Flextronics International Ltd.

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Flextronics International Ltd.

11 Ubi Road, #07-01/02
Meiban Industrial Building
Singapore 408723
Telephone: +65 844 3366
Fax: +65 448 6040
Web site: http://www.flextronics.com

Public Company
Incorporated: 1969 as Flextronics Inc.
Employees: 70,000
Sales: $6.4 billion (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: FLEX
NAIC: 334413 Semiconductor and Related Device Manufacturing; 334418 Printed Circuit Assembly Manufacturing; 541420 Industrial Design Services

Flextronics International Ltd. claims to be the second largest electronic manufacturing services (EMS) provider in the world in terms of revenue, with estimated fiscal 2001 revenue of between $10 and $12 billion, behind industry leader Solectron Corp., with projected revenue of $15 billion. Through global expansion the company has more than 16 million square feet of facility space and some 70,000 employees worldwide. Flextronics expanded significantly by acquiring other manufacturers while taking advantage of the desire of original equipment manufacturers (OEMs) to outsource manufacturing and sell off their manufacturing facilities. In addition to manufacturing, Flextronics offers a full range of design services that enable it to create, test, and manufacture a product based on a customer’s concept. Flextronics serves the manufacturing needs of customers in telecommunications, networking, computers, consumer electronics, and related industries.

Developing from “Board Stuffer” to Contract Manufacturer: 1969-92

Flextronics Inc. was founded in 1969 by Joe McKenzie to provide overflow manufacturing services to Silicon Valley companies that needed more printed circuit boards than they could produce in-house. The companies sent their overflow work to Flextronics, where McKenzie and his wife hand-soldered all the parts onto the boards and then returned the finished goods. This type of work was known as “board stuffing.”

The business did well in the 1970s, and in 1980 Flextronics was sold to Bob Todd, Joe Sullivan, and Jack Watts. Todd became CEO and transformed the company from a board stuffer to a contract manufacturing firm. The company pioneered automated manufacturing techniques to reduce labor costs associated with board assembly. It introduced board-level testing to insure quality and in 1981 became the first American manufacturer to go offshore by setting up a manufacturing facility in Singapore.

Flextronics expanded its services in the 1980s and began delivering turnkey solutions in the middle of the decade. Based on customer specifications, Flextronics would handle everything from buying parts to manufacturing. The company also began offering computer-aided design (CAD) services, designing and blueprinting an entire printed circuit board based on a customer’s idea. In 1987 the company was able to go public, but it was just three weeks before the stock market crashed.

Flextronics expanded to produce working, shippable products in the late 1980s. Its disk and tape subsystems were used in Sun Microsystems workstations. The Hayes modem was also a product that Flextronics helped assemble. The company built a global manufacturing base with factories located throughout Asia. Unfortunately, these factories relied on a high-volume U.S. market that virtually crashed during the economic recession of the early 1990s. As profits disappeared and losses mounted, survival of the company became paramount.

Since the Asian operations were still profitable, one option would have been to scale back or close the company’s U.S. facilities. The high cost of closing a manufacturing facility, however, would have bankrupted the company. Instead, the Asian plants were spun off as a separate company and taken private in 1990 with the help of outside funding. The U.S. plants were subsequently closed.

Growth Through Acquisitions: 1993-98

The new, private company—renamed Flextronics International Ltd.—had its headquarters in Singapore. Michael Marks became chairman in July 1993 and CEO in January 1994. The company had its initial public offering (IPO) in 1994, becoming a publicly traded company for the second time. Marks’ s strategy was to rebuild the company’s U.S. presence. From 1992 to 1995 revenues nearly tripled to $237 million.

From 1993 to 1998, when Flextronics’ revenues surpassed $1 billion (later restated to $2.3 billion to reflect acquistions), the company completed more than 12 acquisitions. It built a global infrastructure for high-volume manufacturing, expanded its purchasing and engineering capabilities, and increased its workforce from 3,000 to more than 13,000. At the core of Flextronics’ international growth was its industrial park model. Located in low-cost regions of each major geographic area—including Mexico, Brazil, Hungary, China, and later in Poland and the Czech Republic—Flextronics’ industrial parks brought suppliers onsite to decrease logistics costs, increase time-to-market, decrease shipping costs, and improve communication and quality. The co-location of manufacturing operations and suppliers in the industrial parks gave Flextronics greater operational flexibility and responsiveness to customer needs.

In 1994 Flextronics acquired nChip, which specialized in semiconductor packaging and multichip modules. In 1995 Microsoft picked Flextronics as its new turnkey contract manufacturer for its mouse. Among the products being discussed were wallet-size PCs and intelligent home devices linked to computers and other hardware.

In December 1996 Flextronics closed its contract electronic manufacturing plant in Richardson, Texas. The closure was part of the company’s strategy to shutter its smaller plants in order to create larger campuses, or industrial parks, at other locations. Workers at the plant were offered jobs at Flextronics’ San Jose, California facility. During the same year Flextronics acquired two companies in Hong Kong—the Astron Group and FICO Plastics Ltd.—and the Ericsson Business Networks production facility in Karlskrona, Sweden, which was finalized in April 1997.

In 1997 Flextronics completed a 150,000-square-foot expansion of its manufacturing and R&D facilities in San Jose, California, where its U.S. headquarters was located, giving it a total of 280,000 square feet in two buildings. Toward the end of the year a secondary stock offering of 1.5 million shares was expected to raise about $56 million. The company also expanded its global facilities, including an expansion of its plant in China from 210,000 square feet to 450,000 square feet, and built a new plant in Guadalajara, Mexico. By the end of 1997 Flextronics was ranked as the fifth largest contract manufacturer in the United States, up from tenth in 1995.

To better serve the wireless market, Flextronics and Dow Chemical Co. formed a joint venture called Intarsia Corp.—with Dow holding the majority interest—to produce thin-film integrated passive components. Flextronics expected to make use of Intarsia’s capabilities to build and develop products for wireless communications OEMs.

Between March 1997 and mid-1998 Flextronics acquired seven manufacturing-related operations in Brazil, Hungary, Italy, Sweden, and the United States. As a result of these acquisitions, Flextronics’ revenue more than doubled from $640 million in fiscal 1997 ending March 31 (subsequently restated to $1.5 billion), to $1.34 billion in fiscal 1998 (subsequently restated to $2.3 billion). Net income nearly doubled from $11.6 million (later restated to $43.6 million) to $22.4 million (later restated to $77.7 million).

More Acquisitions, Partnerships: 1998-2000

In 1998 Flextronics introduced a worldwide network of Product Introduction Centers (PICs), which were facilities that designed, prototyped, tested, and launched new products, thereby shortening critical time-to-market. Among the products designed and built by Flextronics were 3Com’s Palm Pilot and the Microsoft mouse.

Hewlett-Packard selected Flextronics to be a primary manufacturer in Europe for its inkjet printers. Flextronics would supply printed circuit board assemblies and complete box assembly for the printers, which would be manufactured at the company’s industrial park in Hungary.

By mid-1998 Flextronics had 2.6 million square feet of manufacturing space in 26 operation centers in Europe, the Americas, and Asia. Recent acquisitions included contract manufacturers Neutronics Holdings A.G., Conexao Informatica Ltd. of Brazil, and Altatron Inc. It also acquired DTM Products Inc., which produced injection molded plastics, and Energipilot A.B., which provided cables and engineering services.

Company Perspectives:

Headquartered in Singapore, Flextronics International is a leading provider of flexibility and speed in Electronics Manufacturing Services (EMS) to Original Equipment Manufacturers (OEMs) in the fast-growth communications, networking, computer, medical and consumer markets. Flextronics is a major global operating company with design, engineering and manufacturing operations in 28 countries and four continents. This global presence allows for manufacturing excellence through a network of global facilities situated in key markets that in turn provide its customers with the resources, technology and capacity to maximize productivity. Flextronics’ ability to provide design and manufacturing services, coordinate innovative product design, provide a full spectrum of specialized services and IT [information technology] expertise, in conjunction with their global presence, establishes Flextronics as a top-tier EMS provider.

Flextronics had aggressively gained manufacturing contracts among telecommunications and networking OEMs, including Ericsson A.B., Motorola Inc., Alcatel Alsthom, Bay Networks Inc., and Cisco Systems Inc. Telecommunications and networking products accounted for 46 percent of the company’s revenue, followed by consumer goods (29 percent), computer products (12 percent), medical products (four percent), and others (nine percent). Having gained outsourcing contracts from computer OEMs Hewlett-Packard Co., Compaq Computer, and Intel, Flextronics expected computer products to account for 25 percent of its revenue in fiscal 1999. For the fiscal year ending March 31, 1999, Flextronics had revenue of $2.2 billion and net income of $60.9 million.

After letting up on acquisitions to consolidate its holdings, Flextronics announced in December 1998 that it would acquire the ABB Automation Products manufacturing plant in Vasteras, Sweden, which produced printed circuit boards and other electronic components. As a result, ABB would become a Flextronics customer, purchasing output from the plant’s new owner.

In April 1999 Flextronics entered into a service partnership with Corio Inc., an application service provider. Under the agreement, Flextronics would host and maintain application software on its servers, while Corio would implement the software for their joint clients. This would enable clients to rent, rather than purchase, expensive enterprise resource planning (ERP) systems and help them meet capacity demands without big investments.

Also in April 1999 Flextronics announced that it would purchase a second manufacturing facility from Ericsson, this one located in Visby, Sweden. The purchase was part of a trend among contract manufacturers to acquire the manufacturing facilities of OEMs. Upon completion of the purchase Flextronics also announced a new global supply agreement with Ericsson. In June Flextronics strengthened its presence in Western Europe by acquiring Finnish telecommunications contract manufacturer Kyrel EMS Oyj for approximately $100 million in stock. Flextronics strengthened its relationship with Compaq when it won a new order to supply Compaq with printed circuit board assemblies for PC servers.

In October the company made a secondary stock offering of five million shares. Around this time it also expanded its manufacturing operations in Richardson, Texas, by leasing an additional 109,000 square feet, primarily to serve customer Lucent Technologies Inc. Then, in November 1999, Flextronics announced that it would purchase The Dii Group Inc. of Niwot, Colorado, for $2.4 billion in stock. It was the largest acquisition among contract manufacturers to date.

In January 2000 Flextronics was ranked third on Industry Week’s list of “100 Best-Managed Companies.” The company continued to acquire manufacturing facilities from OEMs, who were willing to divest them to concentrate on their core competencies. The acquisitions positively affected Flextronics’ bottom line, as it reported its best quarter ever for the fiscal quarter ending December 31, 1999, when it had a 103 percent increase in quarterly revenue to $1.2 billion and a 117 percent increase in quarterly net income to $34.3 million. In January 2000 it acquired facilities in Rochester, New Hampshire, and Limerick, Ireland, from networking solutions provider Cabletron Systems for about $100 million.

In a move to increase its design capabilities, Flextronics appointed Nicholas Brathwaite to the new post of senior vice-president and chief technology officer. Brathwaite came to Flextronics in 1996 when the company acquired nChip, and he led the development of Flextronics’ Product Introduction Centers (PICs). Flextronics planned to establish two or three more PICs in 2000, noting that more than half of the company’s revenue was from products impacted by the centers.

In March 2000 Flextronics added more than 600,000 square feet of manufacturing space on the East Coast with the acquisition of four companies based in North Carolina’s Research Triangle: Circuit Board Assemblers, Newport Technology Inc., EMC International, and Summit Manufacturing.

Flextronics also joined with Cadence Design Systems Inc. and Hewlett-Packard Co. to establish SpinCircuit Inc., an e-commerce company. SpinCircuit was an Internet gateway that would link printed circuit board (PCB) design engineers directly to suppliers of more than two million parts through its online catalog. SpinCircuit was intended to cut costs associated with PCB development and the selection of electronic components. Later in the year Flextronics and Cisco Systems partnered to integrate their supply chains via the Internet.

For fiscal 2000 ending March 31, Flextronics reported revenue of $4.3 billion (later restated to $6.4 billion), a 93 percent increase over the previous year. Net income nearly doubled to $120.9 million (later restated to $143.2 billion).

Flextronics made several acquisitions during 2000, with no end in sight. The largest was The Dii Group, completed in April 2000 for $2.4 billion, which gave Flextronics a manufacturing presence in Ireland, Germany, and the Czech Republic as well as additional PCB assembly capacity in China, Malaysia, Mexico, Austria, and the United States. Other acquisitions included Uniskor Ltd., the largest and fastest-growing EMS in Israel, for $20 million; enclosure maker Palo Alto Products International; Chicago-based Chatham Technologies Inc. for $590 million; Singapore-based JIT Holdings for $640 million; and plastics supplier Li Xin Industries Ltd. for about $69 million.

Key Dates:

1969:: Company is founded in Silicon Valley as Flextronics Inc.
1980:: Company is sold to new owners.
1981:: Flextronics becomes the first American manufacturer to go offshore by setting up a manufacturing facility in Singapore.
1987:: Flextronics goes public.
1990:: The company goes private in a leveraged buyout and is reorganized as Flextronics International Ltd., with Singapore as its new base.
1994:: Flextronics goes public for the second time.
1998:: Annual revenue surpasses $1 billion in fiscal 1998 ending March 31, 1998.

Major outsourcing contracts won in 2000 included a five-year agreement with Motorola Inc. with an estimated value of $30 billion in revenue. Motorola would outsource as much as 40 percent of its manufacturing operations affecting cell phones, two-way radios, set-top boxes, and other broadband cable products. Anticipating that consumer demand could fluctuate unpredictably, Motorola sought the greater flexibility offered by outsourcing the development and manufacture of communications-related products. As part of the agreement, Motorola made a $100 million equity investment in Flextronics that was convertible over time into 11 million shares of Flextronics stock, representing a three to five percent stake in the company.

Flextronics also continued to strengthen its manufacturing capabilities in Europe. It announced plans for an industrial park in Gdansk, Poland. For fiscal 1999 Europe accounted for 40 percent of Flextronics’ revenue. The company’s new Multek unit, acquired from The Dii Group, gained a 60,000-square-foot PCB manufacturing facility in Guadalajara, Mexico, with the purchase of Cumex Electronics S.A. de C.V.

In August 2000 Siemens signed an outsourcing agreement with Flextronics to build 33 million mobile telephones for Siemens by the end of 2003. Later in the year Flextronics purchased the Siemens operations in L’Aquila, Italy.

Around this time Flextronics acquired Chicago-based Chatham Technologies Inc. for about $590 million in stock. Chatham was a leading provider of integrated electronic packaging systems to the communications industry. Later in the year Flextronics would form a new enclosures business unit.

Flextronics’ aggressive acquisitions strategy began to affect the company’s bottom line in fiscal 2001. For the first quarter ending June 30, 2000, the company reported a $368.9 million loss. Without amortization and one-time charges, though, the company would have reported a $71.7 million profit.

In the meantime, Flextronics was anticipating aggressive growth over the next five years. According to Business Week, Chairman Michael Marks predicted Flextronics’ revenue could grow to $50 billion in five years. Leading contract manufacturer Solectron Corp. was already on track to reach the $20 billion mark within a year. The electronic contract manufacturing industry was expected to grow at a 20 percent annual rate, and in the past four years the industry had more than doubled to $88 billion annually. Fueling this growth was the willingness of OEMs not only to outsource manufacturing, but also to sell their manufacturing facilities to contract manufacturers to achieve greater flexibility in meeting consumer demand.