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Michael Marks (Flextronics) : "Relocation of assembly in America and Europe is a long-term trend"
March 7, 2000 |Estimated reading time: 10 minutes
Michael MarksChairman of Flextronics International
"Relocation of assembly in America and Europe is a long-term trend."
"Made in China" is no longer the mantra of EMS providers. Flextronics and other similar companies are regrouping on a by-continent basis and, while increasing their stake in low-cost countries, are also investing where the best-qualified manpower is to be found. The aim is to site production as close as possible to the consumer.
In recent years, the major contract manufacturers have experienced astonishing rates of growth and their stocks have soared. Could it be that this is just the beginning of the story? Our industry continues to grow. The assembly sector will assume world importance with sales expanding from $360 billion in 1998 (of which contract manufacturers were responsible for only 17%) to $460 billion in 2003 (with 32% coming from contract manufacturers). The major part of the assembly work will be carried out by a small number of large firms, which will experience non-stop growth, largely by buying up their competitors.
The EMS market is expanding, and at the same time strongly concentrating in the hands of a few firms. The ten largest companies in the sector already control half the world market. Where does Flextronics stand in this cut-throat competition? We are fourth in the world. In 1999 terms, Solectron weighs in at $10 billion, SCI at $8 billion, Celestica at $5 billion and Flextronics at $4 billion. In 2000, we are expecting a turnover of $5 billion. Maybe we will move up a place in the rankings, but our competitors are also expanding. In fact, there are seven of us in the race, each operating worldwide and in permanent competition in every market. Our smaller competitors are being left behind. Even among the leaders, concentration continues apace; we expect to be no more than five by the end of 2000. Long-term, of course, Flextronics International is aiming for the top slot, but that will take . . . some time. Everything depends on which firms ask us to buy their assembly plants. In the States, the move to outsourcing has been very fast, and we could reach $10 billion in just two to three years. Leading-edge technologies are the motor that drives the U.S. economy. This is less true in Europe, but we are increasing our turnover there, too.
What distinguishes Flextronics from its competitors is its major involvement in Europe. Right?Right. In 1999, we did 43% of our turnover in Europe. This makes us the biggest contract manufacturer in Europe, even though we started in Singapore. On the Old Continent our competitors carry a lot less weight.
You have also been prime movers in relocation to Eastern Europe, especially Hungary. Hungary, with a 7,000-strong workforce, has become essential to us. We are doing work there for our major customers: Lucent, Ericsson, Cisco, Motorola, Nortel, etc. Most of our consumer and micro-informatics products are assembled in this kind of low-cost country: Hungary is our platform for the European market, China for Asia, Mexico for North America, and Brazil for Latin America. Mind you, Brazil is not really cheap, but taxes on imports are so high there that you are better off manufacturing on site. All the major contract manufacturers are following the same path. We may have the best position in Hungary today, but in five years' time, everyone will be there. It's not a long-term advantage.
In the Sárvár (Hungary) industrial park, Flextronics' assembly line is in the big orange building, along with the screen deposition and storage. Other companies on the site are Hirsch Styfoam (packaging), Philips Components (capacitors and resistors), Pressmatik/Itocu (metal foils and sheets), SCA Packaging (cardboard packaging) and EcoPlast (plastic molded parts).
What is the main problem in working with low-cost countries? The main problem in these countries is their lack of infrastructure. We cannot rely on support services. So we have built industrial parks where we set up our main suppliers' plants right next-door to our assembly sheds. That way, we have within reach everything we need to manufacture our customers' products. We try to bring together the raw materials and the components and assemble them on the spot. This enables us to respond to modifications more quickly.
How do you divide up your activities between East and West Europe? In Hungary, the industrial park concept targets low-cost mass production: telephones, micro-informatics, consumer electronics, etc. For more complex products we go to Sweden or France. Scotland or the U.S.: GSMs, telephone exchanges, professional electronics, etc. These countries are more expensive, but they have skilled engineers and the test facilities we need for these products.
This must be a sizeable need since you are increasing your acquisitions of plants in Western Europe. Absolutely. We already have a presence in five West European countries: Sweden, Scotland, France, Finland and Germany. Our European customers include major companies, Ericsson, Alcatel, Nokia, etc. We are hesitant about Italy and Spain, where opportunities are limited. We haven't yet made up our minds about the Netherlands, though Philips, our biggest customer, is showing an interest. We are planning to set up in Ireland.
Why don't you group your production sites in Western Europe together? t's useful to have a local presence so that you can work together with the companies in a country, especially in Germany. Often we could easily manufacture our products elsewhere, but the customers don't want us to. For example, Alcatel will not agree to a total relocation of production outside the European Union. That's why, since we bought the Lunéville plant (Lorraine), we've been continuing to produce GSMs and PBXs for Alcatel there. That doesn't stop us from doing part of our production for Alcatel-headsets and keypads, for example-in China.
What do you have in mind when you buy a plant? n every plant we take over, we want to broaden the customer base in order to diversify production. For example, in one of the plants we purchased from Ericsson, which formerly produced only for Ericsson, we now work for fifteen different customers. Conversely, part of what Ericsson produced there is now produced in China or in Hungary. We have to allow for a period of transition and reorganization. That's why we are careful never to buy a plant unless we can broaden the customer base and restructure production. And when we already have one site in a country we are less interested in acquiring another.
Plants and industrial parks aside, Flextronics also has some smaller sites. What are these for? They are technology centers that we have built around the world: smaller plants where we develop new PCB designs, prototypes, industrial design and dedicated test equipment. These units are near to our customers who come there to finalize their products. We are planning to open one shortly in France. We don't build these in our industrial parks because Swedish designers and engineers don't want to go all the way to Brazil or China to put the finishing touches on prototypes: they want to stay in Sweden.
Do you manage to make this kind of site viable in a country like Sweden? We are very well established in Sweden, mostly because of two large sites of Ericsson's where we manufacture mainly GSMs and telephone exchanges. It's a very important country to us, not for mass production-labor is too expensive-but for engineering, research, development and all kinds of complex products. The salary cost of an engineer is not much greater than for a worker. What's more, it is one of the lowest taxed countries in Europe, and the one where energy costs are lowest. You've got to get away from prejudices. Our French plant at Lunéville, for example, is not as expensive as you might think, especially as the workforce is young. Lunéville is cheaper than Finland, and a lot cheaper than Germany. For that reason, part of our production for Nokia's German market is in France.
Isn't Asia still the best area for contract manufacturers? There again you have to get away from your prejudices and learn how to adapt as things change. Why do you think we have just made a further investment in Hungary and taken on another 1,200 people? Because products assembled there were previously assembled in Asia. The relocation which once took place, from France and Germany toward Asia, is now being reversed-to the benefit of Hungary, which is much closer. We gain in transport costs and delivery times. The same thing is happening with Mexico. When NAFTA was being negotiated, its opponents feared that it would bring about a relocation of plants from the U.S. to Mexico. In practice, this has hardly happened. On the other hand, American assembly plants, which had been relocated to Asia, have come back to Mexico, to be closer. With NAFTA and the fall of the iron curtain, we can at last develop the potential of low-cost countries close to the main consumer markets.
What is your policy towards Asia today? In China, we are producing mainly for the Asian market. When I joined Flextronics in 1993, we produced 100% of our turnover in Asia. We will produce less than 20% there in 2000. A part of our Asian production is still exported to the rest of the world, as it still has the lowest costs. But in the future, Asian production will be increasingly for the local market. That's why relocation of assembly in America and Europe is a long-term trend.
Is that your strategy or your analysis of the market? Both. Hungary and Mexico are becoming more and more important to Flextronics. Our customers and our competitors are turning their attention to these areas. In Asia, the EMS market continues to grow, but at a slower rate. In Mexico, though, the market has gone from zero to $4 billion in four years, largely due to relocation. So it's really both my analysis and our strategy.
By offering your services worldwide do you find yourselves increasingly close to your customers' customers? Flextronics is complementary to its customers, who are increasingly turning to outsourcing and even "dematerialization" of communication paths. The most developed example is Cisco's e-commerce. Their catalog is on a Web site, where the customer can decide which configuration best suits him among the products and options offered. The customer places the order on the site, and Cisco's system sends the order to our production system. We then manufacture the product, send it to the customer and inform Cisco. Physically, the product does not pass through the hands of a single Cisco employee. But the client receives a Cisco product and a Cisco invoice. The only Cisco services affected by this order are Accounts and Marketing, which needs to know which products are selling well, with which design and which features, in order to develop the range.
So, why don't you develop your own Web site sales operation? Because it's not our job. Cisco customers trust Cisco, Alcatel customers trust Alcatel, Philips customers trust Philips, etc. It's a future possibility, as the public will increasingly place orders on the Web. The manufacturer will forward his orders to the assembler, who will choose the production site nearest to the customer. We are nearly there with Cisco: we have a factory dedicated to its products in California, and another in Mexico. In 2000, we will have two more in Europe and in Asia. Our other customers want to follow the same path, but they don't yet have the necessary systems. Cisco got a step ahead by developing the system internally, and that's why we are able to use it already. We are the obvious partners for Cisco since we are better equipped than our competitors, especially in e-commerce where we invested very early on.
A conversation with René-Martin Simonnet
Michael E. Marks has been chairman of the board of Flextronics International since July 1993 and chief executive officer since 1994. In five years, Flextronics has gone from 22nd to fourth in the world. A graduate of Harvard Business School, M. Marks was chairman of Metcal, a manufacturer of precision heating instruments. He joined Flextronics in December 1991.
Flextronic bursts onto the PCB scene
In just a few months, Flextronics has burst into the world's top ten manufacturers of PCBs. In addition to local production units in some of its plants, the group already owned Hong Kong-based Astron, which produces PCBs in two plants in the Chinese town of Doumen. Astron's turnover grew from $80 million in 1998 to $120 million in 1999. Last November, Flextronics acquired a majority shareholding in the DII group, whose six Multek plants had a total turnover of $440 million in 1999. Flextronics may, thus, be considered to have sold $560 million of PCBs in 1999.
Geographical distribution of Flextronics' turnover 1993 1999 2000 $89 million $4000 million N.A. Asia 100 % Asia 24 % Asia 20 % America 35 % America 37 % Europe 41 % Europe 43 % 22nd worldwide 4th worldwide N.A.
For 1999 and 2000: estimates