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Elcoteq CEO is out. Why and, what’s next?

By Mark Zetter

NOT MUCH HAS BEEN in the news since EMS provider Elcoteq announced CEO Jouni Hartikainen resigned.

Imagine the level of news generated in the electronics industry, and greater business news media, had Terry Gou announced his resignation.

Perhaps not many people are aware of Elcoteq or, perhaps they just don’t care.

Following Mr. Hartikainen’s resignation, Elcoteq released a statement attributed to Hartikainen stating, “[he] felt his ability to manage the company and to objectively safeguard the benefits of all the company’s shareholders became impossible due to the recent actions by the revolving credit facility lenders.”

Some say this looks like finger pointing.

Elcoteq further [denied] responsibility by stating, “The revolving credit facility lenders have continued their enforcement actions against the company and its affiliates and such actions are severely damaging the current operations of the company as well as its customers and other creditors,” the Company also said in a statement.

Elsewhere online, its easy to note Danske Bank, which acts as an agent for a group of banks, said in July lenders had given Elcoteq time and support to refinance the bank facility, for which the maturity was extended twice.

The operative word is, twice.

Elcoteq has since indicated that, for the time being, the board will run the Company. This translates to no one person will be held accountable for top decision-making.

The situation may appear benign to some but to put this in a different perspective, say you’re on an Airbus A380 flying over a large body of water… You want to know someone in the cockpit is accountable and making decisions.

For the time being, Elcoteq should at least appoint a figurehead / interim CEO.

What’s also missing (in addition to a CEO) is a boardroom with dissenting opinions to challenge and flesh out half-baked strategic ideas or, to nurture good ideas through to execution.

Do you feel any member on the Company’s board is comfortable sticking his neck out to make the tough calls required in the current boardroom environment?

It’s my guess board members will want to blend in as much as possible to not risk their own careers, or the wrath of shareholders.

But, let’s say they do make decisions. Who is going to execute the decisions with the executive team? Do Elcoteq vice presidents even have a level of familiarity with members of the board?

Elcoteq also appears to be nurturing a corporate, victim’s culture mindset.

The Company finds itself in the mess it faces today not because of lenders, but because of strategic decisions made over the past few years.

The company was trying to service a niche segment of the electronics market without an adequate supply chain business model.

Components of the handset supply chain consists of more than just printed circuit board assembly and plastics casings, these being the majority of Elcoteq’s components supply contribution to that market.

For an EMS provider to intentionally narrow its focus on a single market segment, especially a market with extremely thin margins where high volume is key, it must be very good at what it does on a number of levels.

Furthermore, to really ‘own’ a niche market segment an EMS provider must also embrace vertical integration on a scale at least as large as its EMS competitors also serving that market in order to be competitive from a price and distribution perspective.

Taking a look at some of Elcoteq’s competition, some of the ODM / EMS providers also serving the handset market include Foxconn International Holdings; Flextronics, Jabil, Lite-On IT and a host of others.

Part of Elcoteq’s problems that contributed to where the Company stands today is Elcoteq does not own the market it claims to focus on and therefore offers no real differentiation among its competitors.

Some additional component / service capabilities across the handset supply chain EMS providers can offer customers (which Elcoteq does not) include ODM capabilities; high density PCB, flexible printed circuit boards, optical lenses and camera modules, keypads, connectors…to name a few.

Each of these add real value to an OEM’s bottom line. Combined, they offer a powerhouse of technical capabilities and BOM line items for even the most demanding handset and smartphone OEMs seeking to outsource their product design and manufacturing.

Foxconn International Holdings has, by a wide margin, the greatest scope and depth in its offerings for handset and smartphone OEMs. (FIH offers each of the above component / services, plus more)

But, aside from being able to complement handset and smartphone line items to reach the top-level of a BOM, there’s still the issue of Elcoteq facility geographies, distribution, plus the volume issue relative to thin margins in consumer electronics.

Elcoteq’s customer list should also not be over looked. Problems in the handset sector and internal Nokia contributed to major-Elcoteq-customer Nokia’s change of heart in its relationship with Elcoteq.

But, one has to wonder whether Nokia also felt it had better leverage than Elcoteq does in the handset supply base by going to EMS providers capable of serving greater component/services for the sector. The board should have seen this coming in 2009.

Today, however, Elcoteq can still count Andrew, Ericsson, RIM, Royal Philips Electronics, Siemens, Sony-Ericsson, and Thomson as noteworthy customers.

The Company was on our Top 10 EMS / ODM rankings list through 2009 but dropped off in 2010. The way things are going, if it survives, what’s in store for Elcoteq’s future is anyone’s guess.

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