Olin King will step down as chief executive of contract manufacturer SCI Systems in June but stay on the board, amid financial setbacks for the company.
Although a longtime leader in the contract manufacturing market, SCI has seen profits and revenues decline recently due to competition in the personal computer industry.
In February, the Huntsville, Alabama, company announced that it was cutting jobs at several of its manufacturing plants "in the interest of efficiency enhancement," and that revenue and earnings wouldn't meet projections for the two coming quarters. The company attributed the problems to decreasing market share and increasingly competitive pricing.
Originally an obscure business, PC contract manufacturing is more of the rule rather than the exception in the industry. PC makers, including Dell Computer, Compaq Computer, Hewlett-Packard, and Apple, among others, outsource the assembly and manufacturing of a number of PCs to contractors like SCI and Solectron. Acer, according to some sources, seems to be in the process of shifting from being a brand name PC seller to serving as a contract manufacturer.
A $90 billion industry in 1998, contract manufacturing is expected to nearly double to $178 billion in 2001 as more and more name-brand manufacturers seek to take advantage of the manufacturing capabilities and Third World labor pool of the contract builders. (See related story.)
King and SCI played a significant role in defining the industry. He helped start SCI in the 1960s, and SCI helped define the business of making money by assembling PCs for other companies.
For its last fiscal quarter, which ended on December 27, 1998, the company reported net income of $32.4 million, or 48 cents per diluted share, compared to net income of $37.6 million, or 55 cents per diluted share, for the same quarter the year before. The company's stock has dropped from above $55 in January to just below $30 today.
Additionally, SCI was passed last fall by longtime rival Solectron for the No. 1 spot in the industry in terms of revenue.
King, who will stay on as chairman of the board, will step down as CEO on June 30, the end of SCI's fiscal year. Current president A.E. Sapp will take over the next day.
"The vendors are finding it harder and harder to keep their costs down, and [contract manufacturing] is a way of dealing with costs," said Roger Kay, an analyst with International Data Corporation. "They [contract makers] have as efficient a manufacturing capability as anybody in the world, and they have begun to assume a larger and larger role for actual box-building."
Contract electronics manufacturers' net income has been increasing at 25 percent a year, but in 1999 and 2000 will likely grow by 30 percent, according to Paul Fox, an analyst at NationsBanc Montgomery Securities. In a pre-released statement, King said that it has been his intention to step down and hand the CEO title to Sapp for some time. King recently turned 65.
"The company is extremely fortunate to have a person of Gene Sapp's talent, knowledge, and energy to guide SCI through exciting times which lie ahead," he said.