Contract Manufacturer Grows In San Jose

HFF, Bay Area, Exeter Property Group, Cohen Asset Management, Holliday Fenoglio Fowler, Newark

By Sharon Simonson

Growth fueled by acquisition and organic business expansion is pushing global contract manufacturer SMTC Corp. to expand its employee count and more than triple the size of its San Jose operating space.

Toronto-based SMTC has gone from 20,000 square feet to more than 65,000 square feet at its Trade Zone Boulevard location. In the last year, it has grown from 60 employees to more than 170 at the site.

The expansion reflects both “organic growth” and the company’s 2011 acquisition of San Jose’s ZF Array Technology Inc., said SMTC President and Chief Executive Claude Germain. But it also reflects the increasing importance of San Jose to the company’s future.

“San Jose is the largest market in North America for the kind of manufacturing we do,” Germain said. “We view San Jose as an engine for our growth.”

The ZF Array purchase expanded SMTC’s footprint in Silicon Valley, and beefed up its engineering and operational capabilities in prototype development and new-product introduction.

The San Jose plant specializes in low-volume, high-value complex manufacturing, sometimes done at a prototype stage. Customers include medical-device makers, telecommunications manufacturers and extremely high-end consumer electronics companies.

The plant has five production lines, four of which are dedicated to higher-volume manufacturing. The fifth line is reserved for new product creation and is used more and more, said Joel Bustos, vice president and general manager of SMTC San Jose.

The San Jose plant, which includes a new clean room for medical device manufacturing, retains additional space for expansion. Already the plant is operating 16 hours a day and Saturdays. The capital equipment is so expensive and profit margins so thin, that machines are used as much as possible to juice the return on investment, Bustos said.

Besides the manufacturing operation, the company has its only engineering and design center in Silicon Valley. It maintains additional manufacturing and engineering facilities in Toronto, China and Mexico.

The company declined to say how much it has invested in its expanded San Jose operations, other than that it was “millions” of dollars.

On Aug. 9, SMTC reported second-quarter revenue of $75.1 milion, a 54 percent increase over the same period a year ago and a slight increase over the first quarter. Net income for the quarter was $2.8 million. The company increased its revenue guidance from a maximum of $270 million to a maximum of $290 million when it released its second-quarter results.

SMTC’s expansion is part of a larger resurgence among specialized contract manufacturing companies in Silicon Valley, according to a report completed earlier this year for work2future, a local workforce and economic development organization. The sector employs approximately 8,000 people in Santa Clara County, a fraction of the 160,000 people employed in manufacturing generally countywide.

Mayor Chuck Reed, who visited the SMTC campus Aug. 15 as part of an informal celebration of the new facility, said any manufacturing jobs were welcome. “You all were around for the dot-com bust. We lost a lot of jobs. A lot of those jobs were manufacturing jobs, and we haven’t built that back yet.”

But contract manufacturing is returning to the valley, Germain said, because wages are rising globally, the dollar’s value is relatively low, and “manufacturing is getting more productive in the United States.”

“Our customers are becoming more educated about total landed cost, which includes customs duties, transportation costs. When you factor all of that in, it makes sense to be in the U.S.”

A “small example of our organic growth has been moving business from Mexico to San Jose and then shipping the product back to Mexico,” he said. It is cost effective because the highly educated engineers and testing talent are better in Silicon Valley.

SMTC works for both established companies and startups to design, manufacture and ship advanced electronics. Its clients are original equipment manufacturers such as Sunnyvale’s Blue Coat Systems Inc., a web security and network optimization company, and San Jose-based Vocera Communications Inc., which creates mobile communications systems for hospitals.

SMTC makes both components that its customers then assemble to make larger products and does full-on product manufacturing.

The company makes both entire products on behalf of its customers, such as Bluecoat, including shipping the final product directly to customers. It also makes components for larger products, which its customers then integrate into their own final manufacturing and assembly.

Typically, the company will make a product in San Jose for a number of months, Bustos said. Then about half the time, full-fledged manufacturing is then shipped to one of SMTC’s plants in Mexico or China. The company also does the more technologically complex work on some products, then sends them to Mexico to be completed.

SMTC has 600,000 square feet of manufacturing capability worldwide with more than 40 manufacturing and assembly lines and approximately 2,000 employees.

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