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Tech Industry

Investors abandon contract manufacturers

Stocks of some of the biggest companies that manufacture products for PC makers dive as much as 29 percent in what one analyst dubs "guilt by association."

Contract manufacturing stocks dived as much as 29 percent on Thursday in what one analyst called "guilt by association."

Jabil Circuit, SCI Systems, Flextronics, Celestica and Solectron--manufacturers of everything from modems to optical switches to PCs--slid with the broader market on earnings warnings from PC maker Gateway and chipmaker Altera.

In afternoon trading, Jabil Circuit tumbled $11.94, or 29 percent, to $28.06. SCI Systems declined $5.81 or 18 percent, to $25.19. Flextronics slid $4.06, or 14 percent, to $23.25. Celestica fell $8.56, or 14 percent, to $51.94. And Solectron dipped $3.25, or 9 percent, to $25.96.

Gateway warned Wednesday that fourth-quarter earnings and revenues would fall short due to sluggish holiday sales over the Thanksgiving weekend.

Chipmaker Altera said its fourth-quarter revenue will be flat, compared with an earlier projection of 12 percent growth.

Both warnings spurred a large-scale sell-off in technology stocks, driving down shares of PC sellers, chipmakers, and contract manufacturers that make PCs.

Contract manufacturing is the open secret of the hardware world. Increasingly, brand-name manufacturers are outsourcing manufacturing, product design, and even customer support to these companies.

The contract manufacturing industry will rake in $49 billion in revenue this year and will grow to $81 billion by 2002. Solectron is currently the market leader.

Over the past two years, contract manufacturers have worked to diversify their businesses, moving away from PC orders and into telecommunications equipment, among other products. But this diversification seemed to matter very little Thursday as investors sold off contract manufacturing stock en masse.

"In this market, people don't think through all that. They sell first and think later," said ING Barings analyst Patrick Parr, dubbing the problem "guilt by association."

By afternoon, the Nasdaq declined 158.8 points, or 5.87 percent, to 2,548.13--a 15-month low and nearly half its March value, which topped 5,000.

"Clearly it's an unbelievably hostile environment today," Parr said.