One group in this complex industry–the board-box assemblers--havehas fared somewhat better in the public financial markets than another well-known group, namely, the IC assemblers.

We'll explore the implications and suggest future scenarios for each, which will include the potential for convergence.

Electronic manufacturing service (EMS) providers meet the manufacturing outsourcing needs for board-box-systemsboard-box systems of OEMs and IC package assembly and test of IDMs (integrated device manufacturers).

These two major classes of customers, OEMs and IDMs, define the two major EMS categories. One is comprised composed of Celestica, Jabil, SCI, Solectron and hundreds more; the other group counts comprises Amkor, ASAT, ASE and dozens more.

Chip Scale Review often refers to the latter EMS group as packaging foundries, a synonymous term. For clarity, we'll designate the board-level group by the acronym originally devised by the IPC for them, EMSP, and we'll designate the IC package assembly group PF.

Actually the world is not that pure. PF Amkor, with its multi-chip and RF module offerings, and PF OSE are also board-level assemblers; Flextronics, a major board-level EMSP, puts chips on boards, eliminating the package. But we're getting ahead of our story.

Both EMSPs and PFs are in a high-growth mode and need lots of capital. The public money markets are a capital rationing device, made to order for high growth industries.

Growth is rewarded with high price/earnings ratios. In turn, the highly valued stock becomes great currency for acquisitions. It's positive feedback that spirals ever upward. While the process goes on, no one worries about the limits.

(The party is too much fun, so we won't spoil it-just now-by talking of dilution and other nasties.)

Hereby Herein lies a major difference between the two EMS groups. After climbing to P/Es in the 60s to70s in April 2000, the stock prices of the two groups headed in opposite directions. Speaking in general terms, The the EMSPs moved up while the PFs headed downward, (along with the semiconductor infrastructure companies), ). speaking in general terms.

Electronics industry output reached such high levels early this year that production shortages and glitches cropped up, interrupting demand. They rippled back and impacted the semiconductor bottom of the food chain first. That was an underlying reason for the divergence–but there are two others:

(The reason is certainly not gross margins. The PFs, gauged by Amkor, earn twice as much as the EMSPs, which are stuck below 10% for most.)

1. The board-box assembly EMS firms get to resell almost everything else - semiconductors, sheet metal, you name it–fast turnover is what they offer and profit from.
2. Every other day an OEM somewhere in the world decides to peel off a factory to an EMSP. With the recent exception of ChipPAC’s buyout of an older Malaysian Intersil assembly plant, there is no comparable move by the IC companies to divest their packaging operations–yet.

Using Y2K total available market (TAM) figures, the EMSPs have room to grow sixfold, and that growth is almost guaranteed! The PFs may be looking at 3x growth, but that's not guaranteed - yet. Capital markets love guarantees. (See the sidebar for our derivation of TAMs.)

Suggestions for Increasing Market Share

Following are suggestions for increasing PF market share and enhancing value:

• Take a page from the board-box EMSPs–take your proper place in the supply chain with more B2B interconnectivity to OEM designers, IDMs and wafer foundries for fast execution
• Become more expert than the IDMs in chip stacking, and wafer-level packaging; solicit more outsourcing. The IDMs have other things to do to improve their competitive positions.
• Form alliances with the other group of EMS companies to deliver more complete solutions to OEMs from chip-on-board for mobile/internet Internet appliances to C4 for high-end servers.

Acquisition activity increases with focus on OEM divestitures and expanding product and service capabilities. Source: Market Manufacturing Insiders/Robertson Stephens EMSP Conference.