Commercial-based design helps propel contract manufacturing to center stage

Many of the large military systems integrators are looking to contract out a least a part of their manufacturing, which is placing unprecedented demands on the capabilities of contract manufacturing firms and requires the contractors to stay at the forefront of technology developments

Feb 1st, 2002
Th 84070

technology focus

Commercial-based design helps propel contract manufacturing to center stage

By J.R. Wilson

Many of the large military systems integrators are looking to contract out a least a part of their manufacturing, which is placing unprecedented demands on the capabilities of contract manufacturing firms and requires the contractors to stay at the forefront of technology developments

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Military electronics designers continue to adopt new ways of doing business. They face a world in which essential core components, such as microprocessors, no longer are manufactured to military specifications, budgetary restraints force increasing use of commercial-off-the-shelf (COTS) adaptations, and where the military often puts forth ever-more demanding environmental requirements.

Design results under these contemporary limitations often involve prototypes that demonstrate proof of concept without meeting production-level needs.

"Many of the COTS suppliers out there today don't really get it," warns Ed Hennessy, vice president of marketing and business development for Sky Computers in Chelmsford, Mass. "They are trying to take a commercial package off the shelf and force-fit it. Those unable to read the signposts and adapt will wither and die. If a company is unable to see that what they provided in the prototyping stage isn't sufficient for production and deployment, the military customer will find another way."

To avoid many of the technological and business pitfalls that broad use of commercially developed components can impose on a system design, today's manufacturers increasingly are turning to specialized contract manufacturers to help guide them through often-difficult and unfamiliar problems and help smooth the transition from system concept to full-scale manufacturing.

Difficult choices
Ultimately, systems designers must decide whether to use all commercial components in the box or use something with extended-temperature and other reliability factors at the board and subsystem levels, Hennessey says.

Dictating the right solution will be the target environment and the specific application involved. For example, designers of jet fighter-bombers build these aircraft with proprietary designs and components that meet a wide range of military specifications. New technologies, however, have created a wider choice of options for the designer than were available in the past.

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"The real issue with managing environmental requirements at the system level is, do you do your packaging at the box or board level," explains Rick Morgan, president of contract manufacturer Acme Embedded Solutions (AES) of Reno, Nev. AES engineers often partner with Sky to provide added expertise on ruggedization issues.

"The laws of physics conspire to dictate that strategy to you on a case-by-case basis," Morgan says. "There are some instances where you can use more or less commercial boards and take care of the environmentals at the box level. But there are places where that doesn't work."

The classic example of this, Morgan says, involves electronic subsystems on supersonic tactical aircraft such as the U.S. Navy Boeing F/A-18 Hornet carrier-based fighter-bomber. This aircraft and its operating environment present a mixture of requirements that are extremely difficult and sometimes conflicting. Examples are a lot of random vibration from the engine, a lot of shock from carrier-based takeoffs and landings, as well as extremes of heat and cold while idling on the carrier deck and while operating at high altitudes. "While it is theoretically possible to build a box to meet all those requirements, it is more economical to manage that at the board level," Morgan says.

Often, he adds, the solution can involve a "layered defense" — a hybrid approach involving a commercial semiconductor installed onto a ruggedly built printed circuit board. This approach, Morgan says, provides some of the mechanical ruggedization, and later in the design process receives even more mechanical stiffening when designers install the card into a rugged chassis to meet the rest of the environmental requirements.

Deeper integration
In an effort to better control that process, engineers from some companies who once concentrated simply on printed circuit boards now are moving to providing full-box solutions to improve how they deal with military requirements across-the-board. Officials from Sky, for example, say they have been moving in that direction for the past few years, to the stage where more than 70 percent of Sky's hardware shipments last year involved subsystems solutions, not just board-level products.

But Sky's designers say they also agree with the position taken by Dy 4 Systems in Kanata, Ontario. Leaders of Dy 4 last year reported they are trying to move their company to a higher tier than simply designing boards. In fact, Dy 4 executives are proposing to help customers looking to outsource some business by offering to build subsystems for them in addition to board products. Still, Dy 4 engineers have no desire to go into competition with their customers in that arena, points out Ian Stalker, manager of Dy 4's military digital signal processing business.

"We offer it as a way to save our customers time and let them apply their expertise at a higher level," Stalker explains. "A good example is sonar systems, where there are a lot of processors involved. That kind of customer has asked us to deliver integrated, proven assemblies to them, which they know require a lot of work to get going."

Randel Stewart, president of Circuit Design Specialties Inc. in Plano, Texas, says those kinds of requests can cause companies in the long run to take several different approaches — not all of them wise or successful — as military suppliers ask for all-in-one solutions that often are impossible to find in the market.

"You have a number of companies that do one thing very well and, in order to do other things outside that scope, they form alliances with other companies that do those things very well," Stewart says. "One thing we contract out for is conformal coating. It used to be for outsourcing you had a shopping list and the lowest bid got the business. That has changed. Today I work with one or two key outside suppliers in key areas of expertise. That offers better quality, price, and product control. You also don't have the employee headaches (that come with acquisitions or mergers).

"Look at Raytheon, which was buying up everything in sight and it led to problems," Stewart continues. "Now they are looking more at outsourcing. What may appear attractive on the outside may be attractive for the very things you can't provide if you bring them in-house, because it doesn't fit well into your corporate culture, it self-destructs and you wind up outsourcing anyway."

Affects of consolidation
While Sky officials say they agree with that view in principle, Hennessy nonetheless says he believes consolidation will be a major trend in the future.

Sky's parent company, Analogic Corp. of Peabody, Mass., "possesses a great deal of system packaging capability," Hennessy says. "We also have extended ourselves to partners, such as AES, where we are leveraging outside capabilities. Without that, we would be looking at a very narrow and limited opportunity base. As we begin to see the power of these capabilities, mergers, and acquisitions are a standard of life. As companies gain experience and our customers demonstrate need, I expect some kind of natural consolidation will take place out there.

"Where will the drive for consolidation come from — the minnows or the whales, the large technical suppliers and integrators?" Hennessy asks. "A few years ago, BAE, a major platform supplier, acquired all the assets of their electronics supplier, GEC Marconi. So what would cause them not to expand that influence to the next level, to take on more and more content and control the game? The trend is going to naturally be quite dramatic in the future."

Despite the problems that Stewart cites, Morgan says he believes that trend in consolidation also will extend on up the food chain to the industry giants — Boeing, Lockheed Martin, and Raytheon — which he says he believes eventually will consider it advantageous to acquire some of their COTS suppliers.

"Ten years ago those companies built their own electronics or bought them from companies that were not acquisition candidates," Morgan says. "Now we are seeing a slow but inexorable movement toward the adoptions of smaller COTS suppliers by the big defense contractors. As the content level of smaller suppliers in the big platforms increases, interest in acquiring those suppliers also will rise," he predicts.

Stewart's claim that such acquisitions are doing more harm than good generates a debate that is likely to become crucial to the long-term interests of the industry and the military.

Big vs. small
Hennessy argues it is largely a question of economics and good management. "Many of the COTS companies are still small, in the range of $15 million to $20 million, and have a passion for innovation," he points out. "There is a tendency to think once they are acquired, that day is over, but I'm not sure that's true any more. If both parties have an understanding and a commitment to a common goal, they can retain that entrepreneurial spirit and enthusiasm. But if the parties have the wrong expectations, those acquisitions may not work," he says.

"Many small companies get to the point where they are stymied because they don't have the investment funds to innovate, so aligning with a larger player may give them that ability back," Hennessey continues. "I believe, for future growth, consolidation is good, although there is nothing wrong with running a $25- or $30-million company independently, if you can do it successfully. But the larger companies can provide manufacturing and support capabilities smaller companies can't build."

Hennessy says some kind of strategic partnership or consolidation is necessary in several areas. It would not be uncommon, however, for a company getting most of its work from the military to look to a company that provides compelling software or lifecycle support for acquisition or consolidation or a strategic partnership, he says. In that, however, they must look at a whole range of issues beyond the environmentals and packaging requirements.

Stewart says he does agree that the small shops face expenses that are growing beyond their capabilities in areas such as board fabrication. Still, the biggest problem often is in demonstrating the financial stability to guarantee their products.

"Eleven years ago you could buy a piece of equipment for $100,000 and get top of the line, but now that would be $5 million. You can't spend $50,000 to $100,000 anymore and get something decent. And that knocks a lot of the really small players out of the market," he says. "When technology increases, you have up-front costs. Once that is absorbed, the product is easier to produce. And that is the key — but you still have a lot of tooling to absorb on the prototype end and that costs."

Cost pressures
Among contract manufacturers involved in prototyping, "we've already seen an incredible shrinkage," Stewart says. Because of the expense involved in requirements from OSHA and EPA, you're going to see a smaller number of companies doing that type of work. As far as contract assembly is concerned, you will see that number increase, but it also will go through a phase of shakeout on quality and financial stability, probably in about five years. You have to have a financially conservative company to do small business well."

Officials at M.S. Kennedy Inc. in Liverpool, N.Y., are most closely following the trend of increasing complexity of hermetically sealed circuit products. More and more elements that used to be external on the circuit board are now going into M.S. Kennedy products.

"We are either taking up more board space ourselves or allowing them to shrink the board space as we take on some of the tasks," says Greg Overend, sales and marketing vice president at M.S. Kennedy. He cites the company's line of brushless DC motor controllers as an example.

"Ten or fifteen years ago, most of the people in our industry would offer pieces of those controllers, such as the output bridge, and the user would have to build much of the controller around that bridge," Overend explains. "Now you can enclose all of the circuitry for the entire controller in our hermetically sealed hybrid module. "We developed the engineering expertise to do that in-house, but the products themselves were developed in collaboration with our customers, who told us what they wanted it to do."

Overend says Kennedy is on a different path from many other contract manufacturing when it comes to outsourcing; The military specifications that engineers at M.S. Kenney build their products to do not allow them to do much outsourcing. "We need control of the whole process, front to back, internally," Overend says. "That could change, depending on the interpretation of COTS. We don't see that as much of a trend in terms of what we do, but if companies are relying on commercial-grade parts, they have a bit more flexibility to outsource.

"We're such a unique niche in the marketplace, a lot of what other companies may be exposed to doesn't really apply to us," Overend continues. "When you buy a bare semiconductor, because it is unpackaged, there is no such thing as a military-grade part. So essentially we are buying all commercial-grade parts; it is what we do after we get them that turns them into a military-grade part."

Changing technology
Thus company leaders are still under pressure to provide its military customers with end products that meet specifications that the individual components were not designed to meet. And as their products have become more complex, they have been forced to automate most of the manufacturing process to stay competitive.

"That forces you to upgrade your whole facility, which is now about three times the size of the facility we did have," Overend says. "We had to have computer programmers to program the automated equipment. We hired a programmer and developed that in-house, as well."

Sky computers has ruggedized its product line together with Acme Embedded Solutions to produce the Xtreme family of 6U rugged boards, which are integrated with associated slot-1 boards into fully ruggedized systems. For extreme environments beyond this capability, Sky and Acme reformat and repackage boards and subsystems to fit specific deployment environments.
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While Kennedy officials find that keeping much of their work in-house is the most attractive way to go, they also recognize the possibility that they may become a target in a restructuring of the industry.

"Several of our competitors have been swallowed up in recent years, so it wouldn't be surprising at all if someone approached us. As for as us acquiring another company, we prefer to develop capabilities internally, although we did acquire a product line from another company a couple of years ago," Overend says.

"All industries take advantage of advances in technology. In our particular case, as integrated circuits become more capable and higher performance, we integrate those improvements into our products so we can offer more capability and higher performance, usually in a smaller package and at lower cost."

Another company that is seeing changes to its products having a ripple effect with its customer base is silicon wafer manufacturer MEMC Electronic Materials Inc. in St. Peters, Mo.

The change stems from the application of a new technology to their latest product line, the Optia wafer, a high-performance silicon substrate for VLSI (Very Large-Scale Integration) and ULSI (Ultra Large Scale Integration) integrated circuit devices. Optia wafers have zero crystal-originated pits (COPs), making them free of agglomerated defects across the wafer and throughout its thickness. This was achieved with the use of MEMC's patented Magic Denuded Zone (MDZ) thermal treatment, a process that pulls impurities away from the surface of the wafer.

"As devices become more compact, our customers will need better-quality wafers because defects impact them that much more when their line widths shrink," says MEMC investor relations director Janine Orf. "This process could allow them to take some steps out of their manufacturing lines. They now build certain redundancies into the process, so if something doesn't work right, the redundancy will cover it. But due to the advanced level of this wafer, they won't need to have those redundancies built in."

MEMC engineers also are applying MDZ to the company's Aegis wafer, which also uses an epitaxial layer, a thin single-crystal silicon layer grown on the polished surface of a silicon wafer substrate and providing different compositional and electrical properties from the underlying wafer. Aegis and Optia can be formed in various sizes, including those as large as 300 millimeters and down to 100 millimeters. The current workhorse wafer is 200 millimeters.

Orf says these in-house developments led to adjustments in MEMC's manufacturing line, but did not require total replacement of existing equipment.

All of these developments are clear indications of how the treatment of COTS within military electronics is changing — and how those changes are impacting both the manufacturing processes and the structures of the companies supplying the U.S. defense market.

"Part of that has to do with our customers demanding and shaping what we become, because in order to continue doing business with them we have to provide more than just stability and a product that works," says Sky's Hennessy. "For defense, the first thing we need is an understanding of how the market has changed, not just product lines that extend to the different ruggedization levels, but that meet both benign and demanding requirements, providing lifecycle support — not just of the products but of the customer's program."

That includes obsolescence support and technology insertion 10 years from now. "The government has legacy programs that still adhere to full mil spec, but most of the programs the COTS community gets into don't live there, Hennessy says. "We have to reformat, package, or do a technology transfer and licensing arrangement. There are other derivatives of COTS we must set up to fulfill our customer's requirements — that is another area of investment or consolidation and acquisition. If the company believes its future is developing an in-house competence, not just for COTS but leveraging their product or package for more rugged requirements, then they must have that in-house.

"The government and military have really gotten smart and savvy about COTS in the past decade. Now the COTS suppliers see opportunities for them beyond the scope of COTS."

Who's who in contract manufacturing
Acme Embedded Solutions (AES)
Reno, Nev.

Advanced Design & Manufacturing
Portsmouth, N.H.

Assembly Contracts Ltd.
Manchester, England

Circuit Design Specialties Inc.
Plano, Texas

Dy 4 Systems
Kanata, Ontario

Kimball Electronics Group
Jasper, Ind.

M.S. Kennedy Inc.
Liverpool, N.Y.

MEMC Electronic Materials Inc.
St. Peters, Mo.

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