Electronics Production | February 26, 2009

Kitron weathers the storm with new focus areas

The Norway-based EMS-provider Kitron has finished its restructuring successfully last year and is well positioned to weather the current economic crisis. It even eyes China for new growth possibilities. evertiq talked to Johannes Lind, CEO of Kitron Sweden, about Kitron’s current situation.

How do you see the Swedish market today?
Generally many people over-estimate the size of the Swedish market based on the volume that is actually manufactured in Sweden. It`s assumed that a lot of products are produced and created in Sweden when the majority of the value are created in LCC with final assembly or only invoicing performed in Sweden. Many of the EMS players in our size are showing high sales numbers from Sweden that is actually generated in Poland, Baltic States etc. We are boosting the Swedish market size to more than it actually is production wise. I believe that the Swedish market is quite rapidly shrinking – in respect to where things are produced. Based on sales the market is growing – not last year and probably not this year– but it is growing over time. So the market situation and how it is evolving is very interesting for us.

How did you organise the Scandinavian production facilities within the Kitron Group? Are they designated to specific segments?
If you take Sweden; Kitron operated 3 facilities until last year. We closed the Flen facility at the beginning of 2008. Now we have two facilities left – Jönköping and Karlskoga. And these two facilities are very different. The Kitron Group has established 4 primary segments: Data/Telecom, Industry, Medical and Defence/Marine. Jönköping is focussed on Data/ Telecom and Industry – as we define them – and Karlskoga is focussed on Defence/Marine and Medical. Jönköping is also a Microelectronics site – however, more by name than in reality. Jönköping is more of a traditional EMS-facility now with 15% of the sales in the microelectronics field.

Norway is different altogether. Here we have closed 4 or 5 sites and have created a big facility to replace them, which is Arendal. Arendal generates around 55% of the group’s sales. And here you have everything – a full-range site covering all 4 segments, NPI activities etc. We also have one site that is unique in our group – that is the Røros Microelectronics facility.

So that is the biggest difference between Sweden and Norway – Norway has Arendal that cover all segments and in Sweden it is divided into two sites covering 2 segments each.

Is there any segment that you would like to enter?
We are always interested in exploring new segments. But we have to define this a bit. Kitron has included the Automotive Segment in the Industrial Segment, because the current volume in Kitron is too small for Kitron to be a separate segment. If you look at alternative energy, solar panels, windmills, etc. that is very interesting and it is growing quite fast. Especially wind energy is growing very fast here in Scandinavia. Alternative Energy Sources is the segment that we are looking at. Our development engineers are very interested in this area and we are investing in growing our competencies in supporting those activities.

However, the EMS market for alternative energy sources is still quite small and we don’t see it as a separate segment for Kitron – more of a focus area, but not a segment, I would say. We are currently not running volume production for this. We have been working with companies in this sector but only with supporting services – such as prototyping – rather than production.

How do the staff numbers and sales look like in Sweden?
If we look at the Kitron Group, we see that around 60% of our annual sales come from Norway – 55% from Arendal and 5% from Røros – Sweden stands for roughly 22%. That means that we have just under €27million each in sales from Jönköping and Karlskoga. So the Swedish market last year was about €53-€54 million in sales. Lithuania stands for the remainder of 18%.

We are around 250 in Sweden – 95 in Jönköping and 155 in Karlskoga. We have announced a reduction in Karlskoga with 32 persons and will be 125-130 after the reduction. Although the sales are roughly the same, we have a more labour-intense production in Karlskoga. Additionally to that we also have around 30 engineers stationed there for our Test and Development section. That is the reason for the difference in headcount.

How do you organise the production facilities with in the group?
The market is quite interesting. The lower the complexity, the more likely it is to move production to China (see consumer electronics). If products are of mid-range complexity, than you produce in Eastern Europe. Products with high complexity you are normally much more careful about before you move them out, but rather keep production close to your own development staff. This is the production we foresee to stay in Sweden. How I see it – you want to have the final assembly in Sweden complemented with LCC for subassembly.

I expect that value-added work you do in Sweden or Norway is going to shrink. This means that – even if your sales go up – you will not see the same increase in headcount in these countries. My guess is; with a sales growth of 10% - 20% per year – in 2-3 year you will still see the same or even lower headcount numbers in the high cost countries in general.

How do you see the development for the EMS-Industry in general – and for Kitron in particular – in 2009 and beyond?
Kitron – I believe – has a strong footprint today. We have already done the unpleasant task of reducing the number of our sites. We have been restructuring in this area for the last 5 years. That means we have a position where our site structure supports our current volume, we do not like to have over-capacity in our site structure.

In Sweden, I expect that the relation between blue collar and white collar staff will change in favour of the white collar staff. They will handle many supporting activities such as purchasing, quality, NPI etc. to support the subassemblies that you do abroad. That is a trend that has been going on for several years. Now, with the financial crisis – this development will occur more rapidly. Today, some of our customers will be struggling with their results. They might see big losses and then they will try to cut cost and this is the quickest way to do it, even if it has risks associated with the strategy.

If you already started to lose money in 2008, 2009 will be a very hard year. If you look at the situation in the various segments, than I assume the following; the automotive segment will probably go down with 30-50%; the overall industrial segment will go down with 25%. That means that companies in these segments will reduce their purchasing value from our commodity with roughly these percentages. If you look at Medical, I foresee some growth in this segment. Defence/Marine is much less affected by the financial situation, as orders in this segment are usually long-term and cover several years – from order inflow to actual production.

Kitron’s largest segment is Defence/Marine and this gives us a good platform to survive in this economy. That segment represents around 32% of the group sales, than comes Data/ Telecom with around 28%, Medical and Industrial with roughly 20% each. For Kitron, I expect the Industrial segment to go down, even though we win new orders there. I believe that the industry segment as such is going to take a big hit. And if you take the Swedish EMS-industry we see that around 50% of the total market is Industrial customers. This in turn means that many EMS-providers – who have Industrial as their main segment – will have big problems this year.

Any investments planned for Kitron in 2009?
If you look at the last two years (2006/2007), I believe, we invested around 50% of our profit in new equipment. For 2008, I do not have the exact figure, but I believe it will be at least 30-40% of the profit that went straight into new investments. Our main investment area was new machines – an upgrade of our existing machinery so to speak. We have invested in new SMD-lines in Norway, in Lithuania of course, and we bought one new line for our Jönköping facility last year.

I don’t believe we will continue with this high level this in 2009 due to that I do not foresee growth and the need will not be as high as the last couple of years with high growth numbers. We will – of course – invest in new machines where we see the need for it. If we gain new customers who have specific requirements we will certainly invest. So it is a rather mixed picture for us.

What about China as a location for Kitron?
We have a purchasing office in China with 5-10 people working there. We are evaluating China to also start manufacturing there. This is a short- to mid-term business target. Last year we were planning on establishing Kitron manufacturing in China by mid 2009. This might still be possible, you never know. What happens during the next month in the general market will determine our business strategy in this area short-term. If the market continues to go down, than we will adjust to it. We would probably use a china operation to balance out the production that we do in Lithuania over time.

Thank you for the interview.
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