strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: November 30, 2004

 
 

Flextronics: Staying Real in a Virtual World

Mr. Marks was seeking the right location for Flextronics’ first industrial park in 1997 when he encountered a contract manufacturing company named Neutronics that had beaten him to the punch. Austria-based Neutronics began as a 1993 management buyout from Dutch electronics giant Philips. It included the smallish facility at Althofen and four large facilities in Hungary. Labor costs for Hungarian production workers were around $3 an hour, compared with $20 or more in high-wage nations like Germany, Austria, and France, so Hungary was an economical place to do high-volume production for the European market. Neutronics had invited several key suppliers to locate at its largest Hungarian site, Sarvar, 50 miles east of the Austrian border.

Mr. Marks met with Neutronics’ CEO Humphrey Porter, and they discovered they had similar ideas about the EMS industry — in particular, their vision of industrial parks. Mr. Porter teased Mr. Marks about Neutronics’ lead in realizing that vision. “We said, ‘You’ve got the PowerPoint slides and we’ve got the real thing,’” Mr. Porter recalls. An acquisition was quickly negotiated. Flextronics paid $150 million in stock to combine Flextronics’ $1 billion revenue with Neutronics’ $300 million. The deal has since earned many times that price for Flextronics, which is now the dominant EMS company in Europe, with more than double the revenue of its nearest competitor.

After acquiring Neutronics, Flextronics went on to establish similar industrial parks in Poland, Brazil, Mexico, and China. The site in Doumen, China, is the largest, with 15,000 employees and 270,000 square feet of space.

What Customers Like
Flextronics’ combination of vertical integration and global footprint was a factor in winning more business from Hewlett-Packard. Mike Fawkes, senior vice president of operations at Hewlett-Packard with global responsibility for HP’s Imaging and Printing division (HP’s most profitable division), says the company made a strategic decision four years ago to reduce the number of EMS companies it dealt with and to globalize the business, so production could be easily transferred from one site to another to cope with sudden shifts in demand or economic change.

Mr. Fawkes cites an example of how Flextronics’ global reach benefited HP: “A couple of years ago Mexico got very expensive for consumer products, and we moved our production to the Flex factory in Shanghai. To be able to do that is a beautiful thing. If I had to build or shut down my own factories, the lead times would be very long.”

Like Hewlett-Packard, Nortel was attracted by the global footprint of Flextronics’ industrial parks — but for a slightly different reason. Nortel does a lot of business with cellular service providers in Europe and Asia. Telephone companies are very demanding customers. Flextronics’ global footprint gives Nortel the ability to service those customers from facilities close to its own networks, allowing Nortel to offer the speed and support of a local company while keeping a tight rein on global overhead costs.

Nortel, which began large-scale outsourcing in 1999, began testing Flextronics’ manufacturing skills in 2003, using it to manufacture some wireless and switching products. Chahram Bolouri, Nortel president for global operations, says the results were excellent, both in quality and in the suggestions for cost reduction that came from the Flextronics team. In early 2004, Nortel made Flextronics its largest supplier, awarding it a long-term EMS contract worth $2 billion per year.

Many of Flextronics’ competitors were skeptical when it embarked upon its ambitious vertical integration and global industrial park initiatives. Flextronics, they thought, would burden itself with costs and — even worse — alienate its customers, who would fear the company would try to “bundle” its services, mixing the good with the bad, and depriving customers of the transparency and choice they craved.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

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)