Joe this was out today in the Motley Fool luch edition... it is of definite interest:
Here is the link also:
fool.yahoo.com
The Lunchtime News
Jun 19, 1998
FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Outsourcing Imperative
Is electronics contract manufacturing (CM) dead? With numerous original equipment manufacturers (OEM) in various electronic equipment sub-segments forecasting
softening end-user demand, the companies that supply them with "the guts" for that equipment are all getting hit hard. Many are at or near 52-week lows. Hadco
(Nasdaq:HDCO - news) , Jabil (NYSE:JBL - news) , SCI Systems (NYSE:SCI - news) , the list goes on and on, and where it stops depends to a large degree
on investors' perceptions. The important thing to remember, however, is that OEMs are increasingly concerned about their capital returns, and are thus selling off
manufacturing assets to get capital off their balance sheets, as well as reap all the traditional benefits of outsourced manufacturing: shorter product cycles, decreased
expense, and greater flexibility.
This imperative to outsource is stronger than ever. The contract electronics manufacturing industry currently accounts for only 15% to 20% of yearly electronics
manufacturing, but it is gaining share each year thanks to frequent inventory corrections as well as the more recent specter of the Asian contagion. OEMs as large as
handset makers Nokia (NYSE:NOKa - news) and Ericsson (Nasdaq:ERICY - news) will continue to sell electronics manufacturing capacity for much the same
reason that Motorola (NYSE:MOT - news) and Texas Instruments (NYSE:TXN - news) have exited the memory chip business -- outside contractors can
manufacture things cheaper. Even with the markup, cost of goods sold decreases when OEMs use contract manufacturers who are specialists and who can operate
much closer to capacity levels for a greater part of the year. Prescient comments were offered by Jabil Circuit president Tom Sansone when he recently assessed the
OEM problem:
"Companies that are fully vertical with deep bricks-and-mortar exposure to product lines wind up with real downside risk anytime that total markets slow down.
[Asian macroeconomic problems] have an emotional impact on the vertical OEMs out there. I would expect that we will see a very high level of inquiries from
OEMs who have historically been very committed vertical manufacturers."
As it turns out, despite vigorous denials to the contrary, Hewlett-Packard (NYSE:HWP - news) sold printer parts manufacturing capacity to Jabil, which actually
contributed to problems for Jabil due to start-up costs; however, the growth story for the CM industry remains intact. Long-term investors would do well to take a
closer look at the segment now, which would go a long way toward dispelling inventory exposure myths and other popular notions that will not affect the segment
going forward.
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