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TTM Technologies Acquisition of Meadville – A Retrospective Strategic Analysis

TTM Technologies

A shift in the printed circuit board (PCB) industry has motivated leading US defense PCB manufacturers to collaborate with international businesses, particularly in China. In 2010, TTM Technologies became the largest US-owned printed circuit board manufacturer and the fifth largest worldwide by acquiring Hong Kong-based Meadville, a high volume PCB manufacturer. Leading into the 2010 decision, TTM was arguably the most prominent military and aerospace PCB provider in US and possibly the globe.

Since the mid-2000s, the PCB industry has had a new emphasis on less complex, high volume standard boards over the high complexity, lower volume PCBs required for the aerospace and defense industry – TTM’s core competency. In an effort to help diversify its manufacturing and lower costs, TTM acquired Meadville in April 2010, a somewhat controversial move that may well bring an end to TTM’s contracts with the US government.

Readers might not recognize the term PCB, but without them, many electronics used every today would not exist. One might better identify PCBs as the green backbone of everyday electronics. TTM’s 10-K describes PCBS as:

Printed circuit boards provide the foundation for virtually every electronic product. Industry leaders rely on TTM Technologies' unique combination of speed and technology to support their most demanding applications. From the navigation system in commercial aircraft, to a high-speed router in a corporate network, to an advanced diagnostic imaging system in a leading medical center, the breadth and scope of high-performance applications supported by our interconnect solutions is extremely varied. [TTM 10-K]

In order to frame TTM’s decision to pursue Meadville, we must first understand the PCB industry. They do not include the mounted components such as processors, resistors, capacitors, and connectors. The process for manufacturing PCBs is predominantly a chemical process. PCBs can be placed into two broad categories of boards: application-specific “custom” type boards and “standard” commodity type boards. Custom boards are designed for specific systems while standard boards are used industry-wide (i.e. Cellular or PC industries) with customization post-PCB production conducted by OEMs or Original Equipment Manufacturers (i.e. Apple and Dell). Standard boards are significantly less expensive to produce and when possible are preferred due to the significant cost savings. In addition to complexity, the other primary discriminating difference between custom and standard boards is manufacturing quality, which leads to product reliability. Unlike normal consumer electronic applications such as cell phones, which are replaced every twelve to eighteen months, many satellite or military combat systems have mission life cycle requirements exceeding twenty years.

One of the major means of bypassing some of the high costs of custom PCBs is the use of standard boards in conjunction with “glue logic” components. These glue logic components can operate complex systems able to meet advanced requirements while shifting the costs from the customer production to software intensive logic programming. These “glue” chips can be simply thought of as the components and programmable logic devices (PLDs) required to connect the standard circuit cards. As one industry expert explains, “the real magic is in the glue” [Bentley]. This technology shift away from custom boards towards standard or commodity boards places increasing emphasis on the proprietary designs of how to combine the glue logic components. The design of these application specific PCBs and composite glue chip PCBs can be found in what are known within the industry as Gerber files. Gerber files contain all of the necessary three-dimensional interconnection data required for the manufacture of a PCB.

Electronic products today typically have a shorter life cycle. This coupled with customer demand for fast turnaround increases the pressure to get the product to market quickly. The competitive nature of the market requires manufactures to have the ability to turn around production in a matter of days versus the old standard of weeks. Add to this compressed time-frame the increasing complexity of the electronic products requires even more complex PCBs. To meet the demand for the complex PCBs, manufacturers must integrate more complex processes, advanced materials and high-mix production capabilities.

The trend away from custom board manufacturing towards increased use of standard commodity boards is just the first of many industry trends. The standardization trend gives more power to the customer due to the ability to switch suppliers quickly and without penalty. Industry consolidation has swept the industry forcing out nearly every US medium-sized PCB manufacturer. This move is driven in large part by OEMs that, in an effort to create supply chain efficiencies, are reducing the number of PCB manufacturers they rely upon [10K]. As a result, the market today is left almost exclusively with two types of PCB manufacturers: small “high mix/low yield” and large “low mix/high yield.” PCB manufacturers are increasingly migrating to Asia (especially China) to take advantage the large pool of low-cost labor in order to remain competitive.

The standardization trend has even taken hold in the defense sector. Faced with tightening budgets, the DoD has shifted to commercial-off-the-shelf (COTS) electronics for many applications, while still demanding extensive certification requirements, cutting-edge technology and long product life cycles—a set of contradictory demands that raise the bar even higher for the PCB manufacturers. The budgetary constraints of the DoD place its suppliers at risk of projects being cancelled and leaving expenses unrecoverable. Furthermore, due to national security concerns, suppliers may be unable to find a secondary market to offset these losses.

With a clear understanding of the trends and forces moving through the PCB industry, a critical analysis of TTM’s decision to acquire Meadville can be undertaken. Examining first the strengths of TTM, we see that it has extensive experience in not only the US defense and aerospace industry, but also in the international defense and aerospace industry. These relations give TTM both a reputation as a quality manufacturer of high complexity custom boards and the professional engineering knowledge required for the design and manufacturing. Military and aerospace industries require highly complex and extremely high quality assurance (QA) products because many of these products are strictly for “domestic only” productions. Since TTM is a US-based company with eight US factories, US domestic demand is easily met; however, as previously noted, the US demand for these products was expected to decline even prior to 2010.

The weakness of TTM can be seen as gaps in its strengths. It suffered from a lack of high volume manufacturing, high US manufacturing labor rates, and barriers to growing markets. The solution to TTM’s imbalance of capabilities would require a high capacity, low labor cost, Asian counterpart – and TTM has found that counterpart in a Meadville. If TTM could acquire Meadville, TTM would be able to offer its customer the “one-stop shop” solution that provides high-end boards, rapid prototyping, and high volume production at a competitive per unit cost.

In April 2010, TTM completed the acquisition of Meadville, a Hong Kong based PCB manufacturer. The acquisition nearly doubled the size of company and made TTM the world’s fifth largest PCB manufacturer. The acquisition did more than just increase its size, it made TTM not only a high end and complex industry leader but also a leader in higher quantity standard boards. TTM would now be able to provide both the highest complexity boards for both commercial and military customers, and also the lower reliability and far less costly standardized boards at greatly increased volume rates.

The addition of Meadville did not come without complications. As you recall, TTM is the number one provider of US military PCBs. This makes its relation with “Patriotic [to the CCP] Businessman” Tang Hsiang – a predominate member of the CCP and sole owner of Meadville – complex at the very least. Through the acquisition, Mr. Tang would become the largest single stockholder, and nearly the majority stockholder of TTM. Due to DoD and other international regulations, namely ITAR – International Trafficking in Arms Regulation, TTM would now be under increased scrutiny to maintain security of its propriety knowledge of US military and government Gerber files. These laws also bar Mr. Tang from becoming the majority shareholder of the publicly held company. These security requirements are not only difficult to implement and maintain, but also incur a significant cost on TTM. Breach of the security requirements could not only irreparably damage TTM’s ability to conduct business with the DoD, but also give vital military secrets to a potential US adversary.

Other problems with companies operating in Hong Kong and China include extremely high turnover rates of skilled Chinese employees, limited legal protection of proprietary knowledge, and domestic political interference with foreign companies. All of these problems are leading TTM to investigate non-Chinese overseas manufacturing locations as it continues to try and grow its standard commodity board sector [Iverson].

After analyzing the TTM acquisition of Meadville, evaluation of the decision can now be made – was the acquisition of Meadville the proper strategic decision? Conceding the difficulty of the decision to work with a Hong Kong company with ties to Chinese Communist Party and difficulties of Chinese business laws and requirements, we conclude that the “grow or die” nature of the industry, particularly for companies operating in the US, gave TTM few other options. If TTM did not acquire Meadville, a company of nearly comparable size, another PCB manufacturer certainly would have. The fit was right; the acquisition gave TTM an Asian counterpart, increased capacity for standard / high volume PCBs, and shorter turnaround times, but also allowed the Asian factories to gain knowhow in the production of high complexity / high quality boards that TTM’s US division had as a competitive advantage over many other industry leaders.

References:
1.“TTM Technologies 10-K Stockholders Report, 2010”. Web. 22 Sept 2011. http://www.ttmtech.com/investors/documents/10-K/2010-10k.pdf
2.Bentley, Stan - PCB/OME Consultant, Telephone and email interview. 22-30 Sept. 2011
3.Iverson, Ronald, Telephone interview. 30 Sept 2011, TTM board of directors.