Electronics Production | June 07, 2007
Chart: EMS Top 7 after the FLEX/SLR Deal
iSuppli has analyzed the Global EMS-market after this weeks' major deal between Flextronics and Solectron. Check iSuppli's chart and figures showing the 7 biggest EMS-players in the world right now. Also read iSuppli's view on this important deal.
iSuppli: Success of Flextronics/Solectron Deal Depends on Execution The merger of Electronics Manufacturing Services (EMS) providers Flextronics International and Solectron Corp. may enhance the competitiveness of the combined companies—but the success of this venture will hinge largely on how well management executes the deal, according to iSuppli Corp. iSuppli Figure: Worldwide EMS Revenue Market Share in 2006 (With and Without Flextronics/Solectron Merger). Source: iSuppli Corp. June 2007 “Given our analysis, iSuppli is tentatively optimistic about the intent of the merger," said Adam Pick, principal analyst, EMS/ODM for iSuppli. “However, the trick to pulling off this deal is execution. Flextronics head Michael McNamara needs to leverage his operational guru-ness to quickly integrate, align and restructure these organizations. Only then, will margins expand. This deal could be much more than a simple, market-share play." Solectron's dowry Though the merger, Flextronics gains direct access to several, attractive elements of the Solectron portfolio, including: Revenue growth. Solectron had five consecutive quarters of increased revenue in 2005 and 2006 and its sales jumped 9 percent during 2006. A rising, profitable medical business. Solectron is reported to have won up to 20 medical programs during the past three years. An expanding after-market and repair services business unit. A strong balance sheet with $1.1 billion in cash. Incremental purchasing leverage as Flextronics' Cost of Goods Sold (COGS) line bulges by $7 to $8 billion. Enough of 'Foxconn this' and 'Terry Guo' that Another element of this deal may be brand and press-related. Through this multibillion-dollar merger, Flextronics gets a very visible forum to show rival Foxconn and the rest of the electronics industry that it intends to remain a power player in the global EMS market. “With its jaw-dropping growth rate, Foxconn has charmed the electronics industry," Pick said. “However, with the Solectron deal, Flextronics gets a temporary platform to signal that when it comes to contract manufacturing, the fat lady hasn't sung yet." Which EMS providers are looking over their shoulder? The more immediate competitive threat posed by the merger is to other EMS players, mainly Celestica, Sanmina and Jabil, rather than Foxconn. The merger may yield opportunities for Flextronics at customers including Cisco Systems Inc. and Sun Microsystems Inc. “Of the EMS players we track, I'm most concerned for Celestica. The company has a new chief executive officer, lackluster earnings and—most importantly—eroding share from Cisco. Solectron, on the other hand, has really ramped up its Cisco revenue lately, reaching a 20 percent contribution in the third quarter of last year." Pick said. M&A indigestion? On the negative side, there's concern that Flextronics could suffer “M&A indigestion," as the process of integrating resources potentially slows sales. Furthermore, there's a potential cultural mismatch between the companies, along with a severe challenge to align people, processes and technology. Finally, Solectron could drag down margins and profitability for Flextronics going forward. “Integrating a $30 billion dollar organization with 200,000 employees is not easy," Pick said. “Just look at Hewlett-Packard as a case study. It required several years and new management to revitalize that company after the Compaq acquisition." Redundant manufacturing footprint shows opportunity Reviewing the Flextronics/Solectron manufacturing footprint, iSuppli believes capacity restructuring could be a very opportunistic move for the merged company. “iSuppli performed a capacity analysis after the deal was announced," Pick said. “If McNamara and team can eliminate 5 percent of capacity, revenue-per-square-feet becomes attractive relative to the other North American-based EMS providers. Foxconn, however, is still in its own league."