Solectron's Neston said. "They
expect me to go forward and choose a location, and we are seriously looking at our
opportunities."
Chuck Tillett, vice president of overseas operations at Avex in Scotland, said part of the
company's overall growth strategy "will need to include something in Eastern Europe. We
are looking for the right country that has a relatively stable currency and stable political
environment. It is actively being discussed, and we'll likely move on it in the next 12 to 18
months."
Dovatron's Thielen said he has watched with interest as SCI and Flextronics have moved
into Hungary.
"There are definite challenges to moving in there, but there is also a strong cost motivation,"
he said. "But if you look at what is happening in Europe, and if all the plans for continued
growth of the united Europe come together, Eastern Europe will be in the middle of
everyone's plans, and many of the ongoing concerns will likely be alleviated.
"With Eastern Europe coming on board, suddenly Europe itself can stand alone," Thielen
said. "A complete range of plants and capabilities will be in place from the U.K. to Western
Europe; and with the emergence of Eastern Europe there will be a low-cost solution within
Europe, versus having to go to Third World countries or Asia."
(Continued on page 2) |
