Electronic Design

Top 50 Employers 2012, Part 4: Molex Makes A Move

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Molex Inc. showed significant improvement as well, moving from number 79 on our 2010 list to eleventh last year. Incorporated in 1972 and based in Lisle, Ill., the company is one of the world’s largest makers of plugs and other electrical connectors.

In fact, Molex makes more than 100,000 kinds of electronic, electrical, and fiber-optic connectors and switches. Its miniature plugs, jacks, and other complex connectors are used in a wide variety of products, including automobiles, computers, consumer electronics, home appliances, industrial machinery, and telecommunications equipment.

Molex sells through distributors and directly to manufacturers that have included Apple, Cisco, Dell, Ford, General Motors, HP, IBM, Nokia, and Panasonic. Asian customers, primarily in China and Japan, account for more than 60% of sales.

Competitive Landscape

The highly competitive global connector industry is estimated to represent approximately $45 billion in net revenue for calendar year 2010. Rapid advances in technology and new product development characterize the industry. The increased functionality of applications in which these products are used has substantially driven these advances.

There is a constant demand for new product solutions and innovations in the technology industry. Product life cycles tend to mirror the life span of customers’ products, although many products are designed into subsequent applications. Consumer and mobile products have relatively short product life cycles, while automotive and industrial products are typically longer. Across all applications, industry trends include:

• Globalization: Synergistic opportunities exist for the industry to design, manufacture, and sell electronic products in different countries around the world in an efficient and seamless process. For example, customers’ products may be designed in Japan, manufactured in China, and sold in multiple geographies.

• Convergence of products: Traditionally separate products developed for the consumer electronics, infotech, and telecommunications markets are converging, resulting in electronic devices offering broad-based functionality.

• Increasing electronics content: Consumer demand for advanced product features, convenience, and connectivity is increasing electronic content in end devices. For example, electronic content in automobiles is increasing due to advances in infotainment, telematics, and safety systems.

• Increasing storage and bandwidth requirements: The global demand and use of streaming information such as audio and video require electronic components to have increased storage capacity and high-speed retrieval capabilities. Increasing Internet traffic is taxing existing network infrastructure, resulting in equipment upgrades and capacity additions.

• Product size reduction: High-density, micro-miniature technologies originally developed for consumer product applications are expanding to markets such as infotech and telecommunications, leading to smaller devices and greater mobility.

• Consolidating supply base: Generally, global OEMs are consolidating their supply chain by selecting global companies possessing broad product lines and a strong financial position for most of their connector requirements.

• Price erosion: Due to rapidly evolving innovation in the technology industry, customers experience pressure to reduce their prices to meet consumer expectations. As a result, component suppliers are generally expected to reduce prices.

• Competitive market: There are many competitors in the connector industry, increasing the level of competition worldwide. The 10 largest connector suppliers, as measured by net revenue, represent approximately 54% of the worldwide market and exhibit a faster growth rate than their smaller competitors.

• Rising commodity prices: Commodity prices continue to increase and affect gross margin.

Markets And Competition

Molex serves six key market segments:

• Telecommunications: Mobile phones and devices, networking equipment, switches, and transmission equipment

• Infotech: Desktop, tablet, and notebook computers, peripheral equipment, servers, and storage

• Consumer: Digital electronics, cameras, flat-panel displays, plasma and LCD televisions, electronic games, and major appliances

• Industrial: Factory automation, robotics, machine tool, complex machine builder, device manufacturers (sensors & valves), and electrical lighting and cables

• Automotive: Powertrain, body electronics, safety electronics, sensors, infotainment, telematics, and other automotive electronics

• Other (including medical, military, and aerospace): Electronic and electrical devices for a variety of products

Principal competitors include Amphenol Corp., Framatome Connectors International, Hirose Electronic Co. Ltd., Hon Hai Precision Industry Co. Ltd., Japan Aviation Electronics Industry Ltd., Japan Solderless Terminal Ltd., and TE Connectivity Ltd.

There also is a significant number of smaller competitors that compete in specific geographies and industries. The identities and significance of competitors may change over time. Many of the 10 largest connector suppliers, as measured by net revenue, representing approximately 54% of the worldwide market offer products in some but not all of the markets and regions Molex serves.

Molex products compete to varying degrees on the basis of quality, price, availability, performance, and brand recognition. They also compete on the basis of customer service. Their ability to compete depends on the company continually providing innovative new product solutions and worldwide support for customers.

The company’s 68-slot leap in 2011 is no surprise, as its $3.6 billion revenue level achieved a new record, surpassing the $3.1 billion the company earned back in 2008. Operating income at $430 million also surpassed the previous record of $313 million. Its 19% sales growth was well balanced across all segments:

• 12% Consumer electronics
• 21% Telecom
• 16% Auto
• 24% Infotech
• 17% Military/medical
• 23% Industrial

Total revenues are also well balanced, with military/medical still small but growing:

• 19% Consumer electronics
• 25% Telecom
• 15% Auto
• 23% Infotech
• 3% Military/medical
• 15% Industrial

A new pricing system combined with the results of Global Lean Six Sigma initiatives helped to ease pressure on gross margins caused by price erosion and higher raw materials costs. Also, Molex started a major new initiative to optimize supply chain management, focusing on logistics, procurement, and demand planning.

Costs for copper and gold rose by 30%, so these initiatives were critical to margin improvement. Had these commodity costs remained stable and the dollar remained strong, gross margins would have been around 31.8%, which haven’t been achieved since before 2007.

Molex introduced 227 new products during 2011, and new products released within the last three years now account for 35% of revenue. Product offerings were also expanded through the acquisition of an active optical cable business from Luxtera with an agreement to partner on future development of Molex products based on Luxtera’s silicon photonics technology. This should position Molex well to boost share in the global fiber optic assemblies market.

The global connector market has grown from $8 billion in 1980 to $45 billion by 2010, and it is expected to reach $66 billion by 2015, according to Bishop and Associates Inc. That’s an annual compounded growth rate of 6.2% but closer to 8.0% from 2010 to 2015. Four factors are driving this market:

• The growth of household income in key emerging markets such as China is leading to rapid growth in the middle class, further driving demand for digital devices.

• Internet usage has grown at a 50% compound annual growth rate since 2007, driven in part by a dramatic increase in video streaming and social media. The mainstreaming of these Internet platforms is taxing IP infrastructure and increasing the need for additional high-volume, high-speed capacity.

• Mobile devices are becoming more powerful, smaller, and thinner. And as the volume of mobile devices increases, consumers are shifting from traditional desktop and laptop devices to smart phones and tablets for their personal and business use. These trends require interconnect solutions that are smaller, faster, and more robust.

• Pent-up demand for IT upgrades in the corporate world is being released as the global economic recovery continues. In recent years, companies have delayed replacing IT hardware in data centers due to budgetary constraints and economic conditions. Storage capacity, mobile device usage, and speed requirements are driving the demand for faster, more powerful machines. New technology allows companies to add computing power to their data centers at lower cost, giving them an incentive to upgrade.

Molex has set a target growth rate of 1.5 times the industry, or around 11.9%, from 2010 to 2015. The goal is to design anywhere, manufacture anywhere, and sell anywhere. Molex products and presence are well aligned with these key trends.

Steady growth in the automotive market is expected, with global unit growth projected to be up 5% for calendar year 2012. Electronic content increases will also provide support for this market, particularly for the infotainment and safety systems. Molex continues to leverage technologies recently developed for the infotech markets into the auto market, particularly its high-speed networking products with the major U.S. car manufacturers.

Greater adoption of standard products across the industry helps because bigger volumes are obtained across multiple end customers, so equipment costs can be spread out before product is dedicated. There is a lot more adoption of technologies that have been developed for other markets inside the cockpit of the car as well.

Telematics applications, for safety and convenience, and networking products are going into the vehicle itself, including automatic breaking systems. All these technologies require a lot of high-speed connectors that aren’t high speed by infotech standards but are by automotive standards. Industrial customers are also asking for value-added electronic subassemblies.

The electronic content of cars has been rising by a 10% to 15% compound annual growth rate (CAGR) over the last six years, stated Uche Orji, a managing director in the technology group of UBS Investment Bank, in an interview with the Wall Street Transcript, making it an attractive market for connector companies. Automotive electronics ranging from engine control units to sensors for air bags and infotainment systems are expected to account for 40% of the total vehicle cost in 2015, up from some 20% in 2005. This data is based on a report from consulting firm McKinsey & Company, “Managing Innovations On the Road.” While the report was written seven years ago, the industry still relies on the figures today.

Infotech continues to grow with tablets and service the strongest parts and the storage sector relatively flat. The introduction of the Intel Romley platform, the two-socket Sandy Bridge-EP based server line, has had a positive impact on the demand from leading server OEM customers.

Reasonable growth for IT products is expected, as there is still pent-up demand for new equipment, both to replace aging equipment and to add new equipment with higher bandwidth capability. This is to support the growth in mobile video content.

Molex is also well positioned for the gradual transition from copper to fiber-optic platforms, with a wide range of high-speed copper passive and active optical solutions. One of the key technical challenges is to offer connector systems that can transmit data at faster speeds with more economical solutions. Molex has recently demonstrated a new active optical technology—the first 100-Gbit I/O connector and cable solution.

For telecom, smart-phone penetration will continue to grow but production of mid-range devices will likely continue to decline. The company is well positioned with all of the major OEMs in this area as well as with the telecom infrastructure submarket, whose supply chain is in Asia. Molex also is well positioned for next-generation systems and the transition to Long-Term Evolution (LTE), which will require similar high-speed products that it has already developed for the infotech market. High-speed networking products are a core strength for Molex.

Relatively low growth is expected in the consumer electronics market over the next year until higher wages in low-cost countries result in significantly more purchases of consumer electronics. Uneven consumer sentiment and poor economic conditions in Europe and in Japan are slowing this market down. The manufacturing side has been struggling for several quarters now due to excess inventory and project delays.

However, revenues and orders are starting to increase, indicating that inventories are more in line with demand and also reflecting the increased confidence of OEMs and distributors. Factory automation appears to be the biggest driver as a result of rising wages in developing countries and a lot more focus on automation to reduce labor costs.

In terms of future acquisitions, Molex will focus on RF from a technology perspective with respect to integrating RF into its high-speed cabling capability. The company also has a strong interest in expanding its presence in the industrial and medical markets.

Molex currently has about 40 facilities in 25 countries. Capacity utilization is fairly healthy across those plants and many small, inefficient plants have been eliminated, primarily in North America and Europe. The company is looking to expand in Korea and the Philippines. It also is expanding its tooling capabilities in Chengdu, China, a huge asset for Molex given its strength in Asia.

Download the Top 50 Employers list in .PDF format
See which companies are ranked the highest by their employees.
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