BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
THE 21ST CENTURY CORPORATION -- THE CORPORATE ECOSYSTEM The Barons of Outsourcing As other companies shed manufacturing, outside contractors are becoming global giants Four years ago, cornfields filled the 125-acre industrial park on the dusty outskirts of Guadalajara, Mexico. Now, glistening white factories and 4,000 workers turn out thousands of Ericsson cell phones, 3Com Palm Pilots, Compaq circuit boards, and Cisco routers each day. The industrial campus boasts a growing roster of components producers and a cavernous distribution center buzzing with FedEx, DHL, and UPS trucks destined for the U.S. The complex has its own high-speed telecom network, power plants, and medical center--even a first-rate soccer field and a bus fleet to shuttle production workers to and from their homes. One might surmise that the Mexican government has made tremendous strides in its race to catch up with East Asia as a high-tech manufacturing base. But in truth, this industrial park is a showcase for the growing power of one company--Flextronics International Ltd. (FLEX). The Guadalajara site is just one of a number of manufacturing campuses the company owns or is building in countries such as China, Brazil, and Hungary. Flextronics not only manufactures all the brand-name hardware assembled on the site, it also operates the infrastructure and services, down to the sewage-treatment equipment and the employment agency. By next year, production capacity at Guadalajara will double. Flextronics and other electronics-manufacturing services (EMS) providers are the big beneficiaries of 21st century corporate plans to outsource everything from production to back-office work to logistics operations. In the bid to boost return on capital and hone their core competencies, even the staid industrial giants of Germany and Japan are starting to sell off factories. They then award long-term contracts to outside suppliers--often the same companies that bought their plants. Big-name electronics companies also are asking contractors to handle after-sales service and even to help design new products, entrusting them with intellectual property that before was a closely guarded secret. In the process, outside contractors are ballooning into huge multinationals in their own right. Three years ago, Milpitas (Calif.)-based Solectron Corp. (SLR) was the only EMS with more than $3 billion in sales. By the end of next year, at least five should hit $10 billion, with Solectron on track to hit $20 billion. Flextronics Chairman Michael E. Marks boldly predicts he could oversee a $50 billion business within five years. In the past four years, this industry has more than doubled, to $88 billion annually, and should keep growing at a 20% clip, says Technology Forecasters Inc. in Alameda, Calif. NEW BREED. As yesterday's industrial giants slim down, leading contract manufacturers are bulking up, flouting some key tenets of New Economy wisdom. While many gurus rave about virtual corporations, Flextronics and its rivals have been quietly picking up the abandoned brick-and-mortar pieces and reassembling them into new versions of vertically integrated empires. The new age production experts are happily shelling out billions to acquire competitors along with factories once owned by Siemens (SMAWY), IBM (IBM), and Nortel (NT). To broaden their services, they are also acquiring top design and engineering firms--specialists in creating anything from customized semiconductors to prototypes of futuristic wireless-Web phones. Some outside contractors are buying parts suppliers and stakes in distributors. Flextronics and a handful of fast-growing enterprises like it may be the prototypes of a new breed of multinational. Nominally based in Singapore but with its main operations in San Jose, Flextronics has grown from a nearly bankrupt $93 million assembler of printed circuit boards into an $8 billion, 55,000-worker octopus. Barely slowed by this spring's Nasdaq crash, Flextronics shares have climbed roughly tenfold, to around 76, in two years. For EMS players, vertical integration has its advantages. Unlike traditional manufacturers, EMS companies don't make their own brand-name products. Instead, they provide production and other services to all comers. And because their factories are designed to be quickly rearranged, the same shop can make different products for many customers. As a result, their factories can run at capacity almost all the time. ''They have a laser focus on making products, without having to worry about heavy R&D and marketing,'' says Louis R. Misciocia, a Lehman Brothers Inc. analyst who tracks the sector. And they can get cheaper components by buying in enormous quantity. Even though EMS companies earn low gross margins, typically 6% to 8% on sales, they generate a respectable return on equity--usually around 20%. Similar economics are reshaping other industries. Huge, integrated services conglomerates are emerging to handle tasks outsourced by banks, pharmaceutical companies, and auto makers. Companies are rediscovering the merits of integration, says McKinsey & Co. management specialist Lowell Bryan. ''You are seeing the disintegration of old industrial structures and new ways of organizing them,'' Bryan explains. ''People are starting to bundle together services that were once in different industries because their customers want them to.'' But isn't a Flextronics in danger of becoming as unwieldy as the IBM of old? ''The issue is how far can a contract manufacturer go before it no longer is excellent at what it does,'' says Technology Forecasters President Pamela J. Gordon. Marks agrees there's a risk. ''There is no question we'll be a big company,'' he says. ''The question is whether we'll be a good big company or a bad big company.'' GROUNDBREAKING COUPS. So far, Marks has struck the right balance. He has spent $4.8 billion on acquisitions this year alone. In March, Flextronics bought Dii Group Inc., a $2 billion designer of custom chips and circuit boards. Next came Palo Alto Products, designer of the hot-selling Palm Pilot. He's also snagged factories from Siemens, Ericsson, and Bosch. Recently, Flextronics scored two groundbreaking coups. In April, Microsoft Corp. (MSFT) hired it to manufacture and help design a new electronic game console dubbed Xbox. And in May, Marks struck a partnership with Motorola Inc. (MOT) to make a variety of telecom products for the company that has long prided itself on production quality. Marks's diversification into design is as crucial as its budding partnerships. Flextronics now has teams of industrial, mechanical, and chip engineers scattered around the world. A Flextronics-made cell phone may comprise radio-frequency components designed in Norway, custom chips created in Israel, circuit boards crafted in India, factory tooling developed in Italy, and mechanical engineering from Taiwan and Colorado. But as contract manufacturers move into design, some knotty issues arise. How can a customer be sure its breakthrough idea won't end up in a rival's product? What's to prevent a contractor from becoming a direct competitor? To avoid such conflicts, Marks says, Flextronics will not make its own products. But as the role of contractors grows, the brand name on a product may not indicate the real power behind an industry. By PETE ENGARDIO _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Ecosystem And Now, the Just-in-Time Employee TABLE: Of Those Who Define Themselves as Free Agents Perspectives: The New Wired World of Work The Barons of Outsourcing CHART: The Boom in Outsourcing Perspectives: Limits of the New Corporation Different Countries, Adjoining Cubicles TABLE: Where White-Collar Jobs Are Going Commerce Reweaves the Social Fabric High School Will Never Be the Same Watching over the World Wide Web TABLE: The New World Order INTERACT E-Mail to Business Week Online

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