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October 18, 2004
Engineering Manufacturing Service (EMS)
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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Electronic Manufacturing Services (EMS) firms provide contract design, manufacturing and related product support. EMS clients are generally electronics OEMs. The OEMs own the design and brand name. EMS firms are sometimes referred to as Contract Manufacturing or Contract Electronics Manufacturing companies.

According to Electronics Supply & Manufacturing and to Manufacturing Market Insider the top 50 largest EMS companies accounted for ~80% percent of the sector's global revenue of about $90 billion in 2003. The top 11 firms each had revenues over $1B and the next 40 largest firms each had revenue over $100 million. From 2001 to 2003 the Americas' share has dropped from 65% to 43%, while the AP share outside of Japan has increased form 29% to 39%. The table below shows the revenues and net income for the last four reported quarters and the last reported fiscal year. Given significant differences in their fiscal years direct comparison is difficult.

Table 1 Top 6 EMS Providers

Figure 1 Reported Revenues Top 6 EMS Providers

Over the last few years the industry has been relatively flat. However, several major players have had negative earnings in part due to restructuring charges as they move from relatively high cost locations to relatively low cost location and in part to the downturn in the industries served by their OEM clients. As a typical example consider the following excerpt from the 10K of Jabil Circuits.
“The EMS industry experienced rapid change and growth over most of the past decade as an increasing number of OEMs outsourced an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry's revenue declined as a result of significant cut-backs in its customers' production requirements, which was consistent with the overall global economic downturn. In response to this industry and global economic downturn, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Our restructuring activities included reductions in workforce,
and re-sizing of certain facilities and the transition of certain facilities into new customer development sites. Additionally, we have made concentrated efforts to diversify our industry sectors and customer base through acquisitions and organic growth. Industry revenues have slowly increased over the last year as customer production requirements generally began to stabilize.”
Since EMS firms are heavily invested in property and capital equipment they typically have single digital percent gross margin.

The primary markets served by EMS vendors according to end user product category are:


Computing and Storage

Consumer Products




Defense & Aerospace

The major benefits that EMS firms claim to offer provide their customers, principally OEMs, are:
Reduce Capital Investment: OEMs can significant reduce capital expenditures for property, plant and equipment as well as in systems and infrastructure. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures. OEMS can shift fixed costs to variable costs.

Better Supply Chain Management: As significant purchasers of electronic components and other raw materials, EMS companies can capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS' scale and continuous interactions with materials marketplace helps OEMs reduce their cost of goods sold and inventory exposure.

Global Manufacturing Services: By having manufacturing facilities throughout the world especially in lower cost regions EMS are able to reduce costs, to have proximity to end markets, and to reduce freight and logistics costs, tariffs and time consuming custom clearance.

Access to Latest Manufacturing Technologies: OEMs would find it increasingly difficult to maintain their technology edge as the industry moves to new process nodes.

Opportunity Costs: By employing the services of EMS OEMs can focus their limited technical and financial resources on areas of their core competence and where they provide differentiation and greatest value.

Access to Engineering Capabilities: As electronics products become increasing complex and sophisticated OEMs are increasing relying on EMS companies for product design and engineering services.
EMS firms rely heavily for revenue on a few client firms. Combined these major customers often account for a majority of a given EMS' revenue and individually for more than 10% of the EMS' revenue. Major customers include such well know firms as IBM, HP, Dell, Cisco, Motorola, and Ericsson. This can be a two edged sword as major OEMs have considerable negotiating leverage.

A common practice among EMS firms involves the acquisition of facilities and employees from their major customers, so called divestiture transactions. As Sanmina-SC describes:
“We typically enter into supply agreements with our major OEM customers with terms ranging from three to five years. Many of these supply agreements were entered into in connection with divestiture transactions, which are transactions in which we also acquire plants, equipment and inventory from the OEM. In these divestiture-related supply agreements, the customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. Our OEM customer supply agreements that were not entered into in connection with divestitures typically do not require the customer to purchase their product requirements from us, and in these cases customers may
alternate sources of supply available to them. Our supply agreements with our OEM customers generally do not obligate the customer to purchase minimum quantities of products. However, the customer typically remains liable for the cost of the materials and components that we have ordered to meet the customer's production forecast but which are not used, provided that the material was ordered in accordance with an agreed-upon procurement plan.”
From the viewpoint of a major OEM and EMS customer Cisco
“We primarily employ an outsourced manufacturing strategy that relies on contract manufacturers for manufacturing services. Our manufacturing operations primarily consist of quality assurance of materials and components, subassemblies, final assembly, and testing of products. We presently use a variety of independent third-party companies to provide services related to printed circuit board assembly, in-circuit test, and product repair as well as product assembly. Proprietary software on electronically programmable memory chips is installed in our systems in order to configure products to customer needs and to maintain quality control and security.“
The broad services rendered by EMS providers span but are not limited to the categories described below. Individual EMS providers will have different areas of focus.
PCB Fabrication - prototype, preproduction, transition to volume manufacturing, low volume and high mix, high volume and low mix.

Systems Assembly and Manufacturing - assemblies incorporate PCBs and complex electromechanical components, enclosure systems, power and thermal subsystems to interconnect subsystems, cabling and enclosures.

Testing - management defect analysis, in-circuit testing, optical and x-ray inspection, functional testing, environmental testing, testing for conformity to applicable industry, product integrity and regulatory standards.

Logistics - warehouse and distribution, freight management, logistics consulting services, product and materials visibility and reverse logistics.

After-market product and support services - field failure analysis, product upgrades, product repair, re-manufacturing and maintenance at repair depots, logistics and parts management, returns processing, warehousing and engineering change management.

Supply chain management - links to factories, extranet-based management, vendor-managed inventory and build-to-order programs.

End of Life Support - product recycling, part reutilization, remanufacturing and waste management.

Design services - electronic design, industrial design services, mechanical design, computer-assisted design (CAD) and applied research and development.


Flextronics International Ltd. was incorporated in the Republic of Singapore in May 1990. The company is the top EMS provider, with revenues of $14.5 billion in fiscal year 2004 and over 12.5 million manufacturing square feet in 29 countries across five continents.

Customers, include Alcatel SA, Casio Computer Co., Ltd., Dell Computer Corporation, Ericsson Telecom AB, Hewlett-Packard Company, Microsoft Corporation, Motorola, Inc., Siemens AG, Sony-Ericsson, Telia Companies, and Xerox Corporation. The ten largest customers accounted for approximately 64% and 67% of net sales in fiscal year 2004 and fiscal year 2003, respectively. The largest customers during fiscal year 2004 were Hewlett-Packard and Sony-Ericsson, each accounting for approximately 12% of net sales.

Table 2 Flextronics Financial Performance

Table 3 Geographic Breakdown of Flextronic's Revenue

Figure 2 Flextronics Market Segmentation

On June 8th Flextronics announced an agreement whereby they would acquire 55% of Hughes Software Systems, a provider of software products and services to telecom infrastructure companies. At the end of June Flextronics announced a four-year manufacturing agreement, whereby it will assume most of Nortel Networks' systems integration activities, final assembly, testing and repair operations, along with the management of the related supply chain and suppliers. Flextronics' revenues from Nortel Networks should reach an annual revenue rate of approximately $2.5 billion.

As for their future Flextronics says:
“We have recently begun providing ODM services, where we design and develop products that we then manufacture for OEM customers. We are actively pursuing ODM projects, focusing primarily on consumer related devices, such as cellular phones and related products, which requires that we make investments in research and development, technology licensing, test and tooling equipment, patent applications, facility expansion, and recruitment.”


Solectron was established in 1977 and began by manufacturing solar energy products. The name Solectron is a combination of "solar" and "electronics. In 1991 the firm had only a single manufacturing location. Today the company spans five continents and has facilities in more than 15 countries. It owns or leases more than 13 million sqft of manufacturing space. Revenues from continuing operations for fiscal year 2004 were US$11.64 billion. Selectron is organized into four business units, namely Global Operations, Technology Solutions, Global Services and MicroSystems. Global Operations provides customers with pre-manufacturing, manufacturing, materials management and fulfillment
services for printed circuit boards, backplanes, system enclosures and complete electronic products. In fiscal 2003, Global Operations generated sales from continuing operations of $8.8 billion, or 79.7% of total net sales, as compared to $10.1 billion and $17.1 billion in fiscal years 2002 and 2001, respectively. In Fiscal 2003 Tech Solutions was 12.1%, Global Services 6% and MicroSystems 2.2% of revenue.

As shown in the table below revenues decreased from $18.6 billion in 2001 to $11.0 billion in 2003. Solectron attributes this sales decline primarily to continued weakness in customer demand, particularly in the telecommunications and networking segments, resulting from the worldwide economic slowdown that significantly impacted the electronics industry. The decreases were partially offset by revenues from their acquisitions completed in fiscal 2002, including C-MAC Industries, Inc.

Table 4 Solectron Financial Performance

International locations contributed 64% of consolidated net sales in fiscal 2003, compared 53% in fiscal 2001. This increase has been primarily due to project transfers from sites in the United States to lower cost regions. According to Solectron:
“We have shifted our manufacturing capacity to lower-cost locations over the past few years - Mexico, Eastern Europe and, particularly, Asia. This reflects our belief that OEM customers will be driven by the cost advantages associated with these locations, among other factors, in the coming years. As of August 31, 2003, approximately 70% of our manufacturing capacity in terms of headcount and equipment, and 50% of our manufacturing capacity in terms of square footage, were in these low-cost regions.“
This is shown clearly in the table below.

Table 5 Geographic Breakdown of Solectron's Revenue

Figure 3 Solectron Market Segmentation

In the last three fiscal years the top three customers (HP, Nortel Networks and Cisco Systems) combined accounted for more than 1/3 of the company revenue and individually for slightly more than 10%. The top ten customers accounted for 61% of net sales in fiscal 2003, 68% of net sales in fiscal 2002 and 72% of net sales in fiscal 2001.

Solectron continues to remain optimistic about the growth opportunities in the EMS
Industry. The firm currently projects revenue growth to be between 12% and 16% in 2005.

Solectron is a major advocate for employing Lean Six Sigma in both design and manufacturing. The company is also pushing collaborative design rather than ODM services. With collaborative design Solectron and the customer share IP and work together to design products for cost and production considerations, starting with the earliest stages of design.


Sanmina-SCI was incorporated in Delaware in May 1989 by acquiring its predecessor company, which had been in the printed circuit board and backplane business since 1980. In December 2001, the company merged with SCI and formally changed its name to Sanmina-SCI Corporation. The company is headquartered in San Jose, CA.

Table 6 Sanmina-SCI Financial Performance

During the last four reported quarters the company had revenue of $11.6 billion and a net loss of $102 million. The company generates slightly more than a quarter of its revenue domestically (United States). The continued shift toward international operations has resulted from overseas acquisitions and a desire on the part of many of their customers to move production to lower cost locations in regions such as Asia, Latin America and Eastern Europe.

Sales to the firm's ten largest customers accounted for 68.5% of fiscal 2003 net sales and 65.8% of fiscal 2002 net sales. For fiscal 2003, the two largest customers, IBM and HP, accounted for approximately 28.8% and 9.6%, respectively, of net sales.

In January 2003, the company entered into an agreement with IBM under which IBM agreed to outsource the manufacturing of a portion of its low and midrange servers, workstations and ThinkPad notebooks to Sanmina-SCI and in turn the company agreed to acquire IBM's related manufacturing facilities in Greenock, Scotland and Guadalajara, Mexico. The transaction closed in February 2003 for a cash purchase price of $173.8 million. During fiscal 2003, the company also completed several other acquisitions that were immaterial individually and in the aggregate for an aggregate purchase price of $49.9 million, including a manufacturer of high-end complex medical systems and other high-end industrial
products, a wireless communication equipment assembly facility and a developer of enterprise-class servers. In 2002 the company entered into divestiture agreements with HP and Alcatel.

The future direction of the company is spelled out in an executive letter to shareholders signed by Jure Sola, Chairman and CEO, and Randy Furr, President and COO. This letter says in part:
“Technical leadership in our industry has long been a key part of our differentiation in the EMS market and in 2003 we continued to invest significantly to ensure that our design and engineering capabilities remain unequaled. Over the past several years, as our customers compete in their respective challenging end markets, we have been asked to play a bigger role in product development or provide original design manufacturing (ODM) solutions. Specifically, our customers want a company that not only offers world-class manufacturing and design capabilities, but combines those capabilities with innovative and cost effective design solutions - thus providing a true end-to-end solution.

Responding to our customers' requests and the opportunity to expand our service offerings, during 2003 we acquired Newisys, Inc., a developer of enterprise-class servers. Newisys brings highly skilled hardware and software design engineers to our already existing global team, providing technology solutions. This acquisition solidly positions Sanmina-SCI as an ODM providing innovative solutions for the enterprise computing and storage markets.

We have historically been involved in the early stages of our customers' product designs, and we believe our entry into providing ODM solutions allows us to further leverage our vertical manufacturing model and technical expertise to deliver additional revenue streams and profitable growth. We believe our ODM strategy complements our EMS competency and supports our mandate of helping our OEM customers deliver products to market faster and at reduced costs. We are at the forefront of this strategy and anticipate additional expansion in this fast growing outsourcing opportunity.”
On June 28, 2004, Sanmina-SCI announced it had entered into an agreement to acquire Pentex-Schweizer Circuits Limited, a printed circuit board fabrication provider with operations in Wuxi, China and Singapore. The total purchase price is expected to be approximately $78.8 million.

In July 2004, the firm announced a phase three restructuring plan, which they expect will result in restructuring charges of up to approximately $100 million over the next four to five quarters. At the conclusion of phase three restructuring activities, they expect to achieve reductions in non-cash and cash costs totaling approximately $22 to $24 million per quarter.

Hon Hai Precision Industry Co. Ltd

Company founder is Terry Gou who started Hon Hai in 1974 in a garage with 10 employees making plastic parts for black-and-white TVs. The company's early success was with sockets that allowed add-on memory modules to be snapped into PCs. The firm opened its first production facilities in China in 1993 and now has five industrial parks. Hon Hai is the largest Taiwanese manufacturing company ahead of TSMC. It is also the country's largest exporter. The company's brand name is Foxconn. Recent financial information for the company is available only through reports made to the Taiwan Stock Exchange (M.O.P.S. Market Observation Post System of the Taiwan Stock Exchange)

Table 7 Hano Hai Precision Industry Financial Performance

Figure 4 Market Segmentation FY2003

In November 2003 Hon Hai announced an agreement to acquire Ambit Microsystems Corporation, Taiwan's leading ODM and supplier of broadband communications products in a stock transaction valued at US$1.08 billion. Ambit's revenue of NT$30 billion consists of 40% wireline broadband, 24% wireless broadband, 14% analog modems, 14% power products, 6% RF packaging and 2% other. Ambit's WLAN and broadband access strengths, together with Hon Hai's PC dominance, create a strong 3C platform for diversification into integrated mobile computing devices.


In January 1994 Celestica was incorporated as a wholly owned subsidiary of IBM. In 1997 Celestica was acquired by Onex Corporation and Celestica management from IBM. In July 1998 the company completed largest IPO in EMS history and largest technology IPO in Canada, raising gross proceeds of US$414 million. Celestica embarked on a aggressive acquisition campaign, 8 in 1998. In 2000 Celestica acquired the Rochester, Minnesota, and Vimercate and Santa Palomba, Italy operations of IBM. The same year Celestica announces a strategic EMS alliance with Motorola with an estimated value of more than US$1 billion over a three-year period. In 2001 the firm announces a five-year strategic
manufacturing agreement with Lucent worth up to USD $10 Billion. In 2002 the company formed a strategic five-year USD $2.5 billion outsourcing relationship with NEC Corporation.

Table 8 Celestica Financial Performance

For the last 4 reported quarters Celestica had revenues of $7.88 billion and a net loss of $264 million.

Table 9 Celestica Geographic Breakdown

By the end of 2003, the Company had transitioned most of its high volume products to low cost geographies, with approximately 70% of its production facilities in lower cost geographies, up from 50% a year earlier.

Figure 5 Market Segmentation

In FY2003 Celestics's top five customers accounted for 51% of revenue down from 66% in FY2002. The top ten customers accounted for 73% down from 85%. SUN, IBM and Lucent technologies each accounted for more than 10% of revenues for 2001, 2002, and 2003. Cisco did in 2003.

During the electronics industry downturn Celestica has been expanding the company's exposure in non-communications, non-computing segments. These segments include industrial, aerospace and defense, medical, automotive and consumer. Over one-third of the company's 80 new customers are in these segments. In March 2004, Celestica completed the acquisition of Manufacturers' Services Limited (MSL), a diversified EMS provider with broad exposure to some of these markets. The transaction was valued at $320 million. In 2004, revenue from these diversified segments should approximately double as a result of the MSL acquisition.

On Sept 30th 2004 Celestica Inc. announced it has completed the divestiture of its Power Systems business to C&D Technologies, in an all-cash transaction valued at US$52.8 million.

Jabil Circuit Inc

Jabil Circuit began 1966 in Detroit, MI. Their earliest work was the manual assembly of replacement circuit boards for Control Data. The name Jabil originated with the founders' first names, a combination of James and Bill. In 1976 the company won a large contract with General Motors to develop a customized, highly automated production process. In 1982 the company moved its headquarters to St. Petersburg, Fl. The company had its IPO in 1993. During the nineties Jabil opened operations in Europe, Latin America and Malaysia. In 2002 the firm acquired Philips Contract Manufacturing Services.

Table 10 Jabil Circuit Financial Performance

The company has been consistently profitable. However, with the exception of 2002 net income has never been above a few percentage points of total revenue. In the last four reported quarters Jabil Circuits had revenues of $6.2 billion and net income of $167 million. In FY2003 the top five customers accounted for 53% of total revenue. Cisco, Philips and HP each accounted for more than 10%.

Table 11 Geographic Revenue Breakdown

During FY2003 the firm entered into divestiture transactions with Lucent Technologies (Shanghai), Seagate Technology (Mexico), Quantum Corporation (Malaysia), NEC (Japan), and Philips (multiple locations)

Figure 6 Market Segmentation

Jabil provided guidance for its full fiscal year 2005 indicating that it currently foresees revenue in a range of $7.2 to $7.4 billion.


The two major trends in the EMS industry is movement to lower cost locations, particularly China, and expansion of services into design arena. Several EMS providers are encroaching on original design manufactures (ODM) market that is dominated by Taiwan firms. EMS firms are also if not shifting from traditional major target markets at least more aggressively pursuing other markets like medical and automotive. This might help lessen impact of cyclical downturns.

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-- Jack Horgan, EDACafe.com Contributing Editor.