The restructuring is done.” So says Sanmina-SCI president and COO Joseph Bronson. After six years of wrangling to get its operating costs in line with its revenue, the EMS company can finally face the future with a dose of confidence.

In an exclusive interview with Circuits Assembly in late November, Bronson, a former semiconductor executive brought on board last August, outlined the embattled EMS provider’s strategies, while firmly asserting that those who forecast the company’s impending demise are roundly wrong (see the full interview below).

Some of the company’s problems can be traced to its still-questionable acquisition of SCI. That $4.5 billion, all-stock deal took place in December 2001, amid the industry’s worst recession. Although Sanmina purchased the much larger SCI – at the time, the world’s second-largest EMS company – for just 0.54 times the latter's revenues, the rationale that SCI’s massive PC business would provide ongoing internal demand for Sanmina’s bare-board products never fully materialized. (The day the deal was announced, Sanmina’s stock was trading at $23.19. Today, shares of the combined company are near their 52-week low of $1.70.)

But that was long before the days of the $250 PC. As if to break with that part of its past, Sanmina-SCI now plans to sell or otherwise dispose of its PC and business computer unit within the next year. “We don’t have an end-to-end solution for PCs,” Bronson said during the interview, “so we can’t pick up margin points at each step of the process. I don’t see how we can get more cost out of [our PC operations]. We won’t have the leverage some others do.”

Yet PCs make up nearly $3.2 billion of Sanmina’s annual revenues ($10.3 billion in fiscal 2007). Losing that business will almost certainly banish any hopes the company may harbor of re-attaining a place among the largest of the large EMS providers – a prospect to which Bronson seems indifferent. “The inherent value in being the largest has faded. I have this vision of all these [top-tier EMS companies] heading 90 mph, using debt to grow revenue. They’ll hit a wall. That’s not what we’re doing anymore.”

Anymore. Sanmina-SCI grew mostly by acquisition throughout the late ’90s and early 2000s, and says it has learned from its past. Says Bronson: "We have to pursue markets where we can generate value and grow margins. Eventually you can grow into a supply chain and add value. It’s better than buying a plant, and then watching the OEM send its business somewhere else.”

One element of its history Sanmina-SCI isn’t shying from: defense contracts. The company has a rich tradition of supplying the U.S. government (considered a founder of the EMS sector, SCI was incorporated in 1961 as Space Craft Inc.). And while every major North American EMS supplier, save for Flextronics, is targeting that market, Bronson says a combination of the firm’s connections and its branded products has Sanmina well positioned.

Most EMS companies like to press as points of differentiation their size, global reach, pricing and supply-chain management capabilities. I would argue that all the Tier 1s make those cases. For his part, Bronson sees nuances: “For some customers, the global footprint is very important, and sometimes it’s what’s best for that customer that’s important. Each EMS has locations that are unique to its customers. We try to differentiate on the basis of our engineering skill, getting to market more quickly than our competitors.” He also intimated a bigger push into the ODM side. “We’re focused on markets. We are having a lot of success in defense and aerospace, designing products for them. The medical market, the industrial equipment market. Certainly in enclosures … we have a product that’s ours and could consider selling.”

A company-wide Lean initiative is helping. “We’re Leaning out a number of lines. It really enables us to save money, improve efficiency and drive throughput,” Bronson told me. Inventory turns, among the best in Sanmina-SCI’s peer group, are headed up, and the company-wide goal is 13 times – well above its competition today. Says Bronson: “The EMS business is healthy. Our margins are pretty close to the top-tier industry performance, and we believe exceed as many as six of the eight companies in the space. Our focus is on improving asset management.”

Is the view worth the climb? I asked Bronson.

“The company has underperformed for a long time,” says Bronson, “so it has a lot of skeptical followers waiting for the body to enter the crematorium. I don’t think that’s going to happen. If we can continue to execute, we’ll be in a good place next year.”

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The following is the text of Editor in Chief Mike Buetow’s Nov. 28 interview with Sanmina-SCI president and COO Joe Bronson.

CA: Sanmina-SCI has the capacity to perform the highest volume of work, yet it will perform prototype business for certain customers. Under what circumstances would you perform such work?

JB: We have various NPI capabilities with factories staffed with designers. We’re focused on markets. We have a product for the military market that’s ours. Where we are having a lot of success is in defense and aerospace designing products for them. The medical market, the industrial equipment market. Certainly in enclosures: that’s almost the way you do business in enclosures now, unless the customer just brings you something like a cabinet to build. Some are part sophisticated, like the outdoor cabinets. In this case, we’ve actually designed a product provided from an engineering group with the specs. That is a bit different than the normal situation. But we have a product that’s ours and could consider selling through distributors.

CA: On an analysts call last month CFO David White alluded to “a road map to improving the profitability of the EMS business.” What can you share with our readers about your strategy?

JB: The EMS business is healthy at the moment; it’s the components business that has underperformed. Our margins are pretty close to the top-tier industry performance, and we believe exceed as many as six of the eight companies in the space. Our focus is on improving asset management, particularly inventory turns.

We’re Leaning out a number of lines, doing a lot of those techniques. It really enables us to save money, improve efficiency and drive throughput, which in turn reduces our cost structure and allows us to go after more revenue programs. It also makes us competitive on pricing of certain business. This is a never-ending kind of task; by no means are we “done,” particularly in Asia where some of the plants are newer. We’re still adding factories, and will probably have one in India in 2009.

CA: Where does Sanmina’s Lean implementation stand today? Have all your plants worldwide at least begun to adopt core Lean principles?

JB: Absolutely. Particularly, I’ve seen a number of Lean applications in Guadalajara, which I’ve visited. We’ve made a major turnaround in our Toronto enclosures plant. With Lean, it just needs to be determined it will be done, have the right number of industrial engineers, get the people trained, and run with it.

CA: All things being equal, would you anticipate any potential capacity reductions once the entire enterprise has been “Leaned?”

JB: I think we need more revenue. Lean creates capacity for you. A number of our plants are not full, by our estimation. We have some plants that are flat out, still have some room to go.

CA: Could you comment on the capacity utilization with respect to EMS and PCB?

JB: We don’t measure across the business but plant by plant. Generally, EMS is more loaded than PCB. We have operational, in the board business we have a couple plants that are flat out; over 80%. Some are underutilized, at 60%. Some need either more revenue or operational improvements. A number of the EMS plants are at the high 70s, low 80s.

CA: Can you comment on the Owego PCB plant?

JB: Operationally, more revenue would be better.

CA: Most EMS companies like to press as points of differentiation their size, global reach pricing, supply-chain management, etc. But none of this is unique to any of the Tier 1’s. So what concepts do Sanmina stress most during sales calls?

JB: For some customers the global footprint is very important, and sometimes it’s what’s best for that customer that’s important. Each EMS has locations that are unique to its customers. We try to differentiate on the basis of our engineering skill, getting to market more quickly than our competitors. That’s what we have to do, because we aren’t going to compete with the guys with 500,000 workers and 1 million sq. ft. plants.

CA: You mentioned a new plant in India. How would you characterize the amount of time EMS firms spend searching for lower-cost regions in which to site production?

JB: It’s driven by the customers. India’s such a big market we have to be there. Our customers are demanding it, so we have to do it. I don’t think you’ll see us do any more after India; we would be hard-pressed to pursue another lower cost region. Know Foxconn is in Vietnam. I imagine that would be pretty close to the last frontier.

CA: Is the commercial paper market a concern at this point, or do you feel your main customers have ample means for capital as needed to supplement their growth?

JB: I think our customers – you are talking about credit risk as a general comment – are of a pretty high quality, so when you look at it that way, I don’t get very concerned about their credit worthiness. As far as our financial situation is concerned, none of our long-term debt is due until 2010, and we’re paying some of that off next month. The naysayers that say the credit crunch will cause a recession in the U.S. and will have an impact on global demand, and we would be affected by that, because there would be a decline in some of our customers’ markets.

CA: In October Sanmina-SCI said it is either going to sell or otherwise dispose of its PC and business computer unit within the next year. What should we take away from this?

JB: We don’t have an end-to-end solution for PCs, so we can’t pick up margin points at each step of the process. But the customers are ever seeking lower and lower costs. You’ve heard of the $250 PC. The major customers are always looking for lower costs. Having seen our operations, I don’t see how we can get any more cost out of it. We won’t have the leverage that some other people do. That business is profitable and generates cash, but over time will be dilutive.

CA: I noticed your margins in that business are on the rise, even if sales are down.

JB: But they’re supermarket type of margins.

CA: Will the sale of that operation include divestiture of certain plants as well?

JB: No, that plant is an IBM facility in Mexico.

CA: High-end computing and storage made up about 12% of net sales during the last quarter. Will that business be unaffected by the loss of the PC business?

JB: That business will be well served. We will have some interesting ideas going forward with respect to logistics, new products, BTO/CTO.

CA: Every major North American EMS supplier, save for Flextronics, is targeting the military/defense sector. Why do you feel Sanmina is positioned to grow in this area?

JB: We’ve got a great organization in Huntsville, very well connected. Some proprietary products. There really isn’t much competition at the time being. We need to continue to develop proprietary products for the military and drive that business. We have some very good relationships with some of the subcontractors like Lockheed-Martin and General Dynamics. The nice thing is no foreign competitors can go after that business.

CA: The restructuring of the PCB operations is complete, and management has a goal of 20% margins in that area. Where are you at today?

JB: I can’t comment on the margin goal. Profitability has to be raised by matching the capability with the needs of the markets. You almost have to bend the business based on the complexity of the boards, the layer counts, etc. The number one measure of driving profitability is more business. This unit has not performed well and essentially has contracted over the past two or three years. You take your eye off the ball. Not enough internal demand. You want more of that because it means you are driving the vertical integration.

CA: Some EMS companies use corporate loading systems, other go plant by plant. How does Sanmina determine the best approach?

JB: So it’s a combination of revenue growth and a lot more vertical integration. Plant by plant, we are in the process of really studying the business processes surrounding this, because I’m not sure we’ve optimized the demand aspects of this. We have a couple plants operating in excess of 20% margins. We have to really reengineer our business processes to align with our EMS cousins. By align, I mean business processes, demand management, how you are getting the people from the division locked in to the EMS plants. Getting feedback, getting specifications, requirements, knowing where to do it, and being able to outhustle because they have to have the lowest cost solution to provide it.

CA: Your inventory levels have reached more than 10% of revenues. What’s a comfortable number for a company Sanmina’s size?

JB: We’d like to turn inventory at least 10 times; we should be shooting for 13X. In PCBs, we should be turning 45 times.

CA: In that regard, overall you are doing well against your peer group.

JB: I think it’s a good indication of the Lean manufacturing initiative.

CA: How much of a threat does Sanmina see Foxconn?

JB: I don’t see them as a threat. When they want a piece of business they can buy it. But they are building millions of cellphones, millions of PCs. Those aren’t our businesses. In our corner they can’t participate in our military and defense business. They can compete in the medical sector – we are the leader now, but I assume there will be some price sensitivity as time goes on. I don’t really worry about going head-to-head in a number of opportunities with them. In the semiconductor equipment business, customers would rather work with us – they may disavow that but it’s true – because they know their IP would be protected.

CA: Now that you’re five or so years in to the restructuring, is the view worth the climb?

JB: It was something that was necessary in order to stay competitive in the long run. Knowing how customers have migrated business from U.S. to Asia, I don’t think the company could have been competitive if it did not have capacity in these areas. You can now put a piece of business in China because you can get all the same engineering and capabilities as elsewhere.

CA: One of the efforts Sanmina management has made over the past several years is to reduce capacity in Europe and North America, and increase it in Southeast Asia. Yet two of your competitors – Benchmark and Jabil – each have more than 50% of their capacity in those “higher-cost” regions. Why wouldn’t their approach work for Sanmina?

JB: Jabil is a global player. Think they are taking advantage of something I wish we would down the road. There’s still a lot of companies that haven’t outsourced their manufacturing. Jabil’s model is enabling them to market and be first to get that business because they are focused on it. Some customers who haven’t even outsourced to begin with; that gets them closer to certain customers. I don’t know Jabil’s mix that well. I think Sanmina was overly skewed to telecom, and had to replace that market as it has fallen off. Benchmark doesn’t have a global footprint.

CA: There was once an inherent value to being the largest EMS company. Has that faded?

JB: The inherent value in being the largest has faded. I don’t know about Jabil, don’t know them very well. I have this vision of all these guys heading 90 mph, using debt to grow revenue. They’ll hit a wall. We’re going to grow because that’s not what we’re doing anymore.

There’s a big difference between outsourcing measurement tools versus a telecom box. We have to pursue markets where we can generate value and grow margins. Eventually you can grow into a supply chain and add value to your customers. It’s a lot better than buying a plant, and then watching the OEM send all their business somewhere else.

CA [laughs]: They never do that.

JB [laughs]: Yeah, they never do that.

CA: We have seen some programs return to Mexico from China. Have you seen this?

JB: We have a lot of capability in Mexico. Often it’s the customer who says what he’s looking for. There’s some cost capability that’s developing, but we have so much capability we might be able to balance that [in Mexico].

We do what the customer wants. Some customers have had bad experiences in Mexico – not with us – and don’t want to do anything there. They just want to go to China.

CA: It’s been suggested that OEMs will never let any one EMS company gain a majority share of the market, that they will play them off each other.

JB: I think you can end up even with one or two players, and that will happen. The OEMs are still strong enough. There’s really five Tier 1s. The exception may be defense and aerospace, but that’s a very small piece of the market. The large OEMs will call the ball. The only way that would change is if the CMs themselves establish practices that made it possible to gain leverage.

CA: Any final points you want to get across?

JB: The only point I want to get across is we’ve got a good brand, the company has underperformed for a long period of time so it has a lot of skeptical followers waiting for the body to enter the crematorium. I don’t think that’s going to happen. If we can continue to execute, we’ll be in good place next year. France needs to be closed. And Colorado. My goal is to have one P/L; no more non-GAAP. The restructuring is done.