Here's another one:
July 12, 1998, Issue: 798
Section: Systems Assembly
Partnering For A Common Cause -- Contract
manufacturers, distributors unite
Warren S. Hersch
New York -- As Ingram Micro Inc. and Solectron Corp.
forge ahead with their channel assembly agreement,
industry observers now expect other channel distributors
and contract manufacturers will enter into similar alliances.
Still, some question the long-term viability and business
fundamentals of such arrangements.
Such partnerships let channel distributors quickly boost
manufacturing capacity without spending on new plant and
equipment, said market watchers. These alliances allow the
channel to leverage contract manufacturers' efficiencies
gained from economies of scale, a key factor that has fueled
the industry's rise.
"There's a lot of copying behavior in this industry," said
Charlie Mullen, senior industry consultant for Technology
Forecasters Inc., Alameda, Calif. "It wouldn't surprise me
if other large contract manufacturers and distributors
pursue partnerships."
"We can expect more of these alliances within the supply
chain," said Charles Smulders, senior industry analyst for
the distribution channel at Dataquest, a San Jose,
Calif.-based market-research firm.
The agreement between Ingram Micro, Santa Ana, Calif.,
and Milpitas, Calif.-based Solectron, unveiled June 15,
combines Ingram Micro's Memphis, Tenn., and
Netherlands-based channel assembly plants with nine
Solectron manufacturing centers worldwide to do final PC
assembly under Ingram Micro's Frameworks program.
How quickly other contract manufacturers and channel
distributors jump onto the Ingram Micro-Solectron
bandwagon, and whether such alliances can last, is being
hotly debated.
Representatives at contract manufacturers Avex Electronics
Inc. and Flextronics International Ltd. said they view the
deal positively, believing it to be a natural progression of
the industry's expanding focus.
"We see merit in such alliances and continue to evaluate
them," said Larry Hanlon, Avex's director of marketing.
Other major contract manufacturers were unavailable for
comment. But one source close to the industry, who
requested anonymity, said such alliances lack the necessary
incentives. "We've talked to a number of channel
companies," he said. "But we haven't found a way to make
[such deals] work. You can't make money doing it."
Some analysts agreed with that assessment. Dataquest's
Smulders said margins in the manufacturing distribution
businesses, which are already slim, will be reduced even
further by revenue-sharing under such alliances.
Jim Savage, financial analyst with New York-based
investment banker Alex Brown, concurred, adding that such
partnerships might increase manufacturing costs by creating
redundancies in inventory.
"I'm not sure that deals like Ingram [Micro]-Solectron make
sense," he said.
Industry observers said if and when additional partnerships
are established, they likely will be limited to the major
contract manufacturers: SCI Systems Inc., Jabil Circuit Inc.,
Celestica Inc., Avex and Flextronics. The 30-plus
small-and midsize players-most of which generate less than
$500 million in revenue-lack the resources and worldwide
assembly capabilities to match the channel's manufacturing
requirements, said experts.
In the long term, build-to-order manufacturing by the
computer maker or contract manufacturer likely will
replace or reduce the channel's direct role in assembly,
leaving channel companies to do distribution and/or
systems integration, said some analysts and industry
executives.
In Ingram Micro's case, this might happen if, say, Solectron
acquires Ingram Micro's Memphis and Netherlands
configuration centers.
"Ultimately, I don't believe channel assembly of branded
products will be very important in the scheme of things,"
said Smulders. "We're probably going to see a
consolidation of channel assembly sites. There are too
many out there now to make sense from a cost standpoint,"
he added.
Technology Forecasters projects that
contract-manufacturing revenue will increase to $178
billion in 2001 from $89.6- billion in 1998, representing a
25 percent compounded annual growth rate.
Computer-related equipment, including PCs, computer
peripherals, workstations, servers and mainframes, will
account for approximately 30 percent of the totals.
Underpinning that growth is a steady rise in the number and
types of products that contract manufacturers assemble, a
step that many an OEM customer previously handled, said
experts.
For example, IBM Corp. and Hewlett-Packard Co. have
since 1992 and 1995, respectively, outsourced
manufacturing of their printed circuit boards to Solectron,
which acquired assembly divisions of the PC makers for
that purpose.
The industry also has grown by offering new services.
Since the 1970s, many of the largest contract manufacturers
have expanded from core manufacturing to providing
product design and development, packaging consulting,
distribution, logistics and support services.
"What [these new services] allow our customers to do is to
focus on their core competencies," said Mark Holman,
Solectron's director of marketing and business
development. "For the PC makers, that would include
primarily marketing and interfacing with the channel, plus
some R&D and engineering."
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