Scanfil: We visited the factory in Malmö

Translation: Original comment published in Finnish on 9/23/2024 at 7:25 am EEST.

Last week we visited Scanfil's factory in Malmö, Sweden. In addition to the Malmö factory tour, Scanfil's customer Invisio gave a presentation on the cooperation between the two companies.

Malmö factory focuses on low-volume electronics manufacturing

The Malmö factory became part of Scanfil in 2015 with the acquisition of PartnerTech. The factory currently employs almost 200 people and has a surface area of 6,000 square meters. The factory's sales have developed positively until at least 2023, thanks in part to the rapid growth of Invision, the factory's main customer. Compared to Scanfil as a whole, the factory's customer mix is concentrated in terms of the number of customers. In terms of industry, industrial electronics has the largest weight. However, as the factory is a part of a larger group, we don't see this as a problem. We estimate that the Malmö factory's strengths lie in delivering fast prototyping and its ability to ramp up volumes. On the other hand, we believe the weaknesses of the factory are cost efficiency, as there are a lot of manual steps in the small-scale factory and therefore no economies of scale. Wages are also high in Sweden. Of course, Scanfil did not disclose the level of revenue and profitability of the factory. We estimate that the Malmö factory is one of Scanfil's smallest in terms of revenue. We assume that the profitability of the factory has recently been below the group average, but still healthy.

Invisio's reasons for outsourcing manufacturing sounded very familiar

Invisio, which is listed in Stockholm but headquartered in Copenhagen, is by our estimates the Malmö factory's largest customer and also a fairly large customer in the group's scale. The Malmö factory and Invision have worked together for more than 25 years. Invisio supplies technology primarily to the defense and public safety sectors. The company has grown very strongly in recent years (CAGR 2019-2023 of around 29%), and with increasing investment in the defense sector in Western countries, the company's growth prospects for the coming years appear excellent. Typical of growing technology-oriented companies, Invisio operates under an operating model in which the company's production is outsourced virtually entirely to contract manufacturers. Invisio's rationale for outsourcing manufacturing was, unsurprisingly, the flexibility, lower capital commitment, and focus on core activities (i.e., product development and sales) that contract manufacturing provides. In addition to the usual hygiene factors of price, quality and security of supply, Invisio's key criteria for contract manufacturers included speed of delivery and location in a "friendly" country. Units close to the Western market, such as the Malmö factory, are generally well placed to meet the latter two attributes. Invisio, however, naturally also had other suppliers for its various products, which is a common sourcing strategy in the industrial sector. However, Invisio tended to concentrate a surprisingly large proportion of its individual product purchases on its number one supplier, so achieving the role of main supplier for the different products seemed important, at least in Invisio's case.  

Organizational renewal at the turn of the year

In September, Scanfil announced that it would restructure its organization and switch to a region-based organization from the beginning of next year (see the company's press release here). We believe that Scanfil's aim is to bring decision-making closer to the businesses, decentralize decisions and build a larger-scale organizational structure. Conversely, there could be a risk that the management of the key global customers that form the backbone of Scanfil's business could be hindered by a model with regional divisions. Our approach to the change is neutral from a business perspective, although we believe that the most tangible benefits of the change will only come as the company grows in size and over time. The change will improve transparency in the business to some extent, as we understand that Scanfil will also start to report profitability on a regional basis.