Sanmina-SCI EMS profile and other challenges

The following information from a recent EMS industry report and company analysis prepared by investment bank JPMorgan, with some interpretation by VentureOutsource.com, highlights a few positive and challenging points for Sanmina-SCI.

Management execution

JPMorgan says Sanmina-SCI [has attempted] to strengthen its leadership team with the addition of Joseph Bronson (COO), Walt Hussey (head of components), and Don Kent (head of enclosures). The investment bank states that while it has seen some improvement in operations and the component business, the firm believes Sanmina-SCI's new leadership team has more to prove.

Additionally, JPMorgan comments on the sale of Sanmina-SCI's PC business which should help margin and business focus - one thing JPMorgan believes has been lacking for some time. With the transaction expected to close in early July, it is anticipated the financial benefits and cash proceeds will be in excess of $200 million.

While the PC business divesture will reduce the size of Sanmina-SCI by approximately one-third, the move will help Sanmina-SCI exit from the highly-commoditized PC assembly market and possibly help the Company become a more focused EMS player going forward.

EMS markets served

Sanmina-SCI has reasonably good capabilities in the non-traditional EMS markets such as medical electronics, industrial electronics, and defense and aerospace electronics. The Company currently derives about 25% of sales from these markets, which typically also command higher margins in the EMS industry.

Meanwhile, these non-traditional EMS markets also remain under penetrated in terms of outsourcing, so EMS providers going after these markets (such as Sanmina-SCI), could benefit strategically. Any success as a result, however, is based on the ability to execute.

Flawed vertical strategy

JPMorgan goes one step further to state Sanmina-SCI has a flawed vertical strategy, citing the Company's focus on high-mix / low-volume products (as opposed to Flextronics and Hon Hai, which both focus their vertical strategies primarily on high-volume, low-mix consumer products). JPMorgan believes the only way for Sanmina-SCI to realize value for its components businesses is to sell them off. On a contrary note, JPMorgan was noted as saying Sanmina-SCI has just finally started to make some improvements in the Company's component business.

Customer focus

JPMorgan also claims to have contacted people in the industry (channel checks) and said it found some of Sanmina's key customers to be displeased with the Company's performance, which, the firm believes has contributed to some of Sanmina-SCI's market share loss.

Source: JPMorgan, VentureOutsource.com, June 2008