EMS providers that once salivated over any deals that would help give them a global footprint are altering their acquisition strategies to instead enhance their supply chain services.
A slowdown in production is giving EMS players, which once chased OEM divestitures across Asia, Europe, and North America, a chance to better scrutinize future investments. Contract manufacturers are now striving to attain skills in three key areas-design engineering, electromechanical assembly, and enclosures.
"[EMS companies] want manufacturing and engineering expertise while they continue to consolidate their operations," said Shawn Severson, an analyst at Raymond James & Associates Inc. in St. Petersburg, Fla. "They want new customers, especially in the telecom industry."
Selling seasonp Major telecom providers such as Alcatel and Lucent are planning to sell several manufacturing sites to operate more efficiently. However, industry observers doubt whether OEMs will be able to rid themselves of underperforming plants now that EMS companies are becoming choosier.
"There's overcapacity and people who want to sell capacity," said David Foropoulos, an analyst at SG Cowen Securities Inc. in Boston. "Some plants are going to be boarded up rather than sold [to EMS providers]."
EMS executives are willing to snap up only those manufacturing assets they hope will pay off during better times. They know the $25 billion in outsourcing opportunities industry observers anticipate within the next year includes OEM divestitures, which continue to occur at a rapid rate.
Last week, Dutch telecom company Philips Electronics N.V. said it plans to get out of the cell phone business and will hand over the work to joint-venture partner China Electronics Corp., a Shenzhen, China, EMS company. Philips has another cell phone manufacturing location in Le Mans, France, that will continue to make residential cordless phones.
"The major reason why we want to bring the business to China Electronics is because we want to minimize risks and costs associated with cell phones," a Philips spokesman said.
Alcatel plant sales
Last week, Serge Tchuruk, Alcatel's chairman and chief executive, told workers that the French telecom giant will split its components business in Europe and the United States into separate companies. The move will allow Alcatel to continue its restructuring efforts as it outsources "part of the manufacturing activity [from those plants]," Tchuruk said, in a statement.
However, the company will keep several other plants tied to core competencies, such as carrier networks, satellites, and advanced optical services.
"We're keeping things that give us unique proprietary technology, but we're selling [several] basic technology manufacturing facilities," an Alcatel spokesman said. "We're in a high-tech industry and there's room for more innovation."
Core to be keptp An Alcatel spokesman would not quantify the number of sites for sale, but reiterated that the company plans to keep some core manufacturing capabilities.
"We sold a mobile phone operation to Flextronics recently, and they're going to make modems for us," the spokesman said. "We'll see the reaction of potential buyers for the other sites."
Last Monday, Alcatel signed a letter of intent to sell its Richardson, Texas, facility, which makes optical networking equipment, to Sanmina Corp., a San Jose-based EMS company. Financial terms were not disclosed, but analysts estimate that Sanmina will pay more than $100 million for the site.
"Our strategy is to focus on a few key technologies used in large, complex [communications] systems," said Randy Furr, Sanmina's president. "If we have access to those technologies, we believe we can better serve our customers."
Solectron takes on enclosures
Solectron Corp., Milpitas, Calif., last week closed on its purchase of Singapore Shinei Sanygo, a custom enclosure maker. The deal marks the first time that Solectron, the world's largest EMS company, has acquired enclosure capabilities.
Solectron plans to rename the Singapore operation Shinei International, a division within the EMS company's newly created Power, Packaging, and Cooling unit. Although financial details were not disclosed, industry observers say Solectron could have paid more than $100 million to bring enclosure services in-house.
"Solectron believes enclosures is an area that will become an important capability in attracting full-system assembly programs in the future," said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York, in a research report.
Picking capabilities carefully
However, EMS providers, regardless of their size, must make sure those newly purchased capabilities will pay off in the future, warned Roger Norberg, an analyst at J.P. Morgan Chase & Co. in Minneapolis.
"Smart companies are assessing whether those purchases make sense," Norberg said. "Some EMS companies want to be big in certain areas, and they're finding out that they paid two times too much in the current downturn."
SG Cowen's Foropoulos believes contractors will search for opportunities to lease manufacturing operations from OEMs rather than purchase sites outright.
"The supply agreement Flextronics has with [telecom company] Ericsson is a good example," Foropoulos said. "Flextronics will lease facilities from Ericsson and migrate that business to low-cost locations. We might see more of that."