Subcontractors Bank On Telecom, Networking Orders

Posted on May 1, 1998 
Filed Under Julian, Nikkei Electronics Asia

By Julian Matthews

Local subcontractor manufacturers are expecting between 25% and 30% growth this year despite the Asian financial crisis.

Growth is spurred by increased demand for a variety of linear and mixed-signal electronic components particularly for the telecommunication and networking industries.

Carsem (M) Sdn Bhd, a subsidiary of Malaysian Pacific Industries Bhd, is investing about US$90 million for equipment and expansion for this fiscal year.

Managing director David Comley said the company hopes to grow its revenue for its fiscal ending in June by 30% to US$260 million, a substantial rise from 12% growth last year.

“We expect another 30% growth for the 1998-1999 fiscal year,” he said.

Dollar Earners Unaffected

Comley says the company, which is in its 25th year of operation, is bullish despite the current financial crisis because almost all its products are exported and sales are denominated in US dollars.

“Being US dollar earners, we don’t have a problem accessing funds for working capital to support our growth,” he said.

He said some contract manufacturers may be forced to hold back on their equipment purchases because of the volatility of the ringgit against the US dollar.

“But this is a capital-intensive industry. The challenge over the next 6 to 12 months is to invest wisely and conservatively, but at the same time not to turn customers away because one doesn’t have the capacity,” he said.

Carsem currently has about 6,000 staff and 55,800m2 of manufacturing space at its two plants located in Ipoh. Comley says Carsem does not have plans to increase its headcount but instead grow its revenue-to-employee ratio.

Last year’s expansion involved adding another 11,150m2 of manufacturing space and the purchase of 4ha of extra land.

Comley said Carsem’s main customers are US companies comprising about 60% of its market, 35% are European, and the remaining 5% Japanese.

Comley said Carsem’s current capacity is about 50 million units a week, primarily linear or mixed-signal components that go into end-products in the telecom industry rather than the PC industry.

Comley said the company has over 80 customers with the top 20 comprising 80% of its sales. “We have managed to balance our customer base so that no single customer commands more than 6% of our revenues,” he said.

Comley said productivity improvements and strong revenue growth had also diminished the significance of labor costs over the years.

“The cost of labor as a percentage of revenues has become less and less significant over the years. We won’t need to move to China to become more competitive,” he said.

Comley said the company aims to bring cost of employment down to 8% of revenues.

Unisem Targets 50% Growth

Another local company expanding and projecting healthy growth rates is Unisem (M) Bhd located at Simpang Pulai, just outside Ipoh.

Unisem chief executive officer, Colin MacDonald, said although the company’s sales grew 50% last year, it is projecting a more conservative 25% growth rate this year in light of the financial crisis.

MacDonald said, however, that the company had not been directly affected by the crisis for now.

“If the situation persists and does not improve, purchases of end products may slow down, and if that happens we are likely to feel the effects of it after 6 to 9 months,” he said.

Unisem produces about 20 million semiconductor units per week in various packages.

“There has been no let up in production since we began six years ago,” he said. “With some customers we do total turnkey operations for assembly and test and ship directly to their end customers,” he said. Unisem mainly serves US companies, comprising about 70% of its market, while the rest goes to Japan, 20% and Europe 10%.

Last year, Unisem pumped in US$20 million to double its manufacturing space to 22,300m2, of which 5,600m2 is Class 1k cleanroom and another 3,700m2 is Class 10k.

MacDonald said the company currently has 1,400 staff and will be adding another 100 staff this year.

He believes contract manufacturers like Unisem have benefited from customers consolidating their businesses and sourcing from fewer contractors.

He said the outsourcing trend is likely to continue especially since subcontractors these days are more dependable, flexible and offer highly automated, quality assembly and test services.

“Subcontractors don’t have the many layers of management typical of multinationals. We have a quicker approval process and speed of execution,” he said.

Published in Nikkei Electronics Asia, May 01, 1998

by Julian Matthews, Malaysian correspondent


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