Not a week goes by, it seems, that LM Ericsson doesn't spin off one of its manufacturing plants to a big contract electronics manufacturer. The cellular-telephone giant has turned to outsourcing to keep costs down and focus on its core competencies.
At rival handset maker Motorola Inc., however, manufacturing is perceived as a key strength, and the company has no immediate plans to outsource.
"We believe we can be cost-competitive with any operation in the world, and manufacturing will remain a cornerstone of our competence," said Jim Caile, corporate vice president of marketing for Motorola's Personal Communications Sector in Libertyville, Ill.
Still other competitors are using both internal and external facilities to handle their manufacturing needs, depending on the levels of complexity.
Indeed, while virtually all PC vendors have embraced the outsourcing concept, and OEMs in other segments have followed suit, wireless-communications managers are taking decidedly different paths in their manufacturing strategies.
"This segment is relatively immature from an outsourcing standpoint, and a lot of the companies that are beginning to outsource are keeping it close to the vest and asking for confidentiality agreements," said Joe Regan, vice president of worldwide sales for Solectron Corp., a Milpitas, Calif.-based CEM.
Regan and other CEM executives, however, believe there is a tremendous opportunity in the communications sector, and analysts say it is only a matter of time before all industry players use outsourcing in one form or another.
"Large companies producing handsets will continue to look to divest manufacturing assets, as well as look to outside capacity, due to the sheer growth rate of the cellular-telephone business," Regan said.
While outside contractors manufacture just 10% to 15% of all cell phones, CEMs could reap as much as $10 billion to $15 billion a year from the segment, according to industry analysts. In fact, analyst James Savage of Thomas Weisel Partners LLC, New York, said telecommunications is the fastest-growing CEM segment, with wireless applications the primary driver.
The opportunity rests not in the cell-phone handsets themselves, but in infrastructure equipment. With about 160 million cellular telephones sold worldwide in 1998, the phone suppliers are able to keep their factories running full-time, reducing the need for outsourcing, Savage stressed. "They get good returns on capital when they can keep those lines running," he said. "OEMs in many markets have traditionally [retained] manufacturing of very high-volume, low-configurability products."
CEMs will continue, however, to make significant inroads with communications-based OEMs, he added.
"[CEMs] are moving more toward participation in electromechanical, enclosures, and systems assembly," Savage said. "They're very happy to increase participation in communications infrastructure equipment right now, particularly when you consider that's higher configurability, more manufacturing content, less materials content, and a higher-margin business for contract manufacturers."
Of the world's top five handset makers, Ericsson, based in Stockholm, Sweden, has led the outsourcing push, implementing a strategy to divest manufacturing assets over the past few years.
In April, Ericsson signed a letter of intent to sell its infrastructure plant in Visby, Sweden, to Flextronics International Ltd., San Jose. The plant, equipment, materials, and 900 employees are expected to be transferred to Flextronics by July.
Flextronics previously acquired two Ericsson plants in Karlskrona, Sweden. The OEM has also divested plants to SCI Systems Inc. and Avex Electronics Inc., and has entered into manufacturing arrangements with multiple CEMs.
Other cell-phone manufacturers to divest operations include Nokia Corp., which sold infrastructure plants in Sweden and Finland to SCI Systems in April 1998, and Mitsubishi, which last summer sold a handset-production plant in Georgia to Solectron.
Helsinki, Finland-based Nokia, however, has no plans to outsource handset production, and has in fact opened three of its own manufacturing plants in the past 18 months, and will open another facility in Hungary this year, said a Nokia spokeswoman. In addition, the company has a 51% stake in a joint-venture manufacturing operation in Brazil with Gradiente, a Brazilian manufacturer and retailer of consumer products.
"While outsourcing may get you better economy of scale or less risk, we have chosen to take on that responsibility since day one," the spokeswoman said. "We wouldn't be expanding our manufacturing capabilities if our idea was to outsource production."
Similarly, Qualcomm Corp. has in the past used some CEMs for limited production of printed-circuit boards for cell phones, but maintains final assembly control and intends to limit any CEM participation, said Gina Lombardi, manager of consumer products for the San Diego-based company.
"We want to make sure we have the best products in the industry," Lombardi said. "Although you can train [outside] people, it's a critical requirement and a core competency."
As for Motorola, the company is producing cell phones at plants in the United States, Brazil, China, and Europe, affording the geographic coverage and capacity needed to supply virtually all Motorola's requirements, Caile said.
Some analysts, however, believe companies such as Qualcomm and Nokia will look to expand their outsourcing due to increased technology requirements.
"Cellular phones are increasingly becoming more like mobile personal computers," said Thomas Hopkins, an analyst at Bear, Stearns & Co. Inc., New York. "Add that level of complexity to all the other things that cause companies to outsource-price competition, capacity, penetration of foreign markets, advances in manufacturing technology, and miniaturization-and the [OEMs] will increasingly seek out the leading contract manufacturers."
The ability to provide the technology needed to address the increasing complexities of the market has led CEMs to pursue acquisitions of companies that have specific RF manufacturing and design capabilities.
For example, Solectron recently acquired the RF design and manufacturing assets of Glenayre Technologies Inc.'s pager-infrastructure equipment plant in Quincy, Ill. The move came on the heels of Solectron's purchase of the manufacturing operations of Trimble Navigation Ltd., a maker of global positioning systems.
"We anticipate that the demand for RF technology will continue to grow," said Ko Nishimura, Solectron's chairman, president, and chief executive. "And with improved expertise, we will be better equipped to respond to evolving market requirements."
William E. Cage Jr., an analyst with J.C. Bradford & Co., Nashville, Tenn., said the two recent RF acquisitions, combined with earlier efforts, provide Solectron with RF capabilities to rival SCI and Sanmina Corp., considered to be among the leading CEMs in RF technology.
"It's the type of technology that's necessary to be competitive for the largest telecom assets that are going to be put up for sale," Cage said. "We're only now beginning to see the very tip of the potential for divestitures within the telecom space."
Although only the top-tier CEMs are expected to participate in the large telecom divestitures and major new production programs, opportunities could exist for midtier companies as well.
Artesyn Technologies Inc., a Boca Raton, Fla.-based specialist in the manufacture of switching power supplies, derived about 4% of its 1998 revenue of $532 million from contracts with Ericsson, Motorola, Nokia, and Qualcomm.
"It's a relatively new area for us, but it probably represents our greatest opportunity," said Joseph O'Donnell, Artesyn's president and chief executive.
Additional reporting by Sandy Chen, Mark LaPedus, and Richard Richtmyer.