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Michael Marks of Flextronics International: New designs

The biggest contract electronics manufacturer survived the tech collapse because it makes consumer and industrial goods. Now it wants a creative role, too.

In 1989, not long after Michael Marks had taken a job as an internal consultant at Flextronics, a small maker of electronic components in San Jose, California, a disgruntled customer suggested that he read World Class Manufacturing: The Lessons of Simplicity Applied, Richard Schonberger's 1986 book on customer-focused production techniques. Marks concedes today, "I didn't really know much about world-class manufacturing." He does now.

Today Marks, 53, runs the renamed and thoroughly revamped Flextronics International, which has become the world's biggest provider of electronics manufacturing services. The $96 billion-a-year EMS industry is one most buyers of electronic devices have never heard of. Yet Flextronics and its dozen or so global rivals anonymously churn out everything from telecommunications gear to computer printers to cell phones to scientific instruments to video game systems, under contract to much bigger companies with familiar brands, such as Cisco Systems, Motorola and Nortel Networks. In fact, EMS companies produce one third of the world's electronics items.

For Flextronics and its fellow EMS outfits, the tech recovery could not have come soon enough. The $21.4 million profit it reaped in last year's fourth quarter was its first positive quarter in two years. The company racked up sales of $13.6 billion in 2003, a 2 percent gain over 2002's depressed figure. Investors, anticipating a turnaround, bid up the company's Nasdaq Stock Market­listed shares by about 176 percent in the 15 months through February 25.

Brought in from outside, Marks, a Harvard Business School MBA who had been running a small heating-component maker, found himself in charge of Flextronics in 1991, after just two years on the job. The promotion from consultant to CEO, however, was a problematic one. That year the company, which had never achieved sales exceeding $100 million and had suffered consistent losses, shut down its U.S. plants and sold its Asian operation to its managers. Impressed by Marks's leadership and vision, the Flextronics board asked him to revive the company, whose headquarters are now in Singapore -- although Marks and other top executives continue to work out of San Jose.

He and his Asian colleagues were convinced that a huge opportunity existed for a company that could handle sophisticated manufacturing and logistics operations for big electronics companies, freeing them up to focus on innovation, design and marketing. But costs were a major consideration. Marks steered Flextronics to low-cost locations in Asia, Eastern Europe and Latin America. He had six huge industrial parks built -- two in China and one each in Brazil, Hungary, Mexico and Poland -- and persuaded suppliers to lease space in them to guarantee that Flextronics could obtain components quickly and cheaply.

The company's sales growth averaged 60 percent a year between 1993 and 2002, when its market collapsed. Not all of this surge was organic: Flextronics has acquired 43 small EMS companies over the past nine years.

In expanding, Flextronics sought to systematically align production with distribution. For instance, 40 percent of its products are manufactured in Europe, where it derives one third of its sales. In all, the company has 100 plants and 100,000 workers scattered across 30 countries. It was into China earlier than its rivals, which are playing catch-up.

In recent years Flextronics has broadened its product line to consumer goods. It's one of the world's biggest cell phone makers, but it also produces Xbox game consoles for Microsoft Corp.; printers for Dell, Epson and Hewlett Packard Co.; and personal digital assistants for Casio Computer Co. and PalmOne. (The U.S. accounts for 40 percent of sales.)

Following the example of Taiwanese contract manufacturers, Flextronics aims to design as well as manufacture products for its clients. For example, it might present a cell phone prototype to Sony Ericsson Mobile Communications in hopes of getting an order for 10 million of that model or one like it.

Marks recently discussed Flextronics' plans with Institutional Investor Contributor Assif Shameen in Singapore.

Institutional Investor: Isn't there still a lot of overcapacity in electronics manufacturing?

Marks: Honestly, I don't believe that there is as much as there is made out to be. Certainly not at Flextronics. We are starting to buy equipment for the first time in two years. If you look at the whole industry, there is probably some overcapacity, but demand is coming back so fast that in six to nine months, people will be seriously looking at adding capacity.

Will bigger companies like yours start buying out smaller electronics manufacturers like those in Taiwan that design their own products?

That's what we are likely to see eventually. Look at Singapore. It had tons of contract manufacturers, and eventually they were all bought out by larger companies, except for Venture Corp. Taiwan has a lot of original design manufacturers, like Quanta Computer Arima Group, Asustek Computer and Inventec Corp., that are very good at what they do but don't have the scale or size that we have. The next step will be to combine the expertise of ODMs that are good at design with [EMS] guys like us who have scale in manufacturing and logistics. It's a natural fit.

With China seemingly becoming the world's manufacturing base, is there a role left for North America and Europe in producing electronics?

This China, China, China stuff is way overblown. Sure, our footprint in China is growing, but I don't think we'll ever have more than 35 percent of our total capacity in China. As global demand picks up, more manufacturing capacity will be added elsewhere -- particularly in North America and in Europe. There is no point making something cheaply in China when your customers are in North America or Poland, because you have to take into account shipping and logistics costs. Ideally, we would like a third of our capacity in Asia, a third in Europe and the rest in the Americas. Having a global footprint means we can make things for customers who want to sell in the U.S. or Europe or Asia without having to worry about exchange rate risks, political risks or logistics.

Critics say Flextronics' exposure to the consumer segment is now too big.

Consumer electronics is an exciting business. It is also a business that is changing, with many new players. Microsoft is selling Xbox. Dell, HP and Gateway are all getting into consumer electronics and competing with the likes of Sony. Since all these new players are outsourcing, it is a big opportunity for contract manufacturers like us. But we don't want to have a big exposure in one particular segment of the business. We are trying to have a balance between the traditional telecom infrastructure and information technology products that we have been good at and consumer electronics products.

Some say Japan is the next big opportunity for firms like Flextronics.

There will be a trickle of outsourcing contracts from Japan, but I don't think we are going to see massive outsourcing from Sony, Toshiba or NEC. They are not about to get out of manufacturing in a big way any time soon, despite the rising yen and increasing cost of doing business. You need something bigger -- like huge cultural change or for some of the older Japanese CEOs to retire and a new breed to take a fresh look at business strategy. The current breed, especially in some of the large electronics firms, just don't have the guts to change a business model they believe worked so well for them for 40 years. But they will eventually have to let go.

Is there an opportunity for EMS firms like yours in the repair business?

When Solectron Corp. went into the repair space, a lot of analysts were asking us why we weren't rushing in to do the same. Honestly, I have never been very enthusiastic about that kind of business, because it is outside our core competence, which is volume manufacturing. Sure, margins in the repair business are great, but we are good at what we do -- manufacturing -- and we need to think about whether we want to invest too much money in repair. Still, our customers want us to be in repair because it's a natural adjunct to our manufacturing. So we've set up a repair business that leverages off our existing distribution and manufacturing. It's a small but very nice business that's growing rapidly. But we are not about to invest billions to become a huge player.

In the future will you tell companies like Sony Ericsson that you have a great cell phone, say, that you can make and supply to them, or will they give you a prototype cell phone and ask you to make 10 million pieces?

The future will be somewhere in between. The truth is that we are basically manufacturers. We don't have access to things like market research. What we do have is the manufacturing how-to to make the best product cost-effectively at locations around the globe that are the closest to the end market. Increasingly, we are acquiring design expertise and logistics. But Sony Ericsson will innovate, and we will manufacture the product and ship it to the distributor or the mall.

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