Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Electronic Contract Manufacture (ECM) Sector -- Ignore unavailable to you. Want to Upgrade?

To: Brendan W who wrote (852)	11/10/1997 2:54:00 AM
From: Asymmetric	Respond to of 2542

This Article Dovetails With Your Thoughts November 10, 1997, Issue: 1083 Section: Viewpoints CEMs face increasing competitive pressures By Darrell Dunn With the global market for contract electronics manufacturers (CEMs) expected to approach $80 billion this year and $120 billion by 1999, the still-emerging industry appears to be one of the safest bets for success. Consider annual growth rates of 25% to 30% and the fact that CEMs have only tapped about 15% of the potential total available market that would exist if all OEMs used contract services, and it would appear that all a company has to do to rake in profits is set up a couple of surface-mount assembly lines and open the factory doors. Evidence indicates, however, that all is not well in the CEM universe. As the industry matures, the great mass of second- and third-tier service providers will need to proceed carefully to survive. Top-tier CEMs, led by SCI Systems Inc., which has quarterly sales approaching $2 billion, seem to be limited only by how quickly they can expand operations worldwide, primarily through acquisition of OEM operations and, to a lesser extent, smaller CEMs. "Midtier companies are having a harder time, especially if they don't have some meaningful competitive advantage in serving top-tier OEMs," said James Savage, a CEM industry analyst at BT Alex. Brown Inc., New York. "Global OEMs are gravitating toward CEMs that are equal to them." The gap between the top tier and the next level of CEMs seems to be growing. Only a small number of CEMs appear capable of keeping a reasonable distance between themselves and multibillion-dollar companies such as SCI and Solectron Corp. A few companies, such as DII Group Inc., Flextronics International, and Jabil Circuit Inc., which have quarterly revenue between $200 million and $300 million, have made impressive strides in the past two years. But rather than challenging SCI and Solectron, those companies appear to be establishing a very strong second tier. That leaves more than 100 other CEMs with annual revenue ranging from $10 million to $500 million. While there appears to be no indication that these companies will disappear, it is clear that the middle ground is becoming an increasingly difficult area when considering that CEMs must operate with perhaps the smallest margins in the electronics industry. Micron Custom Manufacturing Services restructured its customer base after seeing revenue decline from $370 million in fiscal 1996 to $290 million in fiscal 1997, primarily because of the extreme drop in memory prices and the CEM's former heavy reliance on memory-module manufacturing. Group Technologies Inc., which boldly moved to establish operations in Mexico and Brazil in 1994 and 1995, became overwhelmed by the complexities of running a worldwide operation and lost about $30 million over the next two years. It recently sold its foreign operations to SCI. DDL Electronics Inc., which lost $1.7 million on revenue of $49 million in fiscal 1997, had to turn to outside investors to pay off $5.3 million in debt. It is currently embroiled in a lawsuit involving a merger opportunity gone sour. ACT Manufacturing Inc. saw its revenue drop 2.5% to $62.3 million in its most recent quarter and posted a loss of $600,000, which was attributed to softness in demand from several key customers. The losses appear for the most part to be isolated in nature, not part of a trend. Shakeout and consolidation are facts associated with any emerging industry, and the CEM industry certainly is no exception. However, if the vast majority of CEMs are to prosper in the years ahead, they will have to select their markets carefully and, like the current success stories of Flextronics and Jabil, swiftly build adequate momentum to be contenders in the world market. -Darrell Dunn, an EBN senior editor based in Dallas, can be reached at ddunn@cmp.com. Copyright (c) 1997 CMP Media Inc.

To: Brendan W who wrote (852)	11/10/1997 8:43:00 AM
From: 18acastra	Read Replies (2) \| Respond to of 2542

Their are 4 public players that fall into the category of scale and global: SCI, Solectron, Jabil and Flextronics. In my opinion, these 4 will all win, some component of growth coming from ~25% overall industry growth and another 10%-15% growth coming at the expense of smaller, less well positioned playes (maybe not stealing their business, but winning a disproportionate share of new business). In my opinion, Of the four, Flextronics has the most attractive valuation on a P/E and Price/Sales basis. It also seems to have a lot of upside relative to analyst estimates. Additionally, they have low cost manaufacturing in China, Malaysia, and Mexico that is getting lower and lower cost due to currency de-valuations. This should position FLEXF to win more business from their global blue-chip customer base that already includes Cisco, Ascend, Microsoft, Advanced Fibre and other significant datacomm and telecomm players. My opinion.