In the last couple of years, many traditional EMS providers have decided that if they can’t beat the Original Design Manufacturers (ODM), they should join them. The ODM business model has proven successful for two main reasons. First, many OEMs have continued to divest themselves of not only their manufacturing infrastructure, but their design competencies as well. ODMs have proven that they can design with the same level of speed and innovation as their customers. Second, by collaborating with the customer as early as possible in the product’s life cycle, ODMs make themselves practically indispensable later on in the volume manufacturing and assembly phase of that product.

Probably most important to public companies, “ODM” is a term financial analysts seem to prefer over EMS. The three companies we visited aren’t the only ones trying to carve a more profitable niche in the electronics supply chain, but they’re committed to a business plan others are starting to copy.

WKKT Dongguan: Factory ‘Like a Small Town’

Enlarge this picture WKK’s Dongguan campus is 1.25 million square feet, and employs 5,600 people.

Founded in 1986, WKK Technology Ltd. (WKKT) is an EMS provider offering both OEM and ODM services with its headquarters in Hong Kong and manufacturing facilities in Dongguan, Guangdong Province, China. The manufacturing arm of the WKK (Holdings) Limited, WKKT projects over $300 million in sales for 2006--a twenty percent increase over last year. In addition to EMS services and supply chain management, it manufactures PCB fabrication and assembly equipment. The organization spans the globe, with offices in America, China, Taiwan, Japan, Thailand, Singapore, Malaysia and The Philippines.

The WKKT facility we visited in Dongguan was more like a small industrial town than a series of manufacturing facilities. Totaling 1,250,000 square feet, the WKKT compound employs, feeds, and houses an astounding 5,600 people at no charge to the workers. Employees have access to banking services, recreational activities, a free medical clinic, and even a barber shop (the cost for a haircut: 3RMB, or roughly $0.40). In addition to PCB design and assembly services, it manufactures its own dry film photoresist and plastic injection molding products on site.

We met with WKK (Holdings) Ltd. Chairman Senta Wong, WKKT president Bengie Kwong, and Hamed El-Abd, president of WKK Distribution Ltd., the company’s PCB and assembly equipment division in Dongguan. If nothing else, we learned more about how WKKT is adapting to China’s hardcore manufacturing landscape. Following are some excerpts of our interview.

CT: Can you give us an overview of the Dongguan facility?

Wong: Dongguan is one of the biggest industrial zones in China. WKKT leased the land in 1995 from the local government for 50 years. We also have land adjacent to our existing facilities here for future expansion. We have 23 SMT lines and 660,000 square feet of assembly space. Because the local electricity supply is unstable, we generate our own electricity with six generators. We also have our own fire department and security personnel.

Enlarge this picture WKK employees live, work and play on campus.

CT: What are some misconceptions that the West might have about manufacturing in China?

El-Abd: People in America have this false impression about manufacturing in China where everything is dirt-cheap and we treat [our employees] like hell. That’s not true. We have respect for our employees. They’re happy here. They have disposable income. It’s a great improvement in quality of life.

[As we toured the facility, it was clear that El-Abd was correct. Dongguan is a tough town, yet behind the WKK walls, an employee had well-managed food facilities, movie theatres and television rooms, educational tools and health care. To a Western sensibility, it might seem that WKK walls kept tight checks and balances on WKK employees; to WKK, the walls provide security for both the company, its IP, and its employees.]

Wong: Another [misconception] is that China is bureaucratic. But according to WKK’s past experience, we haven’t had any issues in logistics arrangement. Because of the potential for disease to spread, it could disrupt a factory like this. Everyone, including guests, goes through [a temperature scanning device]. We want total security.

CT: What are you working on currently?

Wong: WKK manufactures and ODMs the next-generation of Bluetooth products. We assemble more than two million pieces for one U.S. brand alone. We have five years experience making [Bluetooth technology]. We were the first [EMS provider] to make it for customers. These customers comprise about 40 percent of the worldwide market. This next step is [integrating Bluetooth] with MP3 wireless. If you’re listening to music, you can answer an incoming call, talk, finish, and go back to your music.

CT: Will you be RoHS-compliant by July 1, 2006?

Wong: Yes. In fact, we went lead-free when we moved to this factory in 2002.

CT: 2002?

Wong: Today, half of our production line is not just lead-free, but RoHS compliant. And by March 2006, we will be totally RoHS compliant.

[We were fortunate enough to see the lead-free, RoHS-compliant lines in action. It was, indeed, an impressive sight when one thinks of how many companies are still searching for lead-free assembly answers.]

CT: Is such compliance the exception or the rule in China?

El-Abd: Many Chinese companies are holding back on investing in their lead-free processes. It will be interesting come May. A lot of customers are going to buy new ovens at that time, because their old ones will be inconsistent when dealing with the new solder materials. Equipment prices are going to go through the roof. Prices and delivery are going to be a problem with equipment. For example, screen-printing is going to be important because you need to screen-print and inspect the lead-free materials. Pick-and-place equipment will need to be much more accurate.

CT: It must be a challenge to manage over 5,000 employees at one site…

Wong: In this factory, not only can you see our quality, but the morale is also high. The quality is important, but happy workers make good quality products. The quality will come if we retain good workers and good suppliers.

CT: How many engineers do you have here?

Kwong: About 150

CT: How many different PCB suppliers are you using?

Kwong: It depends on the technology. We use many different PCB suppliers.

CT: If a fabricator supplies PCBs to WKKT, does that help your equipment division leverage your relationship?

El-Abd: Absolutely. Last year in China, WKK sold the highest number of Yamaha pick-and-place machines in the world. No one else comes close.

CT: What markets do you serve?

Kwong: We do computers, medical, automotive. It took us almost four years to get the first business from Japan’s automotive industry. But now we have several customers.

Wong: We want to grow our automotive and medical customers because those are high-quality, long-term product applications.

CT: Where is the growth coming from?

Kwong: Repeat business. The growth is from current business and new business. We want to work with two or three big customers who need volume business. We can become more efficient and economical with volume orders. If you have ten different customers, each of them with five or six different less volume products, you can’t be too efficient.

Wong: Let me give you an example. We supply a major German computer company that has over 200 suppliers. Each year, they present awards to their top five suppliers. We were the top supplier last year. They gave us the award because in early January of 2005 before the Chinese New Year, this company asked us to increase our output by sixty percent. So we managed to procure the additional parts from our suppliers. That’s 300 different types of components. We also had to ask our workers to stay and work, and not to leave for the holiday. The company got what it needed, and we proved our worth.

CT: Is it typical to have so many employees?

El-Abd: We would be considered a middle-sized company [in China]. You have your Foxconn’s with 100,000 people. You have automotive companies with 50,000 to 60,000 people here in China. As EMS providers, we’re ranked number eighteen. We haven’t gone to Mexico or Eastern Europe [to manufacture] because our strength is still here. We can’t copy what we have here in Eastern Europe. And those companies that do have facilities there like Flextronics, they can’t compete with the facilities here in Asia.

CT: How’s 2006 looking for the bare board side?

Kwong: Pretty much flat. May grow a bit but not much. Too much capacity.

CT: How do companies here handle the knock-offs, the IP theft? Will that eventually change?

El-Abd: That’s just the way it’s going to be for a while. Many countries violate IP protections. It would surprise you to know who the real IP culprits are in Asia. China is working hard to put more laws into effect to give greater IP protection. Over time this will improve. The real countries that violate IP-theft are those countries deemed America’s so-called “friends.”

CT: What’s your biggest challenge?

El-Abd: Growing the business--especially as the Taiwanese nip at our heels with lower costs. We don’t want to go down there. But we want to offer quality. If you have good workers who have discipline and stay with you, you will have consistent quality.

Integrated Microelectronics Inc. (IMI)

IMI President and CEO Arthur Tan.

Like WKKT, Integrated Microelectronics Inc. (IMI), the Philippines-based EMS provider, is no stranger to the ODM/EMS model. Its ODM subsidiary, EAZIX, was established back in 1998 to offer higher value solutions to OEMs. One of EAZIX’s core competencies is designing and developing products for wireless local area networking and wireless personal area networking. Another is designing embedded systems, having worked extensively with Linux software for varied applications including consumer, office, and industrial electronics products.

IMI made headlines last December by merging with Speedy-Tech Electronics, an EMS provider based in Singapore. Today, with over 1.6 million square feet of manufacturing space and design centers located in China, Singapore, the Philippines, and America, IMI is an up-and-coming EMS provider profiting from its strong relationship with Japanese disk drive makers, among other customers. In 2005, IMI’s gross revenues were $182 million--not including the revenues of Speedy-Tech. But it’s not relying upon the Japanese to remain strong. The company hopes to benefit from the expansion of its geographic presence as it gains access to the facilities of Speedy-Tech in China and Singapore. The merger also diversifies IMI’s customer base since the company claims there is little customer duplication between the two companies.

Arthur Tan, President and CEO of IMI, said “The next challenge for us is integration--our capabilities, competencies, cultures, management philosophies, systems, processes--in order to ensure that maximum synergies will be realized.”

Enlarge this picture IMI’s PCBA line in the Philippines.

IMI serves customers in Japan, the United States, and Europe in the optical and hard disk drive, communications, industrial, consumer, and automotive electronics markets. Speedy-Tech, on the other hand, serves the IT, industrial equipment, banking equipment, medical devices, telecommunications and consumer electronics sectors covering the U.S., Europe and the Asia-Pacific region.

The company’s largest revenue source is data storage market--hard disk drives and optical disk drives for Japanese OEMs who are key market players. But it also deals with products for medical, automotive, communication, industrial and even consumer electronics. According to CEO Tan, Japan has always been the primary market of IMI. “Our Japanese customers account for 70 percent of our total annual revenues and we work hard to increase revenues from this market.” IMI’s niche is to handle product development, manufacturing, and shipment while allowing the Japanese to focus on R&D and marketing. “They can use our available resources and capacity, and leverage our quality systems, while being sure that there will no infringement of their intellectual property rights.”

IMI USA

An assembled flex circuit designed and manufactured by IMI USA.

To learn more about this rising EMS star, CircuiTree visited IMI USA (Tustin, CA) which helps the company manage its technology programs and new product introductions, while also providing direct support for North American customers. Before it was acquired by IMI, the company was founded in 1987 as Smartflex Systems, a contract manufacturer specializing in precision assembly on flexible circuit substrates, employing approximately 300 people. It was then bought by Saturn Electronics & Engineering in 1999 before being acquired itself by IMI earlier this year.

When one walks through the halls of IMI USA, one is immediately conscious of how innovation has driven the company since its inception. Several cases line the walls, holding various products that the company has designed and manufactured using flexible circuitry and IC packaging. The applications range from hearing aid devices to gas station payment kiosks. The facility is fairly modest, employing only twelve people--but seven of them are engineers responsible for working with their approximately fifty customers to develop prototype products. Though small, the facility has the necessary SMT and production equipment necessary to turn out low volume orders. Once designed and manufactured in Tustin, these products will be transferred to Asia where they will be produced in volume.

CircuiTree spoke with Tim Patterson, the company’s Director of Technology, and Richard Bell, Vice President of Sales, to learn more about what IMI needs from its PCB fabricators. While most of its volume purchasing is procured by the Philippines from board manufacturers in Hong Kong and greater China, Patterson said IMI is concerned about the limit of substrate capabilities on boards with finer lines and spaces. “We need to reduce the pitch of the die without increasing the cost of the substrate,” he said. “Heat dissipation is another big challenge.”

But perhaps the biggest challenge for EMS providers is managing component inventory on July 1, 2006 when the RoHS Directive goes into effect. Patterson said that IMI is “90 percent lead-free now,” but that “inventory management will be a big challenge. Most suppliers know they need to go lead-free, but we are the ones responsible for putting it all together.” According to Patterson, immersion silver is a good replacement from eutectic to lead-free manufacturing.

Regardless of the challenges that lie ahead, Bell is confident that the company’s performance will continue to make IMI successful. “We’ve made our reputation on the fact that we have strong engineering support for our customers. We’re not only managing new product introductions today, but we’re also looking two to three years out so that when the customer comes to us, we have a solution already in place.” To illustrate this point, Patterson mentioned that he and his team of engineers have developed a “traceless” flip chip with a pitch approaching 20 microns. With this kind of innovation, one should expect to be hearing more about IMI in the months ahead.

Many Parts, One Body: The 3CEMS Group

One of the disadvantages of being a U.S.-based publication is the difficulty of exploring the lesser-known (but no less important) EMS providers in Asia. But one such company, though relatively new, is starting to make headlines beyond China’s borders. Located about two hours from Hong Kong, Taiwanese-owned 3CEMS Group is a good example of today’s evolving EMS provider. Owned by First International Computer (FIC), it’s a vertically integrated EMS and PCB manufacturer in one, located in the Guangzhou Free Trade Zone. Its “3C” moniker refers to its market focus: computers, communications, and consumer electronics. It is comprised of two business units--PCB manufacture and assembly services--with a total of six factories. 3CEM’s vision is to become a worldwide ODM market leader, in addition to its current competencies.

3CEMS owns three separate PCB manufacturing companies: Broad Technology, Broadteam and Delton. The PCB business unit’s gross annual revenue in 2005 was approximately $250 million--with a revenue target of $300 million in 2006.

PCB Manufacture…

The oldest of the 3CEMS printed circuit manufacturers, Broad Technology, was founded in 1997 and manufactures double-sided to ten-layer boards. It is capable of producing 900,000 square feet of PCBs per month. It employs approximately 2,000 people, and has 31,200 square-meters of floor space. It is claims a variety of certifications (ISO-9002 & ISO-14001, QS-9000 and UL) and focuses on multilayer boards and polymer thick films. The facility also boasts more than 60 Hitachi drilling machines.

The second company, Broadteam Electronics, was established in 2002, and is dedicated to the production of double-sided to four-layer PCBs. It boasts a capacity of 600,000 square feet per month and features a 13,000 square-meter production area, employing 800 people.

Finally, the most sophisticated of the three companies, Delton Electronics, manufactures eight- to ten-layer HDI boards, and boasts a capacity of 300,000 square feet per month. It has a manufacturing area of 15,300 square-meters, and employs about 500 people. Combined, the three companies boast 1.8 million square feet of capacity per month.

…And Assembly

In addition to its PCB fabrication units, 3CEMS combines three assembly businesses: Danriver Technology, Prime Technology, and Danriver Systems.

Established in 1998, Prime Technology features a manufacturing area of 22,500 square-meters and employs 1,000 people. It has the capacity to assemble 650,000 pieces each month, and boasts fifteen SMT lines from Fuji and Mirae.

Founded in the same year as Prime, Danriver Technology has manufacturing space of 22,500 square-meters and employs 1,500 people. With a monthly capacity of 720,000 pieces and 19 SMT lines, Danriver Technology is one of the largest EMS providers in the area.

The last company, Danriver System Inc., concentrates on Chip on Board (COB) technology. For this facility, 3CEMS installed six COB lines, six SMT lines and a class 10,000 cleanroom. With a manufacturing space of 28,431 square-meters, the company employs 500 people.

During InterNepcon Japan held in January, CircuiTree spoke with Tommy Chiang, the sales manager of 3CEMS Group, to learn more about the company’s current market focus. According to Chiang, Dell accounts for 40 percent of 3CEM’s business, supplemented by big players in the telecommunications and consumer electronics markets. In addition, it’s supplying the automotive sector, with customers like Honda, Toyota, and Nissan.

The Evolving Supply Chain

Based on our conversations with these three companies--and others like them--we believe that the merger of EMS and ODM services will only accelerate. But this gives rise to more questions. Will these companies one day bring to market their own products? Will a revaluated yuan make manufacturing in China less attractive? Will too much capacity threaten future growth? We’ll be watching these companies as they develop in the coming months, and report back. Stay tuned.