- September 25, 2015
No doubt about it: in the grandly profitable, 37-year history of Jabil Circuit Inc., 2009 will not go down as a great year for financials.
It may, however, be the kind of year that the St. Petersburg-based technology company remembers fondly in the not so distant future.
It was not a great year by Jabil standards; it was a solid year by global recession standards.
“I think our strategy has been relatively consistent,” says Timothy Main, Jabil's president and chief executive officer. “We're refining a little to focus on markets we have a competitive advantage in. We've been focused on global electronics manufacturing and have diversified a big part of our strategy.”
Jabil (NYSE: JBL) has sought to stay ahead of bad news over which it has no control with cost cutting and what executives call “aggressive action.” Among these moves: shutting down a manufacturing facility in Massachusetts.
“At the same time,” Main says, “we've kept our core value properties with our customers in good shape. The core values of the company have been preserved and our financial position is in good shape. Customers see stability and Jabil stacks up” vis-Ã -vis its competition.
Citigroup has been impressed with the way Jabil has held steady and shown modest gains, In fact, on Aug. 21, as the company's stock continued climbing, Citi's research analysts upgraded their view of Jabil from a “hold” to a “buy” recommendation. It also increased its price target from $8 to $13.
(In its third quarter statement released on June 23, Jabil reported net revenue of $2.6 billion compared to $3.1 billion a year earlier. Jabil paid a $0.07 dividend on June 1. See chart for more company financials.)
In a brutal economy, Jabil was only off its annual revenues by single digit percentages while most of its competitors were dealing with double-digit drops. “Several of our customers have been down,” says Beth Walters, Jabil's vice president of communications and investor relations, “but we've done a nice job of filling in some of those holes and bringing in new customers.”
Jabil makes its money by providing electronics design, manufacturing and product management to electronics and technology companies around the world, including household names such as Cisco Systems, H/P, IBM, Motorola, NEC, and Nokia. Although it is based in St. Pete, Jabil has 55 facilities operating in 21 countries; it employs more than 85,000 worldwide and 1,800 in St. Petersburg. Over the last two years it has reorganized its vast businesses into three units: consumer, electronic manufacturing services (EMS) and aftermarket services.
“We might have expanded a little less and stayed with fewer locations around the world if we had it to do over,” Main says. “Maybe fewer industries. But overall, I think we've made the right decisions.”
In terms of the recession, Main and his executive team have been through a few of them together. He says the continuity of management and common experience of strategizing and surviving such setbacks has only helped calm frayed nerves this time around. They've planned for the worst, resisted going into denial about the challenges before them, and rewritten the business plan accordingly.
Jabil has always been nimble.
“We have to be able to scale the business up and down based on changes in market conditions,” Main says. “Our employment base in St. Petersburg is in the 1,800 range. Plus or minus, it's about the same level we've had for the last five years. Aside from the dot-com explosion, when we added a lot of jobs, our employment level has been consistent — or up.”
In fact, despite the Massachusetts plant closing, the company's overall domestic employment base is up.
There have, of course, been customer categories at Jabil that declined this year. But which?
“Let's see...” Walters says, pausing for effect. “Everything! There wasn't a single industry segment that wasn't hit this year. It wasn't like the Internet bust in 2000; a lot of our business then was in a couple of sectors. In 2000, 60% of our business was in communications. That was drastically hit. It was a great area to be in until it went down. This downturn was across the board. Everything I can think of has been impacted. And it's around the world, too.
It was Europe, Asia and the Americas.”
For a company that traditionally has waited out regional economic downticks around the world, this malaise hit everywhere Jabil operated. There was nowhere to hide.
And the competition has only grown tougher.
“Our industry has been in a state of very high turmoil for the last five years,” Main says. “Competition is primarily Asian. It's a very, very intense, competitive environment. That is the biggest challenge for the management team.
The [Asian companies] have a willingness to favor market share over profitability. It's different than the Western orientation and what Western shareholders expect. Think of the TV [network] industry in the 1970s and '80s; that's the kind of market share grabbing policy the Asian companies pursue. It's not a strategy any Western company can put up.”
There are some other issues unique to this recession that has been different from previous challenges to Jabil's corporate mojo.
There certainly has been downsizing before. Usually when employment and production ebbed and flowed in the past, it was site-based, meaning that one client might be up or down depending upon demand and regional economic factors.
But this time, the continuing employee base has had a tougher time. More people are concerned about their own livelihoods and how it relates to the company. Keeping morale in tune with the reality of Jabil's business has been different this time.
“We're letting our people know that that while companies all over the world have experienced double-digit declines, we're staying positive,” says Walters.
Opportunities for growth are quite robust, Jabil believes, because it has the global capacity and technology to accommodate so many outsourcing needs. For starters, according to Walters, it found new customers in the cell phone market over the past year.
Adds Walters: “Then there were market share gains in our computing and storage area; expansion among some of our peripherals customers; and we went into new areas such as green spaces, anything from smart grid technology to solar power. That's an area that's just beginning to outsource.”
Some federal funds from the economic recovery act being directed toward expanding green technologies are likely to trickle down to Jabil as it takes steps in that direction, according to Walters. “The place we've seen the most impact is green and clean tech where states are getting funding for clean tech operations,” says Walters.
One of the ways Jabil reduced costs company-wide in fiscal 2008 was by restructuring the company into three divisions: consumer, electronic manufacturing services (EMS) and aftermarket services. Consumer products such as cell phones have shorter product life cycles but higher volume and require more time to market. EMS is an entirely different kind of business, including everything from networking and telecommunications to computing, storage and low-volume industrial electronics.
Plants migrated to be one or the other. Medical instrumentation, for example, requires a higher service level, so Jabil set up its plant sites to be attuned to those different needs. Over time, the intention is to evolve them one way or the other. There are separate operating divisions and separate CEOs while still maintaining the company's best practices.
The company also controls costs by doing its manufacturing, whenever possible, as close to where its products will be used, answering the perpetual question: Where is the lowest total cost?
So where is the money waiting to be made by Jabil in the future?
Cell phones, believe it or not, thanks to an acquisition it made 18 months ago. “Cell phones are rapidly growing, intensely competitive and the margins are challenging,” Main says, “but we can produce the products in a high volume, globalized environment. A lot of the appeal of the product is the look and feel of it and we're engaged in producing the casings as well.”
Apple (iPhones, iPods) and RIM (Blackberrys) are both Jabil customers at different levels. And that's about all Main can say about what his company does for them. “We're not allowed to talk about what we're producing for them but they are customers,” he says. “The brands do not want the manufacturers talking about the products.”
Jabil has also added new customers and business in the medical instrumentation, computing and storage business and gained traction in aerospace and defense. The company's aftermarket business — repair and warranty work — has done well, which is not surprising because people tend to fix things in a recession instead of buying new.
By hanging on to most of its regular customers, enduring while some of their business lines suffered, Jabil expects to bounce back stronger than ever when they do.
“Once we see a flattening of those declines, we should be back in business as a growth company,” Walters says.
Just as the economy was souring, Jabil struck a unique and somewhat controversial deal with the City of St. Petersburg for tax incentives as encouragement to sustain its corporate presence in the city and build a new $54 million headquarters here. That, and add 850 new jobs within the city limits.
The deal is now on indefinite hold.
Jabil's presence in St. Petersburg has actually been among the most stable the company has experienced in the almost two dozens countries where it operates. Corporate staff and IT are both here, as is aerospace and defense manufacturing. Jabil doesn't expect crazy expansion in St. Pete; it doesn't expect the opposite, either.
“We've not changed our reasons for wanting to expand our defense and aerospace manufacturing and getting all of our people in St. Petersburg on one campus,” Main says. “But the economy is not such to allow us to make that additional investment yet. We'd still like to do it.”