NYT

February 15, 2001

Ignore the Label, It's Flextronics Inside

By JOHN MARKOFF

SAN JOSE, Calif. —
Dot-coms are collapsing
right and left, and e-businesses are
vanishing by the dozens, but here
in a nondescript industrial park in
the heartland of Silicon Valley,
business is booming.

And that is certainly poetic justice.
Long ago — before the advent of
the World Wide Web —
companies here actually
manufactured things. Now, with
the bursting of the Internet stock
market bubble last year,
old-fashioned high-technology
manufacturing is suddenly back in
vogue.

Thor Swift for The New York Times
Michael E. Marks, above, chairman and
chief executive of Flextronics, has
overseen a global expansion of the
company, which manufactures
high-technology items for brand-name
clients. Flextronics has 150 factories in 27
countries.

At least that is the way it appears
from the cramped offices of
Michael E. Marks, the
50-year-old chairman and chief
executive of Flextronics Inc., the
world's second- largest company
in an industry known as electronics
manufacturing services.

This industry — which assembles
things like personal computers and
various consumer gadgets — got
little notice until recently. But that
changed in January when the
Swedish telecommunications giant
Ericsson announced that it would
turn over its factories and
manufacturing operations entirely
to Flextronics in a deal that could
ultimately be worth as much as $5
billion a year. And the Ericsson
deal is just the beginning. Still, Mr.
Marks is a remarkably informal
and hands-off manager for
someone who is running a company whose roughly $12 billion in revenue
in 2000 may grow to $20 billion over the next year.

Flextronics and a few other companies like it run counter to the
conventional wisdom in Silicon Valley that "it's all just bits."
Semiconductor companies that focus on design while outsourcing chip
making have become commonplace. But somebody still has to turn the
ideas into reality. And that is where Flextronics — based officially in
Singapore, with its top executives here in San Jose and operations
around the world — comes in.

"Everyone is trying to get out of manufacturing," Mr. Marks said. He
argues that the standard business approach for a growing number of
high-tech companies is: "It's impossible to open a factory; the hollow
corporation is here; end of story."

But Mr. Marks struck a deal last year with Microsoft that could soon
rival the Ericsson alliance. Microsoft has chosen to challenge the
Japanese electronics giants Sony and Nintendo and get into consumer
electronics in a big way with its X-Box video game machine, scheduled
to appear on store shelves by fall.

Although the powerful home computers will come with a Microsoft label,
they will be built by Flextronics. Mr. Marks is now putting the finishing
touches on two new factories, one in Guadalajara, Mexico, and the other
in Tab, Hungary, where 16 assembly lines could churn out as many as
two million of the $400 systems this year.

"A billion dollars here and a billion dollars there, and pretty soon you're
talking about a fairly large business," Mr. Marks said.

Flextronics has, in fact, been on a remarkable seven-year growth spurt.
When Mr. Marks took over the ailing company in 1993 as part of a
turnaround effort it ranked 22nd among electronics manufacturing
services concerns. It is now second. Its stock, though, after soaring as
high as $85 in late 1988, has come back to earth after the company was
forced to take a big write-off last spring. [It closed Wednesday at
$36.94.]

With 150 factories and more than 70,000 employees in 27 countries,
Flextronics has leapt from the obscurity of what was once a grubby
Silicon Valley contract manufacturing business category called board
stuffing. When this industry was born, in the 1960's, it largely operated in
back alleys, with companies paying someone else to do the tedious and
low-value job of placing semiconductor chips by hand on printed circuit
boards and then soldering them in place.

Today, in a sleek building next to its headquarters, six Flextronics
production lines as long as football fields are dedicated to automated
board stuffing, soldering and testing machines that handle thousands of
circuit boards a day.

As recently as the late 1980's there was a great deal of hand-wringing in
Silicon Valley about the danger of "hollow corporations" and the flight of
manufacturing jobs from the area. Most of the original semiconductor
companies had moved their manufacturing and assembly operations
overseas in search of cheap labor, and the computer makers were soon
doing the same. That was before a new generation of executives like Mr.
Marks changed the rules of the game. He, too, has taken advantage of
globalization to place factories around the world, with those heavily
dependent on hand labor established in low-wage countries while the
more automated plants operate in wealthier countries like the United
States, Europe and Singapore.

But instead of the rigid, almost militaristic manufacturing ethos long
popular in industry and honed to a high polish in Asia and elsewhere in
the 1980's, this generation has pioneered something Mr. Marks calls
operations manufacturing.

Its hallmark is extreme flexibility. Not only can Flextronics readily take
advantage of its ability to shift from one product to another as the market
changes, but, even more important, it has managed to radically shorten
the entire supply chain in both time and organization. Manufacturing times
drop from more than a week to less than a day, and in futuristic factories
like those at the Flextronics Guadalajara complex, component suppliers
are often situated adjacent to the assembly line.

Increasingly, Flextronics and its closest rivals — Solectron, which is the
biggest company in the sector; Celestica; and SCI Systems — are
providing a full spectrum of manufacturing and design services to
companies including Microsoft, Motorola, Cisco Systems and Palm.

In a world that is occasionally referred to as Silicon Valley Inc. and
where workers can change jobs simply by turning in a new driveway,
Mr. Marks's goal is to offer almost everything that goes into
manufacturing short of product advertising and marketing.

"He's an aggressive general who's commanding an army," said J. Keith
Dunne, a financial analyst at Robertson Stephens, a San Francisco
investment bank. "He's taking a more verticalized approach than before,
and he's trying to capitalize on the increasing integration of the industry
and the thrust toward one-stop shopping for manufacturing."

Mr. Marks argues that his industry will be able to charge right through
any recession, capitalizing on the hard times that have forced high-tech
companies into cost-cutting. He recently told a group of financial analysts
in San Francisco that companies in his industry would be the biggest
beneficiaries of any downturn — gaining business as traditional
manufacturers look for new outsourcing opportunities to trim expenses.

"The March quarter will be tough for us, but by the June quarter we will
blow everyone away," he said. Flextronics is now working on a number
of other deals on the scale of the Ericsson factory buyout.

Moreover, against a background of a gloomy stock market and the
virtual disappearance of Silicon Valley stock offerings of any kind,
Flextronics priced a Nasdaq secondary stock offering at $37.94 a share
on Feb. 1 in an effort to raise more than $1 billion in working capital.

In addition to growth based on manufacturing deals with companies like
Ericsson and Microsoft, the company has been on an acquisition binge.
Last year, it bought the Dii Group, a $1.3 billion contract manufacturing
company based in Niwot, Colo. Flextronics also made a smaller
acquisition, of Palo Alto Products, a design company that had worked
with Palm Inc. to create the original Palm Pilot as well as other company
models, which Flextronics manufactures.

Today, Jim Sacherman, a mechanical engineer who was founder and
chief executive of Palo Alto Products, heads Flextronics' marketing
efforts and occupies the office next to Mr. Marks.

Acquiring talents like Mr. Sacherman is part of the strategy for
broadening the services that Flextronics can offer, but Mr. Marks also
goes out of his way to acknowledge the role that Cisco's chief executive,
John T. Chambers, has played as an evangelist for the importance of
outsourcing manufacturing.

Mr. Chambers has become a true believer in using the Internet to
connect Cisco's customers directly to the Flextronics factory floor so that
as soon as an order is placed, manufacturing begins.

Cisco's passion for using the Internet to transform business has in turn
translated into strong pressure on traditional telecommunications
companies to try to adopt Internet technologies and business practices.

"There was no telecommunications outsourcing before 1997," Mr. Marks
said, "Now it's moving in our direction at a breathtaking pace."

That explosion has presented Flextronics with some delicate problems:
the company has found it now often makes products for direct
competitors. For example, the Ericsson deal came less than a year after
Motorola signed a $30 billion, five- year manufacturing deal with
Flextronics.

While he acknowledges that he has had to smooth some ruffled feathers,
Mr. Marks said Flextronics had been able to erect "fire walls" to prevent
proprietary information from leaking between competitors.

In fact, electronics manufacturing services appear to be mimicking other
industries that found marked advantages to having one company provide
services to an entire industry.

"If you look at the automobile- industry outsourcing, the same thing went
on," Mr. Dunne of Robertson Stephens said. "There are certain
manufacturing processes that can help everyone in the chain."

Mr. Marks is bringing an old-style Silicon Valley culture to the model.
Flextronics, he said, is based on a management approach that hates
meetings and hates bureaucracy. Rather than debate things for hours, he
says he gives managers responsibility and decision-making ability.

"We have a group mind here," he said. "We just sync up, and then go
and do what needs to be done."

To motivate his workers, he has pushed stock options deeply into the
ranks. And he marvels at the waste and inefficiency at some companies
he deals with.

One had a special team of workers just to change the size of executives'
offices when they were promoted.

"Nothing could be more whacked out," he said. "Around here we tell
bureaucracy stories so we don't get that way."