Oct 09, 2001
Realizing that it no longer makes sense to operate a plethora of sites, the EMS provider is consolidating its operations into eight manufacturing hubs and a select number of regional facilities in key areas to offer more efficient services to cost-conscious OEMs.
The bulk of Flextronics' manufacturing activity by June 2002 will take place in designated low-cost areas-Brazil, Mexico, Hungary, Malaysia, Poland, Shanghai and southern China, and Texas.
�Customers want to come to massive sites in low-cost areas to have their supply chain needs met,� said Michael Marks, Flextronics' chairman and president, during a press conference in New York last week. �We're closing some facilities to make it happen.�
Flextronics executives declined to reveal how many plants are targeted for consolidation.The company's regional plants, though smaller in number, will continue to offer specialized services, such as design and new-product introduction, that warrant being close to their customers. Under the plan, Flextronics' 40 enclosure operations will be scaled back to 14 sites next year.
Although Flextronics agreed to purchase four plants from office equipment maker Xerox Corp. last week for $220 million [see story on page 14], the world's second-largest contractor says it is keen on scaling down and uninterested in acquisitions.
�We are taking work out of [higher-cost locations such as] Finland and Sweden and are sending it to Poland,� Marks said. �We're restructuring to add to our major sites.�
The company has evolved with a supersized-campus look at a time when most of the players in the EMS industry are examining their operations, such as customer concentration, core service areas, flexibility, and responsiveness in the current soft economy.
Having spent the last three years acquiring OEM divestitures and purchasing smaller contractors, major EMS providers like Flextronics are struggling under the weight of those gains.
Flextronics took a $380 million restructuring charge in its second fiscal quarter, which ended Sept. 30.
While most EMS companies have relied on employee layoffs and plant consolidation and closings to restructure, the jury is still out on whether other contractors will aggressively mirror Flextronics' scaled-down efforts.
�It's not a new strategy,� said David Cahn, an analyst at AMR Research Inc. in Atlanta. �It's more of a cost-reduction effort. Flextronics wants to deliver new services to a broader audience in a more efficient manner.�
Downsizing will also alleviate Flextronics' concerns about having to integrate facilities with disparate IT systems into its IT network, he said.
�If I'm a chief financial officer at a major EMS company, and I see revenue is not growing at 60% like it was last year, I'm going to want to consolidate our IT systems and let the manufacturing hub be the driver to get new business in,� Cahn said.
As EMS providers build their global manufacturing footprint, some have created �centers of excellence� or manufacturing hubs in key areas while maintaining several stand-alone manufacturing facilities.
In May, Finnish EMS provider Elcoteq Network Corp. established a major technology center in Sweden to offer enhanced engineering services to Swedish telecom titan LM Ericsson.
�We have several customers in Sweden, and there are many potential customers in the telecom area,� said Ilkka Pouttu, Elcoteq's president of North American operations, at the time. �We're building engineering and new-product-introduction centers on a global basis. This was just a decision in regard to Sweden.�
However, Eugene Polistuk, chairman and president of Celestica Inc., a Toronto-based EMS company, insists EMS executives will carefully gauge their companies' need to restrict their operations going forward.
�We have various hub-like clusters in certain places,� Polistuk said. �There are certain economies of scale that large sites offer.�
But it isn't for everybody. Although Flextronics and Celestica see value in a tighter infrastructure, leading EMS provider Solectron Corp. insists there's no single answer to the size question.
�[Flextronics] is offering one solution, which is a good one, but it doesn't apply to all contractors or customers,� said Phil Fok, executive vice president of corporate administration at Solectron, Milpitas, Calif. �Some OEMs don't want to work within mega-manufacturing hubs. Smaller OEMs are worried about getting lost in larger operations.�
Still, Flextronics believes its massive manufacturing hubs will remain popular with OEMs seeking a host of supply chain services, including printed-circuit boards, PCB assembly, full box-build, and warehouse and logistics management services, said Jim Sacherman, senior vice president of marketing.
�Flextronics' future acquisition activity will be limited to companies that offer technological solutions that the major contractor needs,� Sacherman said. An example of that effort was evident last week when the Flextronics Design division acquired Instrumentation Engineering, an Oakland, N.J.-based systems test equipment manufacturer.
