FARMING OUT WORK--TO IBM, DEC, NCR...
What's a computer maker to do? With sales of such "big iron" as mainframes and minicomputers declining, the massive plants erected to build them can't be kept busy. Assembling personal computers from a handful of microchips and other prefab parts certainly won't do the job. The result: increasingly idle factories, many of which are doomed to be shut down.
IBM, Digital Equipment Corp., and other big computer makers have found a better idea: Instead of closing underused plants, laying off workers, and wiping out earnings with costly write-downs, they're keeping factories open by building products for other companies--sometimes for direct competitors. Such "contract manufacturing" has been standard procedure in the electronics business for decades, but until recently, the Big Blues of the world have farmed the work out--not taken it in.
It may seem like a comedown, but the $17 billion contract manufacturing market represents a welcome opportunity. The business is growing more than 10% annually, says market researcher Technology Forecasters Inc. in Berkeley, Calif., which also says the business has stable, aftertax returns of 5%. Plus, by building for others, a company can hone its manufacturing skills and sell more electronic components of its own.
For the newcomers, the challenge is to learn the business fast enough to compete with the lean job shops that they used to hire. Analysts say it took Texas Instruments Inc., a pioneer that now has a $200 million job-shop business, years to turn a profit.
Still, the field is full of new faces. In addition to computer makers IBM, DEC, NCR, Tandy, and Britain's ICL, dozens of big-name electronics and defense companies such as Eastman Kodak and Westinghouse are jumping into contract manufacturing. John Tuck, editor of industry newsletter Manufacturing Market Insider, estimates that these companies have $800 million in contract manufacturing revenues and have earmarked as much as 20% of their manufacturing capacity to serve others.
STRANGE BEDFELLOWS. In some cases, such work is all that's keeping factories open. "If we don't make a go of this, we'd have to close the place," says Michael H. Flanagan, who oversees a 1,500-person IBM circuit-board plant in Charlotte, N.C. This year, he expects about 25% of his business--worth some $350 million--to come from customers outside IBM. That's up from zero in 1991. Westinghouse Naval Systems' torpedo factory in Cleveland, which faces the loss of as much as 90% of its business because of expiring defense contracts, is bidding on $100 million in contract manufacturing orders. "Our goal is to bring in profitable work that enables us to maintain our current work force," says contract manufacturing manager Jay N. Longworth.
Contract manufacturing can make for some strange bedfellows. DEC, for example, is building Apple Computer Inc.'s LC-2 computer and in-flight video systems for Hughes Aircraft Co. IBM's Austin (Tex.) plant, which makes most of the circuit boards for IBM PCs and workstations, is currently cranking out notebook computers for CompuAdd Corp. and boards for a Taiwanese PC clonemaker.
But there's more to the trend than survival. TI earns healthy profits by assembling workstations for Sun Microsystems, PCs for Gateway 2000, and networking equipment for Wellfleet Communications and Cisco Systems. But those deals also help TI, a leading chipmaker, land other business. For example, TI now builds versions of Sun's Sparc microprocessor and related microchips, and it also supplies design, testing, and project-management services. The Dallas-based company is one of the top three recipients of Sun's $2 billion annual spending on contractors, says Mel Friedman, Sun's vice-president for corporate supplier management.
IBM and DEC also are hoping that contract manufacturing deals will lead to orders for their other products, such as chips and disk drives. "More and more of our customers want us to build our technology into end products, so this is a way for us to extend what we do and really be a strategic partner," says James O. Willis, a DEC vice-president.
For fledgling computer makers, using an IBM or DEC factory can be a shortcut to decades of experience. Late last year, Silicon Valley startup Alaris Inc. had finished designing its first product, a low-cost PC motherboard. But Alaris skipped such contractors as Solectron Corp. in Milpitas, Calif., and SCI Systems Inc. in Huntsville, Ala., which in the 1980s built millions of IBM PC motherboards. Instead, founder Raymond Yu turned to IBM. Besides manufacturing, Big Blue offered to help design and test the board, he says, and it added an unheard-of three-year warranty. Better still, IBM will supply many of the chips Alaris needs, including an enhanced version of Intel Corp.'s 486 microprocessor. "I don't consider them a contractor," says Yu. "I consider them a partner."
'HOOPS OF FIRE.' Still, the newcomers won't last unless they can match the service and razorlike efficiency of traditional job shops, which range from dozens of mom-and-pop outfits in Taiwan to $1 billion SCI, the biggest independent. Says CEO Olin B. King: "We haven't lost a deal" to IBM or its ilk. "You have to be willing to jump through hoops of fire for the customers' slightest whim," he says, "but [the giants] are used to being captive suppliers."
To be sure, keeping up with competitors such as SCI has forced IBM to learn lots of new tricks. At the Austin facility, General Manager William J. Amelio has slashed support staff by 30% and management ranks by 10% since 1986. He has also dropped the IBM tradition of building the plant's own production tools and buying only IBM components. The facility has won contracts from CompuAdd, Advanced Micro Devices, and Western Digital, among others. Even Compaq Computer Corp. and Apple have looked in. Outside orders have accounted for 15% of the plant's output so far this year--from zero last July--and may hit 30% of Amelio's $1.3 billion business by yearend. As with the company's operations in Charlotte, N.C., and Greenock, Scotland, Amelio's goal is a 50-50 mix of outside and IBM work.
But the big players still have lots to learn. Some--including Xerox, Tandem Computers, and even Big Blue--have sold off plants to the contract manufacturers that seem to know better how to run them. More proof that in today's computer business, there's just no easy way to make a buck.WHO'S BUILDING WHAT FOR WHOM
Company Selected Estimated 1993
customers contract revenues
IBM Computers for Hitachi and CompuAdd, $500 million
PC boards for clonemakers, diagnostic
systems for Chrysler
Texas Computers for Sun Microsystems and $225 million
Instruments Gateway 2000 and networking gear for
Wellfleet Communications and Cisco Systems
Digital Computer boards for Apple Computer, in-flight $50 million
Equipment entertainment systems for Hughes Aircraft
ICL Computer boards for Sun Microsystems $80 million
DATA: MANUFACTURING MARKET INSIDER
WILL VAN OVERBEEK
Peter Burrows in Dallas