Richard if you have'nt read this reread it one more time.You said that the slow down could come hard and fast.Well from what I know the primary ecm's is getting 3-5 year contract's and locked in rev's .and Jabil is a primary emc. Their are lot's of second tier emc that would lose biz before jabil.patroller better Late Than Never -- Europe embraces contract
manufacturing in a slew of acquisitions and construction
projects.
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."
Bull's Keryhuel said the company recently established a joint-venture
relationship with a company in Slovakia that will provide the CEM with
manufacturing capacity. Specifics on what products will be built in Slovakia
are still being finalized.
A mature CEM market for Europe
Europe's relatively late start in adopting an outsourcing model may actually
prove advantageous. As increasing numbers of indigenous OEMs move to
utilize contract manufacturing, they'll find a mature industry with multiple levels
of value-added opportunities, Thielen said.
"Contract manufacturing has matured over the last several years, and we have
defined what we do very well," he said. "We've moved from just putting parts
in holes to adding much greater levels of value, so that the European market
will be able to have an immediate benefit. Companies getting involved in
outsourcing for the first time are going to derive the benefits that evolved over
years."
One of the most pervasive trends in contract manufacturing has been
increasing levels of box-build, or full system assembly, which is also beginning
to develop in Europe.
After expanding its outsourcing with SCI to a box-build level in North
America over the past two years, Hewlett-Packard Co., Palo Alto, Calif.,
moved in November to sign a potential multibillion-dollar agreement for
box-build production of its PCs by SCI in Europe for European distribution.
SCI will initially produce the finished products at a leased facility in the
Netherlands, but there are plans to move to an undisclosed permanent facility
in Europe by May 1998.
Bull currently realizes about 25% of its revenue from box-build services, and
that percentage is likely to grow, even as the current split between 55%
North America-based customers and 45% Europe-based customers will also
likely move heavily to European OEMs, according to Keryhuel.
If the European economy continues to expand and spawn increasing numbers
of OEM startup companies, CEMs will benefit, Celestica's Cohen said.
"I don't think the newer companies are even going to seriously consider
investing in manufacturing capacity, and they will tend to outsource early on in
their plans," he said. "The ones that already have a heavy investment in plants
and equipment have found the decision to go through the outsourcing process
more difficult."
Avex's Tillett said his company and other CEMs that have been in Europe for
a decade or more are beginning to see the benefits of a long-term strategy.
"There is a different culture that comes into play in Europe," he said. "I've
found myself having to slow down and gain some patience. Typically, OEMs
here don't make decisions in a hurry, but give them a lot of thought and
deliberation.
"They stand behind their decisions once they're made, however," Tillett said.
"You can still do business [in Europe] on basically a handshake basis.
They don't always require a 30-page contract, but I'm pretty sure that will
unfortunately change over time."
What's left for the indigenous CEM?
First- and second-tier CEMs have aggressively fought for leverage in North
America through acquisition and consolidation, often squeezing the mid- and
lower-tier CEMs out of the picture, and the same major CEMs are now
dominating the European market.
D2D's acquisition by Celestica has left only a couple of European CEMs -
Bull in France and Elcoteq Network in Sweden - with the size to compete on
the largest contracts, Technology Forecasters' Gordon said.
"The contract manufacturing industry is growing so quickly in Europe,
however, that there seems to be enough business for both the smaller,
indigenous companies as well as the multinationals," she said. "There are
hundreds of indigenous European contract manufacturers that will not be
completely overshadowed."
Alex. Brown's Savage said that just as the largest OEMs in North America
generally partner with the largest CEMs, a similar scenario is playing out in
Europe.
"It's generally just capital structure issues, and it is becoming apparent, as
evidenced by the Neutronics acquisition, that the smaller European CEMs are
increasingly going to be absorbed by the multinational contract
manufacturers," he said.
Avex's Tillett said that while there is some competition for "in-country work,"
the larger CEMs in general are targeting customers that also have a global
presence.
Bull's Keryhuel said the company experienced a 33% growth rate in
European business from 1996 to 1997, and has projected 25% growth in
Europe in 1998. He said $380 million of the company's $450 million in 1997
worldwide revenue was derived from Europe. Bull also has facilities in
Lowell, Mass. Keryhuel downplayed the idea that Bull's CEM operations
might be a target for acquisition.
"Right now, Bull Electronics is a valued asset of [parent] Groupe Bull, and it
makes no sense for Groupe Bull to do anything concerning Bull Electronics,"
he said.
The high-volume, high-growth telecommunications and PC markets have
fueled the majority of the contract manufacturing in Europe to date, but
CEMs believe new markets will also begin embracing the outsourcing
industry.
"Europe still has an indigenous consumer electronics industry with televisions
and VCRs, but with the exception of set-top boxes it's not a market contract
manufacturers have related to as yet," Solectron's Neston said. "Consumer is
a slightly different model, and those guys put down very highly automated
lines with low levels of flexibility, which has not played into our strengths to
date."
Tillett said medical instrumentation is a market he believes will grow in both
Europe and the United States in the coming years.
"There has been apprehension in terms of liability, and some reticence on the
part of the [CEM] to go after that marketplace," he said. "But there is
certainly room for growth there, and it will be exploited as contract
manufacturers continue to prove the quality and reliability associated with
outsourcing."
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