Outsourcing fallout: Tek drops packages, Jaco buys contractor

Electronic News, Feb 21, 1994 by Bernard Levine

NEW YORK--The ceramic packaging and printed circuit board contract assembly businesses saw new companies enter and old ones disappear last week, with Tektronix becoming the latest large-system OEM to shed a cost-pressed in-house ceramic component operation, while Jaco became the latest distributor to jump into the burgeoningn contract board-stuffing market

Both moves are tied to efforts at many systems houses to eliminate or reduce in-house packaging, component and printed circuit board production, with the work farmed out to less costly contract assemblers and other outside sources. Increased OEM outsourcing has created strong growth for contractors, prodding a band of distributors to muscle their way into the business, often through acquisitions or alliances. The hot contract market has also attracted some leading systems houses such as IBM, which are battling to keep in-house packaging operations alive by leveraging multichip module and other premium capabilities through merchant deals with other OEMs.

Meanwhile, other distributors have held off direct entries into the contract market dominated by the likes of SCI, Avex and Solectron, but have been sharply hiking value-added expertise in kitting, component sub-assemblies and other areas. These efforts often encompass component design, procurement and building of sub-systems. In some cases they stop just short of the finished printed circuit board or box assembly that is the mainstay of traditional contractors. Richey Electronics last week signed a letter of intent to buy New England distributor In-Stock, the latest in a string of distributor consolidations in which many industrials have increased critical mass and bolstered value-added capabilities (see Off the Shelf, page 50).

"The electronic parts and contract manufacturing industries are coverging, and the acquisition of Brandon, Vt.-based Nexus Custom Electronics effectively positions Jaco at the forefront of this long-term trend," said Jaco CEO Joel Girsky. "Contract manufacturing is growing at a disproportionate rate to the rest of the industry."

That growth will continue as more systems houses abandon internal component production. Tektronix has sold or reduced its participation in a number of component operations over the past year in a restructuring aimed at "reducing Tektronix' vertical integration," according to chairman/CEO Jerome J. Meyer. In June, 1993, Tek first let it be known it was planning to spin off "non-strategic" internal component operations (EN, June 28, 1993). It recently (EN, Jan. 10) agreed to sell its Integrated Circuits Operation to Maxim, with the two also to form a joint venture to operate Tek's Hybrid Circuits Operation. Tek has said it would create an independent unit out of its printed circuit board business, but no further details have emerged. A number of major OEMs have dropped out of the PC board manufacturing business entirely or consolidated operations in recent years.

In ceramic packages, a sector heavily influenced by Japanese suppliers, Tek last week sold its Ceramic Operation to VisPro Corp., a company led by two former Tektronix managers. VisPro was formed by principal investors Steve E. Annas and Charles G. 'Gib' Borquist expressly to acquire and continue the unit, which makes various custom components, multilayer ceramic packages for ICs, and ceramic envelopes for CRTs. Financial terms of the transaction were not disclosed. As part of the acquisition, VisPro will continue to supply Tektronix with the unit's ceramic-based products. The agreement includes existing engineering and manufacturing assets, as well as the rights to utilize all applicable patents and technology within the operation. It currently employs 27 people, 24 of whom have accepted positions with VisPro. The new company will lease the operation's current 31,000-sq.-ft. facility in Beaverton, Ore.

Large OEMs such as Tektronix "want to get out of being so vertically integrated," said VisPro President/CEO Mr. Annas last week. "Tek and others had been going from raw earth to finished product. You can only focus on so many things. Tek has been restructuring to focus on its core businesses. They are getting out of a lot of component businesses. They are trying to design products using more commodity, off-the-shelf items," which are less expensive. "You use in off-the-shelf item and pick a good vendor and you are in good shape on quality, delivery and price," he said, adding "more and more companies are looking to offshore manufacturing of everything."

In addition to supplying Tek, Mr. Annas said, "Our biggest thrust is to grow the business 30 percent a year." The deal, according to John Karalis, vice president of corporate development at Tektronix, "offers advantages to all parties. The new company will be led by managers who have successful experience with the business, which ensures a smooth product flow and transition. In addition, focused ownership will allow the operation to take proven technology and more readily pursue markets beyond Tektronix."