Nortel Networks Reaches Major Milestone in Shift from Vertical to Virtual Integration
Announces divestitures, outsourcing, and strategic supplier relationships
with five manufacturing services companies
Strengthens leadership in bringing unified, end-to-end voice and data
solutions to customers worldwide through improved financial and
operational agility and flexibility
Plan on time and on target
BRAMPTON, Ontario, Aug. 4 /PRNewswire/ - Nortel Networks (NYSE/TSE: NT) today announced it has entered into agreements with five manufacturing services companies to divest and/or outsource certain manufacturing and repair operations, all of which were identified in May. The transactions announced today mark another milestone in the company's three-year global operations strategy announced in January - a strategy designed to focus the company on its highest value-added activities and create the industry's most agile, flexible and responsive provider of Unified Networks solutions.
Nortel Networks will establish strategic supplier relationships with each of the manufacturing services companies, all of whom will play important roles in the evolution of Nortel Networks' end-to-end supply chain.
The five manufacturing services companies chosen by Nortel Networks after an extensive international selection process are: SCI Systems Inc., headquartered in Huntsville, Alabama; C-MAC Industries Inc., headquartered in Montreal, Quebec; Sanmina Corporation, headquartered in San Jose, California; Communications Test Design Inc., headquartered in West Chester, Pennsylvania; and United Tri-Tech Corporation, headquartered in Cornwall, Ontario.
For more than 100 years, Nortel Networks has done most of its manufacturing in-house, because the sophisticated capabilities required to develop and produce its advanced products did not exist outside the company.
With today's announcement, we have achieved a key milestone in moving Nortel Networks from being a vertically integrated company, where we manufactured almost everything in-house, to a virtually integrated company, where we will complement our internal strengths with the best-in-class expertise of these manufacturing and repair services companies,'' said Chahram Bolouri, vice president, Global Operations.
By leveraging the best-in-class capabilities that are now available externally, we will be able to direct our internal resources to those specialized skills that continue to offer us competitive differentiation and that are not easily found outside the company. Those skills include new product introduction, systems and network integration, and systems testing,'' said Bolouri.
Under the terms of the agreements announced today, the manufacturing services companies would employ approximately 2,300 of the 3,000 employees who were part of operations identified in May for divestiture. Of the remaining 700 employees, approximately 200 employees will remain with Nortel Networks, and about 500 employees will have their positions eliminated as a result of Nortel Networks decision to exit manufacturing in Burnaby, British Columbia and Belleville, Ontario.
We realize that what we are announcing today will be difficult for those employees whose positions will be eliminated. We are committed to supporting them in their transition to new opportunities,'' said Bolouri.
The actual number of layoffs resulting from today's announcement is expected to be further minimized through normal attrition, retirement incentives, redeployment to other Nortel Networks positions, and relocation to other facilities. In an effort to minimize the impact on employees whose positions have been eliminated, Nortel Networks will offer education assistance, extended notice periods, competitive severance packages, outplacement services, and career transition assistance.
Details of the agreements announced today are as follows:
Printed Circuit Board Assembly
SCI Systems Inc. (SCI) will purchase Brock Telecom Limited, a wholly-owned subsidiary of Nortel Networks Corporation. Brock Telecom's electronics manufacturing operations are located in Brockville, Ontario. SCI will also purchase the electronic manufacturing assets located in Nortel Networks' Belleville, Ontario facility and two surface mount lines in Nortel Networks' facility in St. Laurent, Quebec.
As part of the supply agreement to be entered into with Nortel Networks, SCI will supply printed circuit board assemblies to Nortel Networks. SCI has been an electronics supplier to Nortel Networks for several years.
Brock Telecom Limited, which will become a wholly-owned subsidiary of SCI, will continue employing the existing workforce.
In Belleville, the 370 positions associated with the printed circuit board assembly operations will be eliminated, and Nortel Networks will exit from manufacturing in Belleville. The 300 non-manufacturing employees in Belleville are unaffected by this announcement. The impacted Belleville employees will be given first consideration by SCI for up to 200 new jobs that are expected to be created by SCI in Brockville this year.
Electromechanical subsystems design and manufacturing
Under the proposed agreements announced today, C-MAC Industries Inc. (C-MAC) would acquire the assets associated with the electromechanical subsystems design and manufacturing operations for Nortel Networks' carrier business, and Sanmina Corporation (Sanmina) would acquire similar assets for the Nortel Networks wireless business. Before final agreements are reached, there will be a period of consultation with employee representatives in Europe.
The proposed divestiture to C-MAC relates to the assets involved in Nortel Networks' operations in Monkstown, Northern Ireland, and would include employment of the related Monkstown employees. Nortel Networks also intends to enter a supply agreement with C-MAC for the relevant products.
As part of the overall relationship between the parties, Nortel Networks also intends to use C-MAC as the supplier of the electromechanical subsystems currently assembled in Nortel Networks' facility in Lachine, Quebec. The employees associated with these operations will remain employees of Nortel Networks, and will be redeployed into the St. Laurent facility. In addition, C-MAC would employ the majority of the electromechanical subsystem designers associated with carrier products and would supply electromechanical design services related to those products to Nortel Networks.
The proposed agreement with Sanmina relates to the sale of the assets associated with the wireless electromechanical manufacturing operations in Calgary, Alberta and Chateaudun, France, and would include employment of the related employees. Nortel Networks also intends to enter into a supply agreement with Sanmina for the relevant products. In addition, Sanmina would employ some of the electromechanical subsystem designers associated with Nortel Networks GSM wireless products and would supply electromechanical design services related to those products to Nortel Networks.
Repair and Logistics
A number of Nortel Networks' repair and repair logistics operations will be sold to Communications Test Design, Inc. (CTDI).
Under the agreement, CTDI will acquire all assets associated with the repair and repair logistics operations in Mississauga, Ontario; Nashville, Tennessee; Sunnyvale, California; and Richardson, Texas, and will become a supplier to Nortel Networks for repair and repair logistics services. Nortel Networks will retain all interfaces to its customers.
CTDI will offer employment to the affected repair and repair logistics employees working in the four divested operations. In the Mississauga facility, voluntary ways to reduce the employee population will be explored, in alignment with CTDI's operations business model.
Burnaby, British Columbia
The assets of Nortel Networks' Burnaby, British Columbia manufacturing operations will be sold to United Tri-Tech Corporation (UTTC). Under the terms of the supply agreement to be entered into with Nortel Networks, UTTC will supply the associated products from its Lethbridge, Alberta facility. As a result, Nortel Networks will exit manufacturing operations in Burnaby and 140 positions will be eliminated. Not affected are the 260 employees in British Columbia involved in marketing, R&D, product development, and customer service - about 215 employees in Richmond and approximately 45 at the Burnaby facility.
Transaction terms
All transactions are subject to customary conditions and regulatory approvals, including applicable European employee consultation processes. The transactions are expected to be completed in the third quarter or early in the fourth quarter of 1999.
The aggregate gross proceeds from today's announced divestitures are expected to be approximately US$400 million, subject to purchase price adjustments. The aggregate value of the supply agreements to be entered into with the five manufacturing services companies is expected to be in excess of US$1 billion in the first year of the agreements.
As announced in January, the company expects savings in the range of US$250-300 million per year when the operations strategy is completed within the previously announced period of 18 to 36 months. The company is on target for achieving results in line with guidance for 1999, and the actions announced today will have no significant impact on 1999 financial performance from ongoing operations.
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