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Flextronics-Lucent Stalemate Could Herald Layoffs by U.S. Firms

4 MINS READJun 29, 2001 | 05:00 GMT
Summary

Singapore-based Flextronics International Ltd. and U.S.-based Lucent Technologies Inc. are at an impasse over the sale of two manufacturing facilities in the United States. The failure to reach an agreement comes at a time when contract manufacturers are showing less interest in U.S. facilities while expanding operations in Asia. This development will lead to further downsizing and layoffs by major U.S. electronics companies.

Analysis

A recent Wall Street Journal article spurred rumors that U.S.-based Lucent Technologies Inc. failed to make a deal with Singapore-based Flextronics International Ltd. on the sale of two manufacturing facilities, ranging between $600 million and $900 million, in the midwestern United States.

The report led to a 9.8 percent drop in Lucent's stock on June 14, despite rumblings the facilities will remain for other bidders. Selling the two facilities is critical for Lucent, as the company is trying to raise $2 billion to aid the spin-off of a subsidiary by September.

Flextronics' withdrawal from discussions with Lucent would indicate the severe devaluation of U.S. electronics manufacturing assets. Manufacturing in Japan and China will become increasingly attractive as buyers abandon opportunities in the United States. The shift to Asia will force many U.S. technology companies to conduct further downsizing, such as in recent layoffs involving Intel, Dell and Motorola.

Companies like Flextronics are contract manufacturers. They purchase facilities in order to reproduce the same equipment as the original manufacturer, often at cheaper cost. Original manufacturers such as Dell, Compaq and Sony are increasingly getting out of manufacturing by outsourcing to companies such as Flextronics that build their products but don't put a brand label on them.

The global downturn in sales for computers and peripherals gives contract manufacturers an opportunity as they take over facilities no longer profitable for original manufacturers. Contract manufacturers once touted themselves as recession-proof.

A few years ago, acquiring any facilities, despite their strategic value, was crucial simply to gain name-recognition. But due to a new strategy by contract manufacturers, computer makers in the United States are losing leverage with such companies and are unable to unload many of their excess products.

Now, four companies are in fierce competition to reach margins above 3 percent: Celestica Inc., Solectron Corp., Sanmina Corp. and Flextronics. These companies are refocusing on Asian markets and divesting earlier acquisitions in the United States, South America and southeastern Europe.

For instance, Flextronics recently suspended construction of facilities in Brazil due to a demand shortage, while Solectron has also shut facilities or reduced full-time employees in the United States, Mexico and Romania.

Contract manufacturers are now charting consumer demand for products and targeting acquisitions in Asia. The region, which until only recently was closed to foreign contract manufacturers, is gaining stride as the key market for mobile computing and handset sales.

China will have 45 million subscribers for cell phone service this year, technology journal Silicon Strategies reported June 15. At the same time, growth in the U.S. subscriber base, at 100 million last year, is beginning to flatten. The technology forecaster Strategis Group also reported that Europe's subscriber base will flatten over the next few years, falling to 4.8 percent growth by 2008.

Contract manufacturers are now turning to Asia. Celestica, which BusinessWeek rated June 18 by as the top-performing technology company in the world, is seeking to expand its revenues in Asia from the current 11 percent of its total. Solectron and Flextronics are early leaders in Japan, and both show a strong interest in China.

Celestica's acquisition, currently under way, of Omni Industries, Singapore's second-largest contract manufacturer, is a critical victory that will give the company access to the Asian market and bring it into the circle of early leaders in the region. From the sale, Celestica will receive facilities in Indonesia, Singapore, China, Thailand and Malaysia. According to technology analyst IDEAadvisor, Celestica's acquisition will bring its revenues from Asia to one-quarter of worldwide operations.

By comparison, Flextronics' near-acquisition of Lucent facilities in the United States could have become a liability for the company. As contract manufacturers make strides in Asia, they will bypass opportunities for acquiring manufacturing facilities in the United States. This will cause U.S. electronics manufacturers to downsize thousands of permanent staff for failure to sell off loss-making facilities.

In Asia, specifically China and Japan, electronics manufacturers will downsize comparatively fewer line-production staff than in the United States. Asia's facilities will remain marketable during the global downturn in sales for computer electronics and peripherals, while U.S. facilities will not.

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