Food for Thought: Why Flextronics' CEO sleeps well at night
By Matthew Sheerin
Electronic Buyers' News
(08/27/99, 03:32:44 PM EDT)
Ask Michael Marks what keeps him awake at night, and he confesses, ?I sleep pretty comfortably these days.?
And why shouldn't he?
As chairman and chief executive of Flextronics International Ltd., Marks is riding the dramatic shift to outsourcing among the world's major OEMs. The San Jose contract electronics manufacturer has seen its compound revenue growth reach 58% in the last three years, and it's on track to top the $3 billion mark in 2000. Major customers include Cisco, Compaq, Ericsson, Motorola, and Philips.
By his own calculations, the Harvard-trained executive figures the company's revenue could reach $20 billion in six years and $40 billion in a dozen or so, putting Flextronics in a league in which just three or four top-tier CEMs will play.
And on Wall Street, Flextronics has seen its stock climb from $11 to $60 in less than eight months, closing last Thursday at $56.88.
If he has any concern, it's that there's too much business to handle. ?There's so much demand and not enough people, you're on the ragged edge of being out of control,? Marks said in an interview with EBN in New York last week.
Marks recounted, for instance, how he recently turned down a $100 million order from a customer he had been wooing for years. ?We're in the implementation mode, and I went to him and said, 'We don't have enough talent to do this.' And he said, 'That's why I like you guys.' ?
A rare instance, but one that Marks wants to avoid in the future. That's why he plans to keep acquiring factories from OEMs and adding to Flextronics' campus-like industrial parks all over the world. The company has operations in Asia, Europe, and North and South America, but Marks sees gaps that he wants to fill.
At the top of that expansion list is the United States, where Flextronics is ?under-represented,? Marks said. The company has a huge operation in San Jose, an expanding facility in Dallas, and a small presence in New England. ?We'll probably buy a half-dozen factories in the next couple of years,? Marks said matter-of-factly.
Like its major CEM competitors-Celestica, Jabil, SCI, and Solectron-Flextronics has fueled its growth primarily by acquiring facilities that outsource-happy OEMs want to unload. It will then hire most of the workers in the facility, provide manufacturing services to the OEM, and make better use of the factory by building products for other OEMs as well. The trick, though, is to find the right factory and the right OEM.
?Everything is for sale,? Marks said, reflecting the great rush of many OEMs to get out of the manufacturing business, as well as the mind-set of smaller CEMs that want to hook up with larger companies. ?For every 30 companies and factories we look at, we'll buy one.?
Most OEMs want to get rid of a facility, he said, because it's either in a bad location, or losing money, or both, so selling it is usually the worst option. ?They're better off biting the bullet and writing it off.?
Flextronics also isn't reluctant to acquire a smaller CEM when there's a specific customer or segment in mind. For instance, the company recently acquired Kyrel EMS Oyj, a European CEM, because it had strong facilities in Finland and France, and was a major supplier to Nokia and Alcatel.
From Marks' standpoint, the big must get bigger or they won't survive. ?In our business, it's really a question of scale.?
Indeed, when a company such as Cisco tells its CEM that it needs a manufacturing presence in Eastern Europe, it better have the infrastructure and resources to make it happen.
That's why Marks' doesn't have much hope for second- and third-tier CEMs trying to go up against the top players.
So what about those companies staking out a claim with midsize OEMs? ?There's a lot of opportunity there. But what will happen is that you'll get some company and nurture it along, and then they'll outgrow you, and they'll need global requirements. This has happened to us 10 times, and we've taken them away,? Marks said bluntly. ?There's no difference in any business in the world. I just wouldn't want to be eighth in anything.?
Aside from the standard printed-circuit-board assembly and system-build services offered by CEMs, Marks sees the role expanding dramatically in the future. ?It's hard to figure out what we'll look like at $20 billion or $40 billion, but our customers will want a very integrated offering that's much more complex than it is today.?
In fact, terms such as CEM and EMS won't properly reflect what it is that Flextronics and its top competitors actually do, Marks said, adding that ?operations management? is probably a better way to describe it. ?It won't be about surface-mount technology. It will be much more about information management and operations consulting. About managing the supply chain, moving inventory, and moving things from one place to another, and figuring out where things get made.?
He adds that the concept ?is in its absolute infancy,? but believes his industry's role will evolve into a much more important position.
The first step in that direction is catering to all of an OEM's outsourcing needs. To that end, Flextronics has aggressively built up its design-services business, which went from zero to $100 million in revenue in a matter of two years. It also is building most of its own plastics, and Marks said his company will most likely get into backplanes, sheet metal, cable, and bare boards. Logistics is another growth opportunity for the CEM, since many OEMs are now asking Flextronics and other CEMs to handle customer orders, he said. |
