Even the last bastion has been hit.
The heat of the economic slowdown is choking contract electronics manufacturers that help the major original equipment manufacturers make their phones and infrastructure equipment.
The scourge of high inventory levels with the OEMs and operators has infected the CEMs, which have been grappling with losses in their earnings results, prompting analysts to point to consolidation as a path out of the doldrums.
“Consolidation is one way out,” commented Richard Valera, wireless analyst with Needham & Co. “It seems that the trend is that smaller manufacturers will find it harder to compete with the larger ones.”
In a stock purchase, Sanmina Corp. underlined this forecast by acquiring SCI Systems Inc. for $4.1 billion. Sanmina undertook the purchase in hopes of selling $14 billion to bring the combined company in the same league as the big three in the CEM space: Solectron Corp., Flextronics International and Celestica Inc.
Ironically, SCI Systems, which is the only company bought so far, and Celestica met their market estimates, with the rest reeling under debt. For the fiscal year, SCI Systems posted sales of $8.714 million, while its fourth-quarter sales stood at $2.074 million.
“SCI has continued to win new business and gain market share, and we expect growth in fiscal 2002 even without end-market recovery,” said Gene Sapp, SCI’s chairman and chief executive officer.
The company has a market share of 9.1 percent with Hewlett-Packard Co., Nortel Networks Corp., Dell Computers Inc., Echostar, Nokia Corp. and Compaq Corp. as key customers, while Sanmina has market share of 5.6 percent and caters to Nortel, Lucent Technologies Inc., Cisco Systems Inc., Motorola Inc., Alcatel Alsthom, Ciena, Tellabs Inc., Sun Microsystems Inc. and EMC. Both companies will combine for 100 plants around the world.
However, both teams have ailed from declining capacity use and order cancellations. Some analysts do not think that the tie-up will necessarily work because it is underutilized. The combined capacity of Sanmina and SCI Systems is 12.1 million square feet, ranking second to Solectron, which has 15.7 million square feet. Flextronics is 12.6 million square feet in capacity while Celestica has 5.3 million square feet.
In sales last year, Sanmina and SCI Systems raked in $12.3 billion, also second to Solectron’s $14.1 billion. Flextronics garnered $12.1 billion and Celestica enjoyed $9.7 billion.
But while Solectron may be the biggest, the Milpitas, Calif.-based company posted a net loss of $186 million, or 28 cents per diluted share, against a profit of $119.7 million, or 19 cents a share, a year ago. Although its sales rose 9.3 percent to $4 billion from $3.6 billion, it fell short of analysts’ targets with sales of between $3 billion and $3.5 billion in the fourth quarter.
Sanmina said its net income dropped to $31.9 million, or 10 cents per share, against $68 million, or 21 cents per share, last year. Its revenue plummeted 35 percent to $776 million from the previous quarter and 29 percent from the same time last year, which was $1.09 billion.
Celestica basked with a net income rise to $93.1 million, or 41 cents per share, against $63.7 million, or 30 cents per share.
Valera said the slide in that space is due to saturation in the European handset market and a “slowdown in the capital market making it difficult for carriers to raise capital and build networks.”
He said there is little the CEMs can do because their fortunes are tied to the larger industry.
