In the end, will the naysayers be proved right?

When Endicott Interconnect Technologies was divested in late 2002, many observers felt the death watch for IBM Microelectronics’ longtime manufacturing arm had begun. And yet, despite a bloated infrastructure, a lousy market and management unfamiliar with the printed circuit industry, the company for years had defied its critics.

“Had.”

EI filed for Chapter 11 bankruptcy protection in June, hoping to stave off repaying nearly $90 million in debts while it scrambles for a new owner. Annual sales have dropped from a 2008 high of $414 million to under $100 million. Without intervention, the company said in its filing, it would run out of cash by September. The development is truly a sad day for American manufacturing, one in which economics (again) trumped engineering.

What went wrong? Let’s start with the location. It was never an ideal design for a modern campus. In contrast with, for instance, Samsung’s newly announced campuses in the Silicon Valley, which are gleaming testaments to world-class architecture and worker collaboration and located at the widely acclaimed center of technology innovation, EI occupied a sprawling, 43-building site in upstate New York that dated to the beginnings of IBM. The operating costs of such an outdated behemoth must have been immense.

But after some initial stumbles, EI seemed to find its stride. Much like its erstwhile cousin Celestica, the EMS giant that also was spun out of IBM and suffered through its share of lean years, EI adapted to the end-market, paring (though not eliminating) its reliance on building network systems in favor of the overflowing post-9/11 defense money pie, and winning contract after contract to supply the US Defense Department.

Simultaneously, EI ramped up its medical expertise, noting the sector’s tendency toward high margins and lower volumes made it a good fit for EI’s onshore capabilities and sterling reputation. EI’s approach – and success – was a firm palm strike to those who dismissed the company’s ability to survive.

After an extensive plant tour in late 2006, I was moved to write, “If you come, they can build it. Is Endicott Interconnect America’s best manufacturer?”

It might have been, but in the end, even that wasn’t enough. While EI has cited competition from low-cost regions as its undoing, the company for years has tried, without success, to expand into China.

Some critics are noting that the primary owners came from the paper and food service industries, and thus were ill-prepared for competing on the global electronics stage. This focus on a lack of experience is somewhat misguided, as co-owner Jim Matthews previously headed EMS firm Matco Electronics.

That said, it would appear management never came to grips with the need to transform not just the customer base but the business itself. EI maintained an internal supply chain, a one-stop shop for everything from design to sheet metal to laminate to bare boards and assemblies, a questionable decision that forced it to employ a large workforce even when demand fell. The China operation, situated inside another company’s plant, was a bust. EI tried to license its multiple (and innovative) chip packaging patents, but never scaled to the level needed to carry the company. Partnerships with US-based fabricators brought more distractions than revenues. Top Tier EMS companies, once customers, began to see EI as a potential competitor and stopped buying.

A longtime EI manager who left the company about two years ago expressed frustration to me over the owners’ unwillingness to confront certain underlying problems, a failure, the ex-worker said, that was the byproduct of management putting their personal reputations ahead of the good of the company.

As of this writing, the company is trying to claw its way back through the bankruptcy courts (see “Around the World”). All the cofounders, save one, have cut their ownership interests, although Bill Maines is still owed millions by the company. The holdover, Jim Matthews, has left EI in order to put together a bid to buy the company.

The final chapter for Endicott Interconnect Technologies has yet to be written. Matthews’ previous company, Matco Electronics, also ended up in bankruptcy court amid a flurry of suits from creditors. An omen?

Setting sun. A big thank you to Tom Falcon, our resident solar technologies expert, who after three years is taking a sabbatical from writing. We wish him the best!

P.S. Have you joined the more than 2,000 designers, engineers and buyers expected to register for PCB West next month at the Santa Clara Convention Center? Go to pcbwest.com for details.