Mar 31, 2003
Cannon said the company had built up a "reservoir of customer goodwill," had made a lot of progress in improving its business position and had "many talented people."
Then Cannon said the company would lay off another 12,000 employees, take $300 million in restructuring charges and eliminate 3 million square feet of manufacturing space as part of a plan to streamline operations and cut costs.
Adding to the misery, Solectron (SLR: news, chart, profile), which makes printed circuit boards for customers such as Hewlett-Packard (HPQ: news, chart, profile) and Cisco Systems (CSCO: news, chart, profile), reported a second-quarter loss of $111 million on sales of $2.8 billion. And it warned that it could report a third-quarter pro forma loss of up to $33 million on sales of between $2.6 billion and $2.9 billion.
The layoffs come on top of about 40,000 job cuts the company has made since 2001. It currently employs about 60,000 workers.
Solectron's challenges aren't unique. It has been a cutthroat market for all electronics manufacturers lately. Competition is fierce, margins are low, and investment in the sector's stocks is considered risky.
Broadly, electronics manufacturers include component makers as well as the biggest players that sometimes include design work with their fabrication and assembly. Under contract, Solectron and its rivals put together products that carry the headline brand names of their clients.
The industry is in "pretty bad shape," said Michelle Guitterrez, an analyst with Soundview Technology. "These guys are way overloaded with too many people and the only reason to look at buying (their stocks) is if they're offering superior growth. And they're not."
Another leading electronics subcontractor, Flextronics (FLEX: news, chart, profile), in January reported a 2003 third-quarter net loss of $6.5 million, on sales of $3.9 billion. It reported a profit of $82 million on sales of $3.5 billion in the same quarter a year earlier. Analysts are forecasting that Flextronics will post a fourth-quarter pro forma profit of $30.6 million on revenue of $3.1 billion.
Flextronics officials recently said they saw the markets stabilizing, and secured $200 million from private investment firm Silver Lake Partners. Flextronics may be best known for building Microsoft's (MSFT: news, chart, profile) Xbox video game console.
New realities
In January, Canadian manufacturer Celestica (CLS: news, chart, profile) reported a fourth-quarter net loss of $435 million on sales of $1.9 billion. During the same period a year ago, Celestica lost $72 million while sales hit $2.5 billion. Wall Street analysts are estimating Celestica will earn a first-quarter pro forma profit of $16 million with sales of $1.6 billion.
Celestica also said it would lay off 2,000 more workers on top of 6,000 previous job cuts. The company intends to move nearly 70 percent of its production to China and other "low-cost" countries, and in late February said it would close its Oklahoma City plant and eliminate 450 jobs.
"We're adjusting to the industry's realities," said Eugene Polistuk, Celestica's CEO. "The biggest pressures come from our customers who want the lowest cost on a product. But we're also very bullish on the long-term and concentrating on fundamentals."
Polistuk said electronic manufacturers have been in a rut for some time, in part, because they are so dependent on their larger, corporate customers. It's a matter of simple supply and demand: when the tech sector was booming in the late 1990s, manufacturers had to ramp up to meet demand by building or buying additional plants.
And with information-technology spending grinding to a halt over the last two years, the effects of corporate budget tightening have left many manufacturers with excess floor space, canceled orders, and unused obsolete equipment that is still sitting in their warehouses.
"Things just have to be going on all cylinders for these guys to get profits," said Bill DeRosa, a fund manager with Badgley, Phelps and Bell, in Seattle. "These companies operate with a hugely leverageable business model that has now left them with a huge amount of infrastructure to sort out."
Diversification plans
Plans to diversify product lines, as well as move many of those operations to Asia, have not necessarily sold Wall Street on the viability of the industry. And the recent string of quarterly losses in the sector has also led many analysts to view electronics manufacturers with a bit of wariness.
"We expected some restructuring (from Solectron), but the $300 million is not only large, it raises execution risk much like we've seen in restructuring stumbles from Celestica," said Steven Savas of Goldman Sachs. Still Savas said he believed that Solectron CEO Cannon, who's only been on the job two months, has grasped the issues facing the company and is taking important steps to get its house in order.
Morgan Stanley analyst Scott Craig has taken a cautious view on the entire electronics subcontracting sector. While saying that stock valuations are more reasonable, he expects consensus estimates on the stocks to fall "as end markets remain subdued and margin pressure remains."
In order to alleviate that pressure, the sector has adopted the mantra of diversification, with the goal of many companies being to not have any single customer make up more than 10 percent of its business within the next few years.
Celestica, for example counts Lucent Technologies (LU: news, chart, profile), Sun Microsystems (SUNW: news, chart, profile) and its former parent company IBM (IBM: news, chart, profile) as 10-percent or greater customers.
At Solectron, Hewlett-Packard accounted for 12 percent of the company's second-quarter business, while Nortel Networks (NT: news, chart, profile) made up 11.1 percent and Cisco 10.1 percent of the company's sales.
Rick Rollinson, senior vice president of Solectron's Americas region, said the company wants to lasso more customers in areas such as the automotive and consumer-products industries, while at the same time maintaining its presence in its traditional high-tech business lines.
"It's a significant strategy for us," Rollinson said. "We believe there are opportunities in other sectors and industries where we can add value for companies that are looking for way to reduce their own direct labor costs."
Celestica CEO Polistuk said his company already has 300 customers, 100 of which he categorizes as "major" customers because they account for several millions of dollars worth of the company's annual revenue. Polistuk said Celestica "has the energy to expand" into other business areas, and cites the defense, medical and automotive industries as targets for growth because of the benefits that come from outsourcing manufacturing operations.
"This is not a model that has to be proven," Polistuk said. "Most of our customers save 10-to-15 percent of their costs from outsourcing and the majority of work in these new areas is identical to what we do already."
Rex Crum is a reporter for CBS.MarketWatch.com in San Francisco.
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