Flextronics: Developing in Emerging Markets (India and Ukraine)

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This article is an overview of a presentation given at the European Supply Chain Convention in October 2006. It looks at Flextronics' EMS business bases in expanding markets and growing regions, like <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Ukraine and India. The presentation centered around the idea of building business in new markets.

Flextronics has undertaken expansion in the Ukraine and India; both expansions are well on schedule and starting to book business. It is critical for Flextronics to be prepared for the demand that will come to these factories. A key step in this is the implementation and adaptation of the local supply network. Our strategy is to accelerate our growth and enhance profitability by using our market-focused expertise and capabilities and our global economies of scale to offer the most competitive vertically-integrated global supply chain services to our customers. Our purpose is to create value that increases customer competitiveness.

Before going further, it is important to note that Flextronics is one of the world's largest EMS providers, with revenues from continuing operations of $15.3 billion in fiscal year 2006. Our fiscal year end is March 31. Flextronics has established an extensive network of manufacturing facilities in the world's major electronics markets (Asia, Europe and the Americas) in order to serve the growing outsourcing needs of both multinational and regional OEMs. In fiscal year 2006, our net sales in the Americas, Europe, and Asia represented 22%, 22% and 56% of our total net sales, respectively.

Flextronics provides a full range of vertically-integrated global supply chain services through which we design, build, and ship a complete packaged product for our OEM customers. Our OEM customers leverage our services to meet their requirements throughout their products' entire product life cycle. Our services include:

* Printed Circuit Board and Flexible Circuit Fabrication

* Systems Assembly and Manufacturing

* Logistics

* After-Sales Services

* Design and Engineering Services

* Original Design Manufacturing (ODM) Services

* Components Design and Manufacturing.

We believe that these vertically-integrated capabilities provide us with a competitive advantage in the market for designing and manufacturing electronic products for leading multinational and regional OEMs. Through these services and capabilities, we simplify the global product development process and provide meaningful time and cost savings for our customers.

Flextronics customers include industry leaders such as Casio, Dell, Ericsson, Hewlett-

Packard, Kyocera, Microsoft, Motorola, Nortel, Sony-Ericsson, and Xerox. This of course is not a complete list.

Flextronics is located all over the world. Currently there are over 100,000 employees in Flextronics. Our single largest facility is located outside of ZhuhaiCity in the town of Doumen, China (located on the Pearl River delta). In Doumen alone, there are over 27,000 employees. Over the next few years we are planning expansions in India, China, Malaysia and Ukraine. We already have substantial operations in Mexico, Canada, India, Malaysia, Poland, and Hungary. We will soon add production capacity in the Ukraine, along with expansion in India.

Currently Flextronics is second largest EMS provider in terms of revenue.

Electronics Manufacturing Services Industry

EMS continues to change and migrate where and when it is needed. The overall industry is still showing strong double-digit growth, with no signs of it letting up. With the emergence of the Taiwan supply base, the competition and pressure has been taken to a new level. This is great news for the customer base and tough news for the supply base. The pricing pressures that are present in the industry today are some of the toughest-margin businesses in the world. Companies continue to fight to provide value in the market and will continue to fight to win the new business opportunities that become available everyday.

Organic growth in the business is coming in two forms. One is from the OEM companies that are just now venturing into the EMS industry. There are hundreds of companies out there that are available in this area. The basic form of this is the manufacturing, then the sourcing, and finally the full supply chain control. Over the past few years there have been more and more deals signed with OEMs that have driven to a full supply chain market. Once the leverage is gained, the benefit shows itself quick to the OEMs. Small companies that could not compete on price against their competitors, can now gain leverage with EMS volume to regain competitiveness. The trend is continuing and will continue to grow.

The second part of growth is coming from ODM-based business. Many companies are new to this model, but are experimenting with having design houses or integrated design houses, like Flextronics, which brings a product from inception to end of life utilizing the full power and resource of the comany. The markets that are taking the most advantage of this manufacturing scenario are mobile, computing and digital consumer goods. The talents and the skills of the EMS players in this space are getting stronger every month and year. Leveraging design, supply chain control and operational excellence across multiple customers will allow the product to get stronger and more competitive. A company that can provide the full scale of this will see considerable growth as the EMS business evolves into a hybrid of design and manufacturing.

With stronger business models come greater challenges. A major challenge for the EMS industry is lack of consistency. In many cases customers want the EMS company to do and run processes the same way they did, so that the change and the transition is easy. The problem comes when the EMS agrees to this. Now all of a sudden their processes are intertwined with the old standard processes; key information points or leverage points are missed, thus creating a challenge in implementation and operational improvement--both of which are promised to the perspective customer. In a tightly constrained and commoditized market, the more consistency that can be used the better the quality and the better the price.

If the EMS industry would push back more and the customers would release more, the efficiency and effectiveness would be much stronger. These are obstacles that we all have to work around. Change is not easy in moving business from the home company to the EMS company. The more communication and commitment that the EMS and the customer have during the initial process, the stronger the relationship and the longer the relationship will be.

Emerging Markets

As manufacturing becomes more and more global there are fewer and fewer areas for expansion. Many think that there is still a tremendous amount of space and capacity available in China. However, some companies want other opportunities. Without a doubt, the most cost competitive and capacity-driven manufacturing in the world, from a general point of view, is still located in China. The question is though; how do I get the best for each dollar with the least amount of risk? Part of that answer comes from growing and moving into emerging markets. Flextronics has made the decision to move into two of these markets: India and Ukraine.

The drive behind a decision to move into new markets comes from many places, but the most common denominators that we see in Flextronics (and in the industries that we compete in) are narrowed down to three:

1. Customer request. As customers grow and need new retail channels or customers, it puts an impact back into the industry. This solution is most closely shown in the expansion that is going on in India. With a population over 1 billion people and growing, India is a prime market for expansion. Low-cost goods and necessity products will be the first to grow and bloom in India. The GDP is still very small and needs time to expand, but there are some products that can bring a good return if the supply chain is balanced correctly.

One driver behind this is the ability to get local materials. Over time the material has to have a cost-effective supply chain coming into India or inside of India for this to make sense. India has a strong base around mechanical and electro mechanical devices, but still has some major gaps in the electronics space. Since these parts are small and normally move from region to region in the air, it is an easier problem to solve in terms of cost. Over time India will become a very competitive market for Europe and for local, but in my opinion will never be able to compete with China.

2. Pricing. In markets that are constrained by the employee base and a demand for higher wages, companies must search for regional markets, for certain goods, that can compete with China but provide more localized support. One area where this is very real is with Western Europe and Eastern Europe. There is a strong workforce available in Eastern Europe that can support certain products for consumption throughout Western Europe. In goods such as high-end computers, servers, infrastructure equipment and industrial equipment, where the prices are not as tight as with consumer goods, this is a very viable option.

As the old Russian block nations start to grow and create an economic environment of their own, the benefits will be leveraged throughout Europe. Companies should weigh their options on expanding in Eastern Europe versus expanding in Asia. The skill of the workforce is strong. The infrastructure and governmental control are the largest risk in the expansion to Ukraine. Similar to India, there will be challenges with electronic parts and specialty parts. Mechanical and electro-mechanical parts will be available with the right support on the supply chain for improvement.

3. Location.

This is similar to pricing in many cases and plays a role in how companies decide to go into emerging markets. Ukraine is a prime location for manufacturing because of the labor force and the influence that they have played on industrialization for Russia prior to the break up of the USSR. The substructure of roads and rail are fairly strong in the Ukraine. In addition there is a good base of raw material (metal) established that will allow them to compete with nations that do not have fundamental base materials. As these markets grow, a small advantage such as location or supply base (basic) will become factors that will drive this country to be a productive member of manufacturing in Europe.

For Flextronics, the closeness to our infrastructure in Hungary and the impact where we can use resources to help manage the integration and development of the supply network were key decisions in how we moved forward on our decision. In addition to Flextronics there are many examples of OEM based companies that have made similar decisions.

Moving Forward

Flextronics is dedicated to growing business in many markets and areas in order for us to serve and bring value to our customers. If we were to make decisions based solely on others going there or it is "the thing to do," then we would not continue to be successful in our industry and to be a leader in bringing the right impact to our customers. Emerging markets will continue to pop up in corners of the world, in each case Flextronics will take careful consideration to move or not move into this market. Once we have made a decision to move, then it is critical for our company to build and sustain the right supply base to make this location successful. In all of these cases, we take into careful consideration what the supply chain is like and how difficult it may be to develop or grow it internally.

Decisions are critical in our business, and failures in these decisions can set companies back years in profits and performance; we do not have the luxury to make mistakes in these arenas.

In addition to these factors and this consideration, it is key for Flextronics to take into account the cultural, political and environmental situation in the emerging countries.

These are key factors in how a company can fail after the decision is already made. Expanding in a market where the EMS or the OEM does not fully embrace the culture and understand the culture can create some significant challenges to success.

In closing, the final stance from EMS and from Flextronics is growth. The outlook is strong and will produce more business opportunities for years to come. Flextronics will position itself to be successful and to continue to drive the industry in a positive direction. The impact that emerging markets will bring to this is critical. These markets provide Flextronics and other companies with options to differentiate in a particular market or region. In all of the aspects of what we are doing and when we are doing it, the one key aspect that we have to stand behind is the value that we bring to ourselves and to our customers. We are committed to growth that is profitable.


George O'Kelley - Flextronics Inc., Vice President of Global Procurement

Mr. O'Kelley joined Flextronics in May of 2003 as Director of Procurement Systems. His role was to design systems and processes to further streamline the control of the supply chain within the Flextronics structure. Mr. O'Kelley was promoted to VP to support mechanical commodities world wide in January of 2005. His current role is to manage the global supply base for mechanical commodities for Flextronics Inc.

Prior to joining Flextronics Mr. O'Kelley was Director of Logistics, Supply Chain Solutions for Nokia Mobile Phones. From 2001 to 2003, Mr. O'Kelley managed the interaction with Nokia factories, customers and suppliers to ensure the strongest and tightest supply chain possible. From 1999 to 2001 Mr. O'Kelley managed the Americas Nokia Accessory business as General Manager of Accessory Operations.

Prior to Nokia, Mr. O'Kelley worked at Texas Instruments as Manufacturing Engineer in various roles of operations and procurement. Mr. O'Kelley worked for Texas Instruments from 1995 to 1999. Prior to Texas Instruments Mr. O'Kelley spent 4 years in the United States Armed Forces as a Field Artillery Officer. Mr. O'Kelley graduated from TexasA&MUniversity with a Bachelor's degree in Building Construction in 1990 and also holds an MBA from the University of Dallas. Mr. O'Kelley is married with two children and currently living in Hong Kong

This paper was presented on October 5, 2006, at the European Supply Chain Convention and is published here with the kind permission of EIPC.



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