It's official. Smart Modular Technologies Inc. is a contract manufacturer. And a memory-module maker, datacommunications and networking-products maker, a design outsourcing center, and for customers that require service, a logistics, shipping, and inventory-management services provider.
To eliminate all doubt about the hybrid nature of its operations and demonstrate how far the company will go to diversify its revenue base, Smart Modular last week agreed to buy the embedded-computer-product unit of Compaq Computer Corp. for an undisclosed amount.
All the services Smart Modular offers more than meet the requirements for a CEM, should the company wish to be recognized as such, said Ajay Shah, the company's chief executive, in an interview. But does it?
"If we're to choose between whether we're a memory-module maker or a contract manufacturer, I'll say we're a contract manufacturer," Shah said. "But we're not quite either."
While it sells a large percentage of its memory modules to Houston-based, Compaq, Smart Modular is struggling-with a large degree of success-to limit its exposure to the highly commoditized market. In the process, the Fremont, Calif., company has found itself managing the delicate task of securing enough design and manufacturing business without attracting the hostility of more entrenched CEMs.
"Buying Compaq's embedded-computing business is part of a move to diversify from the commodity-type memory business and reduce dependence on Compaq," said Jim Berlino, an analyst at CIBC Oppenheimer, New York. "Demand for embedded processors is strong, making the acquisition a right move. We just hope they don't walk away from the other business they have with Compaq."
Shah and his team can't afford to walk away from Compaq's business, which contributed 62% to Smart Modular's $714.7 million fiscal 1998 revenue. Their mission is to wean Smart Modular from the handful of companies that contribute the major chunk of its revenue.
"Certainly, it's our objective to diversify our customer base, and that hasn't happened to the degree that we would like," Shah said. "We're focused on becoming a complete outsourcing company, but not your regular CEM. In addition to manufacturing, we offer design and product conceptualization with strong engineering design skills."
The acquisition of Compaq's embedded business will help achieve that objective. By the end of the fiscal year, the new embedded unit alone is expected to contribute about 10% of revenue, while the contract manufacturing unit and the datacommunications businesses should also raise their contributions.
Smart had been trying to build its embedded-computer-processor business by expanding internally. But there were too many obstacles: The company's customer base was limited to North America, and it lacked a strong design, engineering, and marketing team.
That is about to change. Compaq's embedded-products unit, acquired when it bought Digital Equipment Corp. in 1998, is especially renowned for its engineering successes. In addition, the unit has operations in Europe and Japan.
Perhaps more important than the products that Smart Modular is getting-including Digital Equipment Co.'s software applications, PCI/ ISA passive backplane, and CompactPCI platforms using Alpha and Intel MPU architecture-the pact brings a team of high-tech experts urgently needed by Smart Modular, Shah said.