Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
When Flextronics International and Solectron announced their merger in June, many of us wondered whether this signaled a new round of consolidation and restructuring for contract manufacturers. It would appear that it does: Restructuring through internal downsizing is already taking place.
In a presentation at Technology Forecasters Inc.’s Quarterly Forum last week, Louis Miscioscia, managing director of Cowan and Co., an equity research firm, offered evidence that CM plants outside Asia generate less revenue per square foot than those in Asia. He estimates geographies outside Asia are getting $500 annually per square foot of manufacturing space; most Asian locations, at fuller capacity, are getting as much as $1,000 per square foot annually.
“This would suggest that there is still too much square foot capacity and it needs to come down more,” Miscioscia said in an email exchange with me.
He says how much restructuring is underway is less clear: “It is hard to tell since we only get square foot on an annual basis and almost every EMS company is restructuring now.”
He offered several estimates for the year to date: Celestica has closed 306,000 square feet in Europe; Jabil Circuits, 656,000 square feet in Europe; Sanmina-SCI, 260,000 square feet in Europe, and Solectron, 400,000 square feet in North America.
Flextronics and Solectron hope to complete their merger by the end of the year, and Flextronics has estimated the combined companies will cut costs by $200 million within two years. That certainly involves some restructuring of plant space.
Miscioscia pointed out that restructuring can lead to disruptive costs and excess inventory issues while management focuses on downsizing costs rather than winning new business or improving operations.
We’d like to hear from OEMs and from EMS companies on this. Let us know your thoughts.
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Bill, it is interesting to read your views regarding restructuring as a necessity. It seems to me that I hardly ever read a set of quarterly results without seeing one-off restructuring costs listed. But they are not one-off, they are on-going and perhaps part of being a global EMS company is constantly adjusting production capacity within a global footprint.
Clearly global demand is in flux, with consumer demand growing in China, India and newer markets like Vietnam – this provides one pressure, but the constant demand for lower costs also provides a huge pressure to keep moving to lower and lower cost regions.
The downsizing in Europe that you mentioned represents a total of just 1.6 million square feet, which according to your numbers only represents less than $1billion dollars of revenue, not a huge proportion.
So, I guess my view is that change is the only constant in the electronics industry and we should all get used to it! These giants will have to continue to evolve and develop, or restructure, to compete.
Philip Stoten, Editor, EMSNow
Phil–You raise good points. Change is definitely a constant in EMS and any discussion of restructuring, etc., needs to keep that in mind. Thanks for reminding me.