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CEMs holding on to momentum
Darrell Dunn
After closing 1998 as one of the best-performing markets in the electronics
industry, contract electronics manufacturers are poised to finish 1999 with the
same gusto.
"We continue to see OEM divestitures driving the growth. If anything, [the
December quarter] solidifies the 25%-growth outlook we're looking at for the
year," said William Cage Jr., an analyst with J.C. Bradford & Co. Inc.,
Nashville, Tenn.
Although a recession continues to plague the Far East, residual effects on the
U.S. CEM industry have become less severe in recent months. And OEMs
are beginning to increase orders with their CEM partners, according to
analysts.
In fact, analyst James Savage of San Francisco-based Thomas Weisel
Partners LLC, said the continued acceleration of new outsourced
manufacturing programs is as impressive as the record results reported by
top-tier CEMs.
"Not only are they doing well, but we're seeing war chests being created with
companies like Solectron and Flextronics raising capital," Savage said. "They
have money for additional acquisitions for the acceleration of growth they're
anticipating over the next year."
Results of the top-tier CEMs in the latest reporting period are particularly
impressive, analysts noted. The good news started with Solectron Corp. and
Jabil Circuit Inc., both of which posted strong double-digit gains in their fiscal
quarters that ended in November; their sales in that period increased 71% and
40%, respectively.
The momentum continued with December-quarter reports that included 70%
revenue growth for Flextronics International Ltd., and 25% growth for
Sanmina Corp. And it didn't stop there.
New programs announced in January by the industry's two largest CEMs,
Solectron and SCI Systems Inc., typified the growth analysts expect to
continue throughout 1999. Huntsville, Ala.-based SCI announced an
agreement to acquire a 210,000-sq.-ft. manufacturing operation in Kunshan,
China, from a Hewlett-Packard Co. subsidiary, and signed new manufacturing
contracts with Symbol Technologies Inc. and Silicon Graphics Inc.
Meanwhile, Milpitas, Calif.-based Solectron last week finalized an agreement
with IBM Corp. under which the CEM will become the exclusive maker of
motherboards for the electronics industry giant's notebook PCs.
As part of the agreement, Solectron will lease IBM's 405,000-sq.-ft.
manufacturing operations in Austin, Texas, for the next three years, and will
offer jobs to 1,300 IBM workers.
These recent trends confirm that growth among the top-tier CEMs-those with
annual revenue of more than $1 billion-will be greater than that of mid-tier
players, according to analysts.
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