The InfoTeck 100/99/2
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COMPANY             REVENUE GROWTH

XOOM.COM               615.9%
eBAY                   577.8
EARTHWEB               508.5
INFOSPACE.COM          451.3
AT HOME                443.1
INKTOMI                325.3
EXODUS                 324.3
AMAZON.COM             272.5
QWEST                  267.5
GO2NET                 221.8

Who Is the Biggest of All?

COMPANY             REVENUE MILLIONS

IBM                     $84,366
LUCENT TECHNOLOGIES      32,750
BRITISH TELECOM          30,346
SBC COMMUNICATIONS       29,239
FRANCE TELECOM           28,763
INTEL                    27,375
NTT                      25,986
GTE                      25,467
MCI WORLDCOM             24,357
BELLSOUTH                23,670

DATA: STANDARD & POOR'S, BUSINESS WEEK

Who Is the Most Profitable?

COMPANY               RETURN ON EQUITY

U S WEST                    159.9%
VODAFONE GROUP              108.6
QUANTA COMPUTER              74.0
CAP GEMINI                   63.6
GIGA-BYTE TECHNOLOGY         58.0
DELL COMPUTER                56.4
LEXMARK INTERNATIONAL GROUP  52.5
ARIMA COMPUTER               49.0
ASUSTEK COMPUTER             46.0
CABLE & WIRELESS             41.6

DATA: STANDARD & POOR'S, BUSINESS WEEK

Who Gave the Best Returns?

COMPANY             REVENUE GROWTH

XOOM.COM                615.9%
eBAY                    577.8
INFOSPACE.COM           451.3
AT HOME                 443.1
INKTOMI                 325.3
EXODUS                  324.3
AMAZON.COM              272.5
GO2NET                  758.7
QWEST                   267.5
MCI WORLDCOM            203.5

DATA: STANDARD & POOR'S, BUSINESS WEEK

Internet Spending by Sectors

                       1998         1999*     ANNUAL % CHANGE
                     BILLIONS     1999-2001*

INTERNET ACCESS        $6.8         $9.1         + 28.4%
CONSULTANT SERVICES     4.6          7.0           48.8
ACCESS DEVICES          4.4          6.7           19.7
DATA NETWORKING GEAR    3.0          3.7           35.6
SOFTWARE                1.7          3.5           62.1
SERVERS                 1.6          2.2           41.4
WEB-SITE HOSTING        0.8          1.0          112.1

*Estimates

DATA: INTERNATIONAL DATA CORP.

Job Shops Take Center Stage
PC makers are relying on contract manufacturers to turn out products more efficiently

As a kid, William D. Morean thought his father's contract-manufacturing business, Jabil Circuit Inc., was one big bore. All the suburban Detroit company did was assemble computer boards each week for mainframe maker Control Data Corp. ''I didn't want anything to do with it,'' says Morean, who set out with friends for Alaska to be a bush pilot and outdoorsman. But a few years later, when his dad was on the verge of shuttering Jabil, Morean returned to lend a helping hand. After bringing in some new orders, Morean began to think that working for the company could be as exciting as flying planes across the tundra. ''I called my pals in Alaska and told them they could keep my [truck and albums] if they promised not to kill themselves fighting over them,'' he says.

Smart choice. In the past few years, Jabil and other contract manufacturers have moved from high-tech snoozes into industry stars. As the pace of technology accelerates, companies from Silicon Valley startups to computer giants such as IBM are looking to push responsibility for nuts-and-bolts manufacturing onto no-name contractors like Jabil. That trend is expected to lift industrywide contract manufacturing revenues from $90 billion in 1998 to an expected $200 billion in 2001. Times are so good that Jabil and Flextronics International Ltd. in San Jose, Calif., are turning away low-margin business from PC makers they used to fight over. ''There's just huge demand from everywhere,'' says Michael E. Marks, chief executive of Flextronics, which has increased revenues roughly 70% a year for the past six years.

Now contract manufacturers are stealing the thunder from some of their better-known customers. In this year's BUSINESS WEEK Info Tech 100, the former ho-hum contract manufacturers are the best represented category in the top tier. Industry leader Solectron Corp. ranks No. 3, Taiwan-based Quanta Computer is No. 14, Flextronics is No. 17, and Jabil hit No. 22. ''It's been quite extraordinary. Business is amazing,'' says Solectron CEO Koichi ''Ko'' Nishimura.

Why is the industry red-hot? After their humble start making plain-vanilla products like printed circuit boards, contract manufacturers are proving that they're some of the most efficient producers of everything from PalmPilots to supercomputers. Part of the reason is that they spend almost nothing on corporate frills. Solectron's overhead is a rock-bottom 4% of sales, vs. 18% at Compaq Computer Corp. and 9% at superefficient Dell Computer Corp.

At the same time, contract manufacturers get more out of their capital investments since they handle such huge volumes. Consider, for example, a $600,000 laminography tester, which can be used to scan products for poor solder joints that can't be detected in any other way. A typical manufacturer would use the device once a day, but Solectron, because it makes products for so many customers, uses it five times a day.

Manufacturing is only part of the story. Now these companies are looking to expand their businesses by taking on more of the behind-the-scenes scut work for their clients, including purchasing, logistics, and the more mundane aspects of product design and repair. In effect, they want to become operations-for-hire for tech industry leaders. ''It's no longer about making stuff cheap,'' says Nishimura. ''Now we're doing more and more high-value things.''

Here's how. Companies such as Solectron and SCI Systems Inc. are now major buyers of parts and get volume discounts that can be passed on to big and small customers alike. Contract manufacturers also help clients get their products into global markets more quickly and cheaply because they have facilities around the world. Solectron, for example, has 21 plants scattered around the globe from Brazil to Romania. Solectron even purchased laptop-repair specialist Sequel Inc. on May 20 so that it can fix its customers' products and return them to individual or corporate buyers in one day. In the end, figures Flextronics' Marks, his customers will want to do ''only two activities--design products and create brand.''

There's no reason for anything else. Plunging prices for PCs and other gear are forcing traditional manufacturers to outsource. Not only is a maker of a $600 PC hard pressed to amortize the cost of a factory, but it can't compete with a contract manufacturer that can keep its factory lines humming 24 hours a day. And thanks to E-commerce, customers expect suppliers to deliver custom-configured products at the lowest cost in the shortest span of time. This requires build-to-order manufacturing where products are shipped directly from factories to customers. That plays right into the hands of contract manufacturers that have spent the past five years buying plants and honing back-office logistics skills.

For proof, check out how Cisco Systems Inc. has used contract manufacturers. By electronically sharing sensitive product and sales data with Jabil, Cisco is able to ship routers and other products anywhere in the world in less than two days--without ever touching the product, says Morean. One key reason: Jabil's ''dynamic replenishment system.'' Developed from years of monitoring the production of hundreds of companies, the system analyzes several types of data--ranging from basic sales forecasts to the likely impact of upcoming product promotions--to estimate how much stock it needs to have on hand at any point.

Jabil isn't the only contract manufacturer working with Cisco. The networking giant also has a remarkable setup with Flextronics. When you purchase some low-end routers on Cisco's Web site, the order zips to Flextronics, which fills it. Only then does Cisco arrange for delivery and bill the customer. And since Cisco introduces new configurations every few days, Flextronics revamps its production to accommodate the changes. ''This is the future of the business,'' says Marks.

Even telecom's old guard is scrambling to take advantage of the Solectrons of the world. Nortel Networks Corp. announced in May that it will sell or shutter 17 of its 24 factories within the next three years, a move that's expected to save up to $300 million yearly in pretax profits. The reason why it's cheaper to outsource: Nortel runs its 24 factories at 60% utilization, while contract manufacturers typically run theirs at 80% or more. ''The contract manufacturers have developed into a very major force,'' says Nortel CEO John A. Roth.

Put it all together, and top contract manufacturers are looking at a new wave of business that should help them rival their largest customers in size within the next few years. Solectron expects to boost sales from $5.3 billion in fiscal 1998 to $20 billion in fiscal 2001. ''We're going to grow at rates that no one has ever seen for a company of our size,'' vows Mark Holman, Solectron vice-president for business development. By 2001, say analysts, 30% of electronics gear could be assembled by contract manufacturers, up from 15% today. ''By then, technology companies won't have the in-house manufacturing expertise to fall back on,'' says analyst James Savage of Thomas Weisel Partners. ''So contract manufacturing will continue to outperform the overall high-tech market, with lower risk.''

Of course, there's plenty that can go wrong. The biggest risk: Contract manufacturers could get too big for their britches. Already, some customers worry that they will get distracted from basic manufacturing as they expand into new disciplines such as purchasing, logistics, and repair. And with a multiyear glut on many kinds of high-tech components winding down, contract manufacturers will have to prove they can get parts to satisfy all their customers when supplies get tight. Says one veteran chip distributor: ''They're hitting .320 for April, but we're going to have to wait until next year to see if this is a fad or a major trend.''

One looming problem: conflicts with their customers and suppliers. Solectron and Ingram Micro Inc. recently formed a venture to sell their own low-end PCs. Some in the industry think other PC makers--who also sell their machines through distributor Ingram--may perceive the move as unwelcome. ''We see that as competition,'' says Michael A. Braun, general manager of IBM's Consumer Division. While Braun is mum, analysts say PC makers may become reluctant to give Solectron business.

What's more, distributors who now provide contract manufacturers with components are trying to offer the same inventory management and logistics services to customers that contract manufacturers want to deliver. Distributors think contract manufacturers will have a hard time making progress on that turf. ''They're worse at managing inventory than their customers,'' says a distributor.

For all the risks, contract manufacturers' reign as Wall Street darlings seems far from over. The number of analysts covering the industry has doubled in the past year. And since the fortunes of the top contract manufacturers are tied to some of the most progressive, well-managed tech companies, buying their shares is like buying into a hot-growth mutual fund. Says Morgan Stanley Dean Witter analyst Shelby Fleck: ''An investment in an electronic manufacturing services company is like buying into a Who's Who in high-tech.'' Then again, maybe it's time to add the contract manufacturers themselves to that list.

By Peter Burrows in Milpitas, Calif.

The Computer Kings

(Figures in millions for most recent 12 months)

            PROSPECTS

DELL        This master of direct selling is passing even Compaq in
            sales to big corporate accounts. But there are
            challenges--such as how to make money on sub-$1,000 PCs.

EMC         It sells the Cadillac of storage systems, used by
            corporations for sensitive data. But rivals such as
            Dell and H-P are undercutting its prices.

SUN         With Java and the Net, Sun has created a genuine
MICRO-      Golden Age for itself. Now, it's pushing the next
SYSTEMS     big trend--helping corporations outsource information
            systems.

LEXMARK     Sales of printers and cartridges to businesses and
            consumers will remain strong, but competitors Xerox
            and Hewlett-Packard have formidable brands.

QUANTA      One of Dell's favored suppliers in notebook PCs;
            this year, new clients IBM and Apple are expected
            to help propel the top line 42%.

IBM         It has pulled off a remarkable makeover, going from
            a struggling hardware company to a Net Age provider
            of E-business services. One requirement going forward:
            erasing PC losses just under $1 billion in 1998.

HONHAI      Sales to Compaq have kept this maker of connectors and computer
PRECISION   cases growing at a healthy rate. Now, it has three of the top four
            PC makers as customers, sales, and profits are forecast to grow
            18%.

ARIMA       As goes Compaq, so goes Arima. This one-client, one-product
COMPUTER    company rode Compaq's success. But with Compaq struggling, look
            for earnings to grow 3%, instead of last year's 180%.

GIGABYTE    The supplier of motherboards relies on the clone market, but
            orders from Compaq should help revenues grow 30% this year,
            earnings 22%.

ASUSTEK     The future of the Taiwanese company looks bright. It's
COMPUTER    expanding beyond its traditional business of making computer
            motherboards into the manufacturing of notebook PCs and CD-ROMs


            SALES       SALES     PROFITS
           MILLIONS     GROWTH    MILLIONS

DELL        $19,860      45.4%   $1,589

EMC          4,273       35.8      867

SUN         11,092       17.3      909
MICRO-
SYSTEMS

LEXMARK      3,135       21.4      261

QUANTA       1,587       48.6      282

IBM         84,366        7.0     6762

HONHAI      1,250        55.3      178
PRECISION

ARIMA       969          73.7       83
COMPUTER

GIGABYTE    364          62.5       42

ASUSTEK     1,160        48.9      384
COMPUTER

TSMC: Silicon Central
Its chip business booms as more companies outsource

For years, Motorola Inc. has insisted on making the majority of the microchips that go into its products. It was the only way it could control the quality and design. But in February, the company reversed course, saying that 50% of its chips will be made by outside contractors by 2002, up from about 16% now.

What's going on? With the cost of a new semiconductor plant now at $1.5 billion and rising, it's cheaper, faster, and more efficient to farm out production to specialists. The payoff goes beyond cost savings: At Motorola, outsourcing will free up resources for product design and marketing, says Steve Goodyear, director of the company's Asian semiconductor unit.

The beneficiaries of this shift are so-called chip foundries that spin silicon for companies like Motorola. Such shops already account for 5% to 10% of global semiconductor production They could hit 35% by 2010, says Dataquest Inc. The leader in the field, Taiwan Semiconductor Manufacturing Co. (TSMC), is now going a step further: changing from pure manufacturer to provider of semiconductor design services. The plan could accelerate TSMC's growth, which helped place it at No. 93 on the Info Tech ranking. More crucially, it could reshape the chip industry.

That would be a familiar role for Morris Chang, TSMC's founder and chairman. A 25-year veteran of Texas Instruments Inc., Chang started TSMC 12 years ago and single-handedly pioneered a new industry model. By eliminating the need for chipmakers to build their own fabrication plants, Chang paved the way for an explosion of ''fabless'' chip startups that design everything from graphics chips to computer memory. Many of these companies use TSMC as a virtual factory--helping drive 1998 profits to $468 million on revenues of $1.5 billion.

Now, Chang wants them to have TSMC turn their dreams into designs. He's not just offering to develop ordinary chips, though. Chang wants to help customers design fiendishly complex ''systems on a chip,'' which cram the jobs of many chips onto a single sliver of silicon. Such combos save space, power, and cost. TSMC's ace card is its access to circuit designs from many sources: Chang is creating libraries of chip design building blocks that can be quickly glued together and produced on TSMC's state-of-the-art production lines.

Customers will pay handsomely for such service. One believer is Sunplus Technology, a TSMC customer that designs the chips used in the Furby talking doll. When Sunplus goes back to the drawing board to cook up the next generation of Furby chips, it could save weeks, even months, by using TSMC's library. That would let engineers work on other projects--and help get the doll to stores sooner. It's no wonder TSMC is rocketing to the top of the semiconductor charts.

By Jonathan Moore in Taipei

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