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Academic Group 5

Flextronics International Ltd.


Abhinav Pandey Abhishek Kumar Rahul Hans Sushant Mittal Zainul Khan Luv Rustagi
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones

Founded 1969 by
- Mr. & Mrs. Joe McKenzie
- Overflow manufacturing
services

In 1980s,
sold the company to
private investors
By 1989,
$202 million revenues

By 2002
$13 billion revenue
78,000 employees
29 countries

Board Stuffer
- Labor intensive
- Higher Margins
Contract
Manufacturer
- Turnkey Solutions
Global
Corporation
Full box Assembly
- of the finished electronics
system
Phone 4
- First to be
designed and
manufactured
- Approached
Motorola,
Nokia, Sony
Ericsson to buy
FIND THE
RIGHT
STRATEGY!!!
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Electronics Manufacturing Services (EMS) Industry
Began by performing manufacturing task i.e. board stuffing
By 1990s, expanded capabilities to handle assembly, testing & packaging of
final product
VIRTUAL
FACTORIES for
OEMs
WHY OEMs OUTSOURCE TO EMS PROVIDERS ?
focus on Core
Competencies
Strong in product design and marketing, hence product differentiation
Outsourcing production enabled EMS firms to be more efficient
benefit from
Economies of
Scale
Serving multiple OEMs enabled EMS firms to leverage fixed asset more efficiently
Take advantage in purchase of raw materials and components
broad
Geographic
Presence
Manufacturing facilities spread across multiple countries & continents
EMS firms could reduce risk faced due to concentration in single region
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Rapid Growth in the 90s for EMS industry with much of it coming through Acquisitions
39.1%
67.6%
GLOBAL OUTSOURCING TRENDS
$-
$50,000.00
$100,000.00
$150,000.00
$200,000.00
Outsourced
In-house
Fig-1: Communications Market (including handsets)
$-
$100,000.00
$200,000.00
$300,000.00
Outsourced
In-house
Fig-2: Computer Electronics Market
47.5%
68.6%
THE ACQUISTION STORY
Purchase of under-utilized mfg. assets from OEMs
Stipulated condition by the OEM before awarding
outsourcing contract to the EMS firm
Acquisitions were generally made in the areas of
manufacturing or product design
Such acquisitions helped EMS-
Increase existing scale of manufacturing
Enlarge scope of capabilities
Most acquisitions involved companies from countries
like China with low labor costs (75 % cheaper than US
or Europe)
Large no of Acquisitions by Flextronics from 1997-
2002 with majority for their manufacturing
capabilities
6 major EMS companies controlled the entire market
[Flextronics, SCI systems, Celestica, Solectron, Jabil
circuit etc.]
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
With the growth of the EMS industry, 3 major Business Segments emerged
CONTRACT
MANUFACTURING (CM)
Traditional & most common
form of business in the early
90s
EMS firm received a completed
product design from the OEM
EMS firm focused only on
manufacturing, assembly and
sometimes packaging &
distribution of final goods
Low margin model
Manufacturing was done using
component suppliers specified
by OEM;
Only manufacturing by EMS
firm; model referred to as
BUILD TO PRINT
CONTRACT DESIGN &
MANUFACTURING (CDM)
Margins began to decline for
CM in mid-90s
EMS firms migrated to a more
integrated CDM structure
Additional services like
product design, SCM and
logistic support were provided
Designing done by EMS firm as
per specifications by OEM; IP
rights remained solely with
OEM
EMS firm decided the
component supplier & not the
OEM line in CM model
Better purchasing power
with preferred vendors
ORIGINAL DESIGN &
MANUFACTURING (ODM)
Increased competition from
ODMs; mostly from Asia
ODM would initiate a new
design on its own & shop the
finished product to the OEM
ODMs responsible for
developing the necessary IP
and licensing
Colocation of design &
manufacturing capabilities gave
a cost advantage to the ODMs
Despite colocation, ODMs
couldnt match low mfg. cost of
CM firms like Flextronics
ODMs often sub-contracted
mfg. to CM firms
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Wireless handset was a new market altogether with 2 major competing technologies
GSM vs CDMA
Global System for
Mobile communications
(GSM)

Benefitted from a head
start on CDMA

By 2001, stronghold over
western Europe with 450
mil users

Offered international
roaming throughout
Europe

Mature technology with a
large installed base; more
reliable than CDMA
Code Division Multiple
Access (CDMA)


Popular in North America
& Asia with 82 mil users

Faced tough competition
from GSM in its core
markets

Greater security in
transmission of cellular
data

Lower Power
requirements than
similar GSM models
WIRELESS MARKET OVERVIEW
Included cellular phones (Digital &
Analog), Pagers, Personal communication
services (PCS) & other electronic devices
Cellular & PCS contributed vast majority to
the sales
Global market for wireless in 2002 was
estimated at $60 bil
Motorola & Nokia dominated market with >
50 % share
Healthy Operating Margins through
differentiation in design & marketing
Declining Average Selling Prices (ASP) of
handsets forced OEMs to outsource more
to reduce costs
EMS firms were forced to continually lower
their costs of services
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Advantage
Synergy with the design
experience in Pam pilot
Design reduces unforeseen cost
due to manufacturing processes
Trends
CDM- a small but increasingly
growing segment
Design was becoming an
important attribute for
Customer retention
Threat of Competition
Threat of ODMs
Though Flexotronics had design
experience still lost Taiwan
competitor original design
Taiwanese manufacturers
scaling their PC design
experience
Building the Team
Flexotronics poached designers
freed from divestment by
Philips
10 more were recruited from
China
Strategic Outlook
Lesser gaps in Skill set
Manufacturing experience had
bridged the gap from the ODMs
Organic growth
Flexotronics was looking to
leverage the experience in
cellular phones
Understanding customers
Targeted customers with small
share of existing CM and CDM
business
Extensively spent time to
understand requirements
Companys Strategic Position
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Customer meeting
Prototype Demo: In less than 2
months with $2 lesser target
price
Received feedback of need to
reduce size
Planning
Focus was on leveraging the
learning curve of designers &
Manufacturing understanding
Target of 9-12 months
Execution
Reduced phone size in less
than 3 weeks
Other technical feasibility and
completion of Project in less
than 10 months
Reason
All key capabilities from
concept design through
manufacturing
The new design team had no
bureaucracy and less inertia
Budget
Development cost : $ 5mn. to $
6mn. compared to industry
average of $ 8mn. to $ 12mn.
Challenge
There was constant cost
pressure on design
Project Management
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
New Projects and Capabilities
Two new
ODM
Projects
Phone
2
Phone
3
CDM ODM
Restructuring required to accommodate newer posts
created. Flow of activities and reporting
Issues and Risks
Flextronics Current Business Model
EMS shift from designing initiated by the OEM to
developing indigenous designs and marketing them
Organizational Structure
Risk bearing shift from ODM to EMS
Both the technical and the market risk sit on the
shoulders of the EMS
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
New Projects and Capabilities
Ash Bharadwaj
Sr. VP, ODM Products
Conducting market analysis
required to determine if
Flextronics should pursue
specific ODM projects
Determine the correct
balance between right
technology and getting the
product to market on time at
the right place
Nicholas Brathwaite
Chief Technology Officer
Determine the technological
architecture for potential
products
Select reference designs
Stock design for components
Interact with potential
customers to understand their
preference for various
features
Snyder
Sr. VP, ODM Design Services
Incorporating designs in to
final product designs
Reported by ISBMs (Industry
Segment Business Mangers)
Each ISBM possessed design
expertise w.r.t. a particular
area
Major Focus Points Identified



Development of New
Capabilities
Market Analysis &
Product Architecture
Risk Mitigation
Concern with ODM
phones
Complex IP issues
surrounding GSM
Overlapping patents
created a patent thicket
of cross licenses
Flextronics faced
potential patent-
infringement suits
Option of either selling it
to OEMs or OEM willing
to provide
indemnification

Qualcomm the
saviour
All Patents of CDMA
owned by Qualcomm
It did not market its
own phones but
produced chip sets
Eager to collaborate
with Flextronics and
sell the product to
major OEMs
Advent of Phone
4
First ODM product
with CDMA standard
Appearance similar to
phone 1 but required
substantial amount of
change due to the use
of CDMA
Found a customer who
was producing a
similar phone at cost
of 20% to 30% more
than phone 4
Alternatives

Offer exclusivity as
requested
All or nothing
Limited exclusivity
based on region, pricing
or features
No exclusivity at any
level

Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Some tough decisions need to be taken concerning the future of the ODM model
in Flextronics
A shift to ODM projects would cannibalize companys existing CDM and Cm
business
A bigger concern was that existing may feel threatened and move their CDM or
CM business for phones to competing EMS firms
But future of ODMs looks bright not only in phones but in other electronic
businesses too
If Flextronics doesnt manufacture phones on ODM basis then someone else will

Future of Cell Phones and ODM Model at Flextronics
Flextronics
Intl
EMS Industry
Wireless
Handset
Phone 4
Future of
cell phones
Thank you