A trying year was dramatized by two unfolding stories: the economy and Elcoteq.
When it comes time to write the story of the EMS industry in 2009, foremost will be the effects of the recession. There is another story, however: the dramatic fall of Elcoteq, the former cellphone wonder whose sales have rollercoastered from a high of 4.28 billion euros (about $6.17 billion at today’s conversion rates) to an estimated 1.54 billion euros ($2.2 billion) at the end of 2009.
Last year felt in many ways like the nightmare of 2001-02 all over again. Factory shutdowns among Tier 1 and II EMS companies were the norm, with Flextronics, Celestica, Sanmina-SCI, Plexus, Benchmark, Jabil and Elcoteq all cutting plants and people. Most of the closures came in Europe or the US, where even mighty Foxconn shuttered a 400,000 sq. ft. PC assembly and enclosures plant in Fullerton, CA, relocating or letting go some 600 workers. (Most but not all: Flextronics, for example, shuttered its factory in Kuala Lumpur, the former Casio Computer site it acquired in 2002.) The differences between last year and the tech recession of 2001 were telling, however, in that EMS companies this time around acted with accordance with clear and aggressive strategies. It was as if, after the last go-around, the majors decided that if and when another industry recession hit, they were not going to react passively.
Key moves during the year include Asustek’s decision at year-end to split off its Pegatron manufacturing group, creating overnight one of the world’s largest ODM companies, and Venture’s decision late in the year to push harder into ODM work, which many see as more profitable than traditional EMS services. But while analysts and pundits continue to predict (guess?) that one or more of the top-tier EMS companies would be bought or closed, all – with the notable exception of one (see sidebar) – appear to have learned from past mistakes. They kept their inventories in line, their balance sheets clean, hoarded cash and refinanced near-term debt in order to ensure survival. They also cut fast and deep.
Almost every major EMS company saw revenues fall last year. For most companies, the first or second quarter was the trough, and sequential gains were seen through the rest of the year. In all probability, a return to 2008’s revenues will be a few years away. Among the top 20 companies, No. 1 Foxconn was an exception – barely – with sales growing less than 1%. Another outlier, No. 7 Cal-Comp Electronics, actually grew year-over-year the first two quarters, then fell behind by 8% year-over-year during the third, despite turning in its best revenue period of the calendar year. No. 13 Beyonics, Singapore’s largest EMS company, was up big and will be banging on the door of the Top 10 if it can keep up the pace.
With no major acquisitions or mergers during the year, there were few big changes to the Circuits Assembly Top 50 list. Falling off this year’s Circuits Assembly Top 50 is one company that, in hindsight, never belonged. Viasystems, which is relisting its shares, and as such began to break out its revenues, was in retrospect nowhere near the $504 million in sales we estimated last year. Hitachi Computer Products America announced in late fall it would exit the electronics manufacturing services business (albeit much of its EMS work was likely for its parent company). The biggest shock, however, was Jurong Hi-Tech, which came in at 26th last year. The Singaporean EMS company imploded under accounting irregularities and sold off its assets. (Needless to say, it did not make this year’s list.) And our apologies to Team Precision, Eolane, EPIQ and Electronic Network, all of which should have made last year’s rankings.
Besides Jurong, the two companies that appeared hardest hit in 2009 were Elcoteq and Surface Mount Technology (Holdings) Ltd. The former took a body blow from Nokia, which pulled all its assembly work in-house, taking an estimated $5 billion worth of EMS work offline. As a result, the company’s revenues fell more than 50% last year. Unlike Elcoteq, whose fate is heavily tied to the telecom and handheld sectors, Hong Kong’s SMT Holdings operates in more balanced markets. The company’s revenue comes primarily from industrial controls, computer peripherals, consumer and automotive, each of which makes up 15 to 35% of the firm’s revenues. Since the company does not disclose its major customers, it’s hard to discern why its sales drop (roughly 45%) was decidedly worse than the industry average.
What is always interesting about tallying up the revenues of EMS companies is how inflated the sums are. Macroeconomists might disagree with me, but the amount of double-, triple- and quadruple-counting is staggering. The rule of thumb is about 80% of the assembly’s cost is for materials, and most EMS companies no longer buy on consignment, which means the value of single chip gets highly distorted as it makes its way through the supply chain.
Take your average PC. Intel makes the microprocessor and sells it for $250 to Foxconn. Foxconn builds the board and box and ships it to Dell. Dell sells the finished PC to the customer. Each company adds that $250 (or whatever markup it uses) to its revenues, which means that original chip has now accounted for $750 worth of sales. Throw in a retailer like Best Buy, and perhaps a distributor like Arrow and now that same chip is worth $1,250 in accounting terms by the time it reaches your desk. In doing so, the size of the industry becomes highly inflated. Not that the same scenario doesn’t play out in just about every sector imaginable, but it is something to keep in mind when considering the “real” size of “S” (services) in EMS.
[Ed.: For the pdf of the Top 50, click here.]
To sum up 2009, we learned that putting all your eggs in the basket of a consumer electronics customer could reap great dividends, or great hardships. Whether Elcoteq can return to glory or slips further into the abyss will likely be the story of 2010 too. CA
[Sidebar] Elcoteq’s Miserable Year
No company took it on the chin worse last year than Elcoteq. Sales plunged about 55% year-over-year to an estimated 1,537 euros ($2.46 billion) and are now about 65% off their 2006 high. Global headcount was reduced about 50%, to 10,770. Factories in the US, Russia and China were either mothballed or shuttered. As if the economy itself wasn’t bad enough, its once largest customer, Nokia, pulled all its assembly in-house. As the year drew to a close, Elcoteq was scrambling to finalize a deal with Videocon to invest a reported 50 million euros to help shore up its balance sheet.
Circuits Assembly spoke with Elcoteq director, sales and product marketing Petra Ebner in November. Excerpts:
CA: You are in talks with Videocon to invest. What would this mean for Elcoteq?
PE: Videocon is a potential investor. We are currently in due diligence. The scheduled closing is year-end. It is not clear how this will look once a deal is done, but we’re not talking about them taking over. Elcoteq also is in talks with Kaifa [its largest shareholder].
We also have set certain goals: 1) Find an investor to increase our capitalization; 2) restructure debt – we are offering 15% of the dollar to our unsecured creditors; and 3) focus on more bottom-line customers. We are extending the market scope to higher-tech customers. Those end-products would be filters, RFID, industrial – companies that can benefit from our experience in communications.
CA: When your restructuring is finished, what will Elcoteq look like?
PE: We are now more focused on consumer electronics and systems solutions. We now have two factories in China; we closed Shenzhen. We have plants in Bangalore; Pécs, Hungary; Tallinn, Estonia; Monterrey, Mexico; Brazil. Russia has been mothballed. Pécs is the largest, with about 3,500 staff.
CA: Nokia decided to pull its assembly operations in-house. Any change in its plans?
PE: There are no signs from Nokia of business coming back.
CA: Given the product mix and choice of locations, it almost seems Foxconn has put a bulls-eye on Elcoteq’s back.
PE: Competing with Foxconn is a mission impossible. Customers are under so much cost pressure. Our focus is now the top line, not the bottom line. We want to grow with our existing customers, but we also want to see some different customers. Our focus is on lower volume and higher mix. When I came to Elcoteq, we had communications and industrial customers. I think we will return to that: more mid-sized customers; more box-build and tested finished product. Our target customer is $5 million to $10 million [in annual services provided].
CA: High-mix lines typically use different platforms than high-volume lines. Will your capitalization issues constrict your ability to invest in the right machines?
PE: We won’t need new equipment. In many cases, customers have supplied [it] as consigned equipment. We work with partners on plastics, etc.
CA: Is there an EMS company that Elcoteq is modeling its new strategy after?
PE: We haven’t picked anyone as a model.
CA: Is Elcoteq targeting alternative energy as a possible market?
PE: It’s not off our radar, but we are not thinking much about it. We are discussing with some solar companies about the equipment behind the panels – inverters, electronics, etc.
Elcoteq’s Sales, 2002-09 ($ millions)
2009 1537 (estimated)