November 17, 1997, Issue: 1084
Section: News
HP taps SCI to assemble computers in Europe
By Darrell Dunn
In what may prove to be one of the largest single deals in the history of
contract manufacturing, SCI Systems Inc. last week secured an
agreement to provide box-build services for Hewlett-Packard Co. in
Europe.
Observers said the potential multibillion-dollar deal is an example of an
increasing willingness of major OEMs to relinquish all levels of
manufacturing to contract electronics manufacturers (CEMs)
SCI will serve as HP's primary manufacturing partner in Europe,
producing finished products initially at a leased facility in the
Netherlands and by May 1998 at a planned 300,000-sq.-ft. permanent
facility. The location of the permanent facility will be announced later.
For the past two years, SCI has been performing box-build
manufacturing of HP's desktop PCs for distribution in North America at
its Huntsville, Ala., headquarters. Gene Sapp, SCI's president and chief
operating officer, called the European agreement "a natural extension
of SCI's existing multinational relationship with Hewlett-Packard."
SCI, the world's largest CEM, believes that within two to three years,
its business with HP in Europe could exceed $1 billion per year.
The European market for CEMs seems to be coming to life, according to
Olin King, chairman and chief executive of SCI. "Europe had not
really adopted contract manufacturing quite as rapidly as the U.S. had,
but we see that changing," he said. "We see that European business in
general is picking up, and that's helping contract-manufacturing
momentum."
John Tuck, publisher of the contract manufacturing newsletter
"Manufacturing Market Insider," Needham Heights, Mass., said, "In
terms of being able to manufacture in Europe, with a program of that
size, you'd be hard-pressed to find many other contractors that could
pull this off. It's obviously a very significant contract."
SCI, the world's largest CEM, operates several manufacturing sites in
Europe. For the first quarter of its 1998 fiscal year, which ended Sept.
30, the company reported net income of $36.4 million on revenue of
$1.74 billion.
Over the past few years, HP, once a proponent of in-house system
assembly, has sold manufacturing plants and moved from outsourcing
on a board level to more recently on a box-build level.
Transitioning customers to box-build, or full system-level assembly, has
been a major emphasis of virtually all major CEMs over the past few
years, as the service providers have sought ways to expand their
value-added programs and associated revenue.
The Institute for Interconnect and Packaging Electronic Circuits'
Assembly Marketing Research Council, Northbrook, Ill., estimates that
box-build services accounted for about 20% of total CEM revenue in
1996.
"Box-build as a percentage of the total revenue is ready for a major
acceleration," said James Savage, an analyst at BT Alex. Brown Inc.,
New York. "Contract manufacturers are clearly seeing that this is
where the trend in the market is going, and where customer demand is
increasing."
Savage said box-build services of HP PCs for the North American
market currently account for about $3 billion of SCI's annual revenue,
and the European deal could push the total past $4 billion annually by
1999.
King said box-build services now represent more than half of the
company's total revenue, and could easily grow to as much as 65% of all
revenue.
Susan Wang, senior vice president and chief financial officer of
Solectron Corp., a Fremont, Calif.-based CEM and SCI's closest
competitor in terms of total revenue, said that with the number of
box-build programs increasing, billion-dollar contracts will be more
common.
"OEMs are beginning to really appreciate outsourcing as a primary
manufacturing strategy," she said. "Customers who have relatively
simple products like PCs and printers are in a good position to outsource
their total system immediately. Higher-value end systems, like complex
servers, test equipment, and communications products, are anxious to
move hardware requirements to [CEMs], but are waiting to confirm
that we have put in the engineering resources to support those complex
requirements."
Michael Marks, chairman and chief executive of Flextronics
International, a Fremont-based CEM, said his company has conceded
the PC business to SCI, but said box-build contracts are the wave of the
future for all major CEMs.
"SCI owns that market segment and its very high revenues, relatively
low margins, and pretty decent returns," he said. "We are concentrating
on much more complex systems with more value- added, but lower
revenues."
Flextronics' largest box-build contract is to supply PBX systems to
Ericsson Business Networks AB in Sweden, systems with as many as
150 different circuit boards per unit, as opposed to a single motherboard
in a PC. |
