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Published: November 30, 2004

 
 

Flextronics: Staying Real in a Virtual World

There are many other executives like Mr. Brathwaite inside Flextronics: Engineers with backgrounds in the more glamorous (and usually more lucrative) areas of product development and engineering who moved into the manufacturing side of the business and have elected to remain. This highlights a fundamental shift in the technology industry. Today, product development typically takes place in steady, small improvements to existing designs rather than in revolutionary breakthroughs. Since manufacturers like the EMS companies are by nature more expert at incremental improvement, they now account for a larger share of the added value in technology than ever before.

Michael Marks explains his strategy this way: “If you boil it all down, there’s one principle, and it’s the age-old ‘listen to the customer.’ Each service and each geography we added, we added because that’s what our customers told us to do. And every time we decided to do one of those things, we planned to be aggressive, to do it quickly, and to get really good at it as quickly as we could.”

Flextronics’ most recent strategic expansion involves the original design and manufacture (ODM) of complete products, often before the company has a commitment from any customer. When Flextronics launched its ODM initiative in 2001, competitors questioned whether tech companies would ever agree to outsource product design, which for most of them is a prestigious and profitable core competency.

So far, Flextronics has proved the doubters wrong. In a highly competitive marketplace, cell phone makers are looking for contractors who are ready to help them meet disparate needs and react quickly to market changes. Typically, the ODM contractors design the basic phones that deliver the plain-vanilla voice service at the lowest possible price, and the brand-name cell phone makers focus their energies on designing cutting-edge phones with the latest cameras, music, messaging, video, and other features that appeal to consumers in Japan, Western Europe, and the United States. (Often the basic phones, selling largely in the developing world, show greater sales growth than the trendy models.)

Today, Flextronics designs cell phones for several major manufacturers. Most cell phone makers do not allow ODM contractors to name which manufacturers they are working for, but Mr. Marks does reveal that Motorola is one of the makers for whom Flextronics designs phones. The design contracts bring with them manufacturing contracts. As a result, Flextronics’ ODM initiative is already a $1 billion-plus business.

There are big risks inherent in Mr. Marks’s “big is beautiful” strategy. Flextronics’ giant cost base means that profitability could vaporize in the event of a sudden downturn in business volume. This is precisely what happened when the Internet bubble burst in 2001. According to data from stockbrokers Lehman Brothers, Flextronics’ cash earnings per share fell by more than half between 2000 and 2003. Although earnings are now on a strong upward trend, the PCB fabrication business regained profitability only in mid-2004, and Wall Street has characteristically kept a beady eye on this problem area, even though it is a relatively small part of Flextronics’ revenue.

Leading Change
Significantly, though, the drop in profit that followed the collapse of the technology bubble was felt more severely by most of the other major EMS companies. Flextronics was unique among the majors in growing total revenue every year throughout the downturn. Flextronics’ size, scale, and vertical integration enabled it to seize business in consumer electronics from 2001 to 2003 as orders dried up in the telecom and Internet business. Flextronics went from a 51 percent dependence on the data and telecom industries in 2000 to an 18 percent dependence in early 2004, an intensive reconstruction of the customer base. The company’s new powerhouse products were consumer oriented: cell phones, printers, and computer game consoles.

 
 
 
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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.
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