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Published: November 30, 2004

 
 

Flextronics: Staying Real in a Virtual World

By getting lean, vertical, and global, a Singaporean contract manufacturer became the biggest tech company you’ve never heard of.

Photography by John Paul Endress
The name Flextronics doesn’t resonate like Microsoft, Hewlett-Packard, Xerox, Sony, or Ericsson. In fact, the name Flextronics rarely appears anywhere. Yet the popular products the company makes are ubiquitous: all of Microsoft’s Xbox game consoles (a contract worth $750 million per year), most of Hewlett-Packard’s inkjet printers ($1 billion), all of Xerox’s desktop copiers ($1 billion), all of Sony Ericsson’s cell phones ($2 billion), and, starting next year, much of Nortel’s telecommunications equipment ($2 billion).

Flextronics’ 54-year-old chief executive officer, Michael Marks, is also somewhat obscure — he certainly lacks the name recognition of corporate superstars like Bill Gates, Michael Dell, or Jack Welch. But he has quietly built Flextronics, the largest and most innovative of a new breed of manufacturers that make subassemblies and entire products for brand-name technology companies, into a huge, thriving, global company by following a vision that cuts against the grain of the last decade’s management trends. While many companies have downsized, spun off divisions, or otherwise shrunk, Flextronics has gone in the opposite direction — vertically integrating, globally expanding, and growing by acquisition.

From its modest beginnings in 1990 as a Singapore-based printed circuit board maker, Flextronics has become a global giant of tech manufacturing. With $14.5 billion in annual revenues and 95,000 employees, it is larger than many of its customers. If Singaporean companies qualified for the Fortune 500, Flextronics would be no. 138.

But Mr. Marks prefers to focus on another Fortune magazine list: the ranking of U.S. companies by 10-year returns on equity (ROE). With an ROE of 25.1 percent per annum, Flextronics would rank 31st, ahead of such technology stars as Oracle, Intel, and Texas Instruments. Although profit margins are slender in contract manufacturing — Flextronics’ gross margin is just 6 percent (compared with 36 percent at General Electric) — the overall return on equity can be excellent if a company uses its assets efficiently and grows steadily, two activities at which Flextronics excels.

Flextronics’ successes reveal that in a world where business is increasingly virtual, there are still advantages to being real. Since the 1990s, many technology analysts and management consultants have argued that the future belongs to small, highly focused tech companies, with the classic Silicon Valley venture-backed startup often held up as the organizational role model. Although small may be beautiful in many parts of the technology food chain, Flextronics shows that in the world of manufacturing, scale, global reach, and a deep set of skills and capabilities still matter.

The success of Flextronics also illustrates the importance of vision: In the late 1990s, when technology companies were clamoring for tightly focused best-of-breed component suppliers, Mr. Marks was positioning Flextronics to offer a multitude of services that went beyond manufacturing to include logistics and design — early recognition of a need more and more tech companies are realizing. “Michael Marks’s vision of his changing industry has positioned Flextronics ahead of big market swings,” wrote supply chain management professionals Dave Nelson, Patricia E. Moody, and Jonathan Stegner in The Purchasing Machine: How the Top Ten Companies Use Best Practices to Manage Their Supply Chains (Free Press, 2001).

Consultant and author Richard J. Schonberger says Flextronics’ performance in improving inventory turns is “terrific.” Inventory turns (essentially the ratio of production to inventory), Mr. Schonberger says, is a “catchbasin” reflecting everything a company is doing right or wrong in its manufacturing processes, and Flextronics’ average annual increase of 4 percent puts it near the top of his global database of more than 1,000 companies.

There have been four main elements to Mr. Marks’s strategy over the past decade: First, he built up Flextronics’ core competence in lean manufacturing. Second, he pioneered vertical integration in contract manufacturing, adding capabilities and services as quickly as his customers were divesting theirs. Third, he extended Flextronics’ operations on an ambitious yet carefully designed global footprint. Finally, he has institutionalized his own highly motivational, unassuming, and nonhierarchical management style, enabling Flextronics to execute these strategic decisions with conviction and speed. The strategy has proven to be durable: Although Flextronics suffered during the 2001–03 tech downturn, it outperformed competitors by adapting more swiftly to marketplace changes.

 
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Resources

  1. Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” s+b, First Quarter 2001; Click here.
  2. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b, Fall 2004; Click here.
  3. Tim Laseter, “When Offshoring Isn’t a Sure Thing,” s+b, Fall 2004; Click here.
  4. Jeffrey M. O’Brien, “The Making of the Xbox,” Wired, November 2001
  5. Dave Nelson, Patricia E. Moody, and Jonathan Stegner, The Purchasing Machine: How the Top Ten Companies Use Best Practices to Manage Their Supply Chains (Free Press, 2001)
  6. Richard J. Schonberger, Let’s Fix It! Overcoming the Crisis in Manufacturing: How the World’s Leading Manufacturers Were Seduced by Prosperity and Lost Their Way (Free Press, 2001)
  7. Richard J. Schonberger, World Class Manufacturing: The Lessons of Simplicity Applied (Free Press, 1986)
  8. Richard J. Schonberger, World Class Manufacturing — The Next Decade: Building Power, Strength, and Value (Free Press, 1996)
  9. James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production (HarperCollins, 1991)
 
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