Flexing Muscle In The Marketplace

Updated: Aug 31 2004, 05:30am hrs
A decade ago Flextronics was a $93 million company with two factories in Singapore. Today, sales top $17 billion and it has factories across 32 countries. It is the worlds largest electronics contract manufacturer. Nothing that it manufactures is sold under its own brand. All of it is manufactured for other companies, outsourced to Flextronics because it is cheaper to do so than to manufacture themselves. In a sense this is very similar to why large global companies contract out work to Indias IT services companies because they do the same work efficiently and at a lower cost.

Some years ago, analysts were debating on the limits to growth that such a model placed on companies like Wipro and Infosys. There is just this much they can grow if they dont have a brand, they argued. The Flextronics experience suggests that Indian IT companies are fine doing what they are doing creating cost-effective solutions for others. There is a huge market out there doing just that without getting into the business of selling branded products.

Flextronics CEO Mark Marks thinks that the only brand worth having is that of his company. Some years ago my customers werent comfortable saying their products were made by us. Today, they boast of the Flextronics connection, he says. He certainly doesnt want to go the BenQ way. The manufacturer of cell phones for Motorola now sells phones under its own brand. Not a good idea if you want to remain in the contract manufacturing business, says Marks, as he predicts that Motorola will snap business ties with BenQ.

Marks is the man who steered Flextronics from under a billion dollars in 1993 to $17 billion today. He is also the man responsible for the other big outsourcing trend in the tech industry Electronics Manufacturing Servi-ces. EMS is today a $100 billion business and Flextronics has the single largest share. Essentially, EMS is about making electronic equipment that is then branded and sold by others. Marks makes all of Ericssons mobile handsets, computers for Dell and the XBox for Microsoft. He signed his biggest deal about a month ago with Canadian telecom giant Nortel. The deal, expected to be worth more than $2 billion in annual revenues, gives all of Nortels telecom manufacturing and supply chain management to Flextronics.

Logistics and supply chain solutions, more than manufacturing, have been the biggest reasons for customers to return to Marks. Now, hes moved further up the chain, into original design manufacturing. And thats where India comes in. Today, Flextronics employs a 100,000 people in 32 countries. But half his employees are in China as its the most efficient place to manufacture in. But he says India could become as important as China in his global plans. Indias advantage in software and design make as a compelling an argument to invest in the country as Chinas manufacturing advantage made it a place to build factories in, he told me last week in between deals.

Flextronics is the worlds leading contract manufacturer of electonics
Now its looking at original design manufacturing, to Indias advantage
Of course I didnt know it then. He had acquired a controlling stake in Hughes Software Services for $300 million a couple of months before I met him. He followed it up with the smaller buyout of FutureSoft a couple of days after the meeting.

Marks sees India as a major design centre in the next five years. He expects the design business to reach a billion dollars within a year and to touch $4 billion dollars within five. For perspective, Infosys notched up a billion dollars in sales this year, of course at much better margins.

What makes design attractive are the margins. Marks traditional businesses give him margins of just 4%. Design will return at least 7%. So design work could yield him half his profits even if it comprised only a third of his revenues.

As the Flextronics story shows, brands arent the only way to go. Thats a heartening lesson for Indian outsourcing companies. But there is another lesson which they dont seem to have learnt as well that of acquisition. In his early years at Flextronics, Marks bought over companies at the rate of one every 45 days to notch up 78 manufacturing acquisitions in five years. Thats the path he seems to be following with software firms too. Last year he bought Microcell, a cell phone designer for $80 million. This year he spent $300 million on Hughes Software. And he says that he looks at about 50 companies a year, picking up perhaps three or four of them!

The author is executive editor of CNBC-TV18. These are his personal views