Flextronics International Ltd. is quietly planning to make and sell its own line of generic cell phones, EBN has learned.
The EMS provider's in-house program, dubbed PhoneOne, will offer price-conscious OEMs a low-cost manufacturing alternative enabled by Flextronics' Asian factory base and its design and engineering services.
The strategy takes a page from Taiwan's burgeoning wireless industry, where so-called original design manufacturers (ODMs) pursue contract work but also produce their own low-end phones for resale.
However, a key difference between Flextronics' plans and the ODM model is that the company will not own the IP or design products that compete against its customer base, including Ericsson and Motorola, said Jim Sacherman, Flextronics' chief marketing officer.
"We don't plan to brand any products," Sacherman said. "We don't own intellectual property. PhoneOne is a name for an internal concept."
Sacherman declined to reveal whether Flextronics developed the technology in-house, obtained IP from one of its cell phone customers, or licensed a third-party reference platform. He also declined to say when Flextronics expects to roll out the devices or identify potential PhoneOne customers, although one analyst said he expects a large telecom company to be among the first in line.
"I can't make any announcements like that," Sacherman said. "This is still an internal program."
A flexible strategy
While Flextronics may not be competing against its customers, the PhoneOne project will put it into a head-to-head battle with Taiwan's ODM industry, which is gaining more attention and credibility among cell phone customers.
"For some time, Flextronics has maintained that it is highly focused on the ODM model, more so than its EMS peers," said Louis Miscioscia, an analyst at Lehman Brothers Inc., New York, in a research report.
"There are new customers coming up that are looking for service providers to do things they would [ordinarily] do for themselves," said Gunnar Backman, who heads Flextronics' Network Services operation in Stockholm, Sweden, "OEMs want to cut costs and concentrate on their core business. They also want to compete better in the marketplace."
Jim Savage, an analyst at Thomas Weisel Partners LLC, New York, was not surprised by the revelation.
"This is a company that increasingly looks like a hybrid between an Asian EMS company and Asian ODM," Savage said. "They've talked about building up their ODM capabilities, which include designing white boxes and producing white boxes. It's within Flextronics' strategic goal."
According to Sacherman, Flextronics engaged in the PhoneOne project before it secured a customer, an anticipatory move that is not uncommon for the company
"It's like any phone we'd built for a customer except that we did some work on this before we had a customer, as opposed to having a customer first," he said. "We do a lot of development work for our customers all the time. Sometimes we do the development on our nickel, sometimes it's on the OEM's nickel. This is something we did on our nickel."
Analysts observed that the PhoneOne effort could help boost Flextronics' consumer electronics business, which contributed 30% to the company's $13.1 billion fiscal 2002 sales.
Analysts are also assessing the positive effects the move could have on Flextronics' profit margins.
"The normalized EMS operating margin for assembly work is 3% to 5%," Lehman's Miscioscia said. "In contrast, operating margins for design work can be in the 10% to 15% range, but usually accounts for just a small portion of an entire end-to-end manufacturing solution."
Miscioscia believes a blended EMS/ODM model would create an operating margin of 5%. He anticipates Flextronics' cell phone program would have operating margins between 7% and 9%.
"Flextronics' exposure to high-volume, commodity-type products puts the company in a more competitive situation with ODMs," Miscioscia said. "Our view is that Flextronics is trying to protect its revenue base in the event customers decided to capitalize on ODMs' design skills or products.
"We don't think Flextronics will move into the difficult and conflicting situation of selling a product under its own brand name," he said.
Flextronics' Backman stressed that the PhoneOne program is not intended to alienate existing customers. "The idea is still to work with the OEM and help them take further steps in the market," he said.