Contract manufacturing boom as telecoms slump

Alcatel last week became the latest in a growing line of manufacturers to sell off its production facilities in a bid to reduce costs and focus on higher-value-added activity.

The French electronics and telecoms group, with sales in 2000 of e31bn (£19bn), said it would outsource at least half of its manufacturing operations. In doing so, it is joining a growing trend among electronics firms that is stoking up a multi-billion pound outsourcing industry dominated by fast-growing multinational giants – some of which claim to be winning out from the telecoms downturn.

Alcatel will sell at least 50 of its 100 manufacturing sites to contract manufacturers by the end of 2002. Serge Tchuruk, chairman and chief executive officer of Alcatel, told a meeting of the Alcatel European Workers Council that the strategy is based on the company’s need to have flexible industrial sites and to be able to ‘anticipate and adapt to the current – and future – market-related manufacturing slowdowns and upturns’.

Tchuruk said the strategy would only apply to sites making ‘commodity’ products, and not those involved in technologies such as satellites and optical networking equipment.

‘Even in the case of standard products, Alcatel will outsource only part of the manufacturing activity, since we will retain plants for integration, especially to master the introduction of new products,’ he said.

The company, which has already sold around 150 of its factories since the early 1990s, will retain at least a dozen sites in Europe and the US, he added.

As part of this strategy, Alcatel this week announced a deal to outsource European manufacture of its mobile phones to Singapore-based Flextronics.

Under the agreement, effective from June 30, Flextronics acquired Alcatel’s Laval plant in France, and 830 employees were transferred to the contract manufacturer. Mobile phone production will now cease at Alcatel’s plant at Illkirch, France.

The company’s move is part of a trend which is helping to sustain a global market for electronics manufacturing services that is estimated to be worth $100bn-$130bn per year.

Typically, contract manufacturers buy sites and then expand them, allowing them to sell equipment both to their former owners and also to other firms. This helps them achieve much greater economies of scale, as they are able work on products for a number of customers. While less than 10% of all mobile phones were made by contract manufacturers in 2000, the proportion is set to rise to 27% by the end of this year, and could reach 68% by 2006, according to Neil Mawston, industry analyst at constultancy Strategy Analytics.

‘In the long term, the prospects for contract equipment manufacturers are looking very good. As demand slows, particularly in the handset market, margins are squeezed, putting pressure on companies to outsource as a good way of reducing costs,’ he said.

Contract manufacturers such as Celestica claimed recently that they will actually gain from the global slowdown as companies seek to slash their costs, though few believe they will come out of the downturn unscathed.

However, in the longer term, as consumers demand ever cheaper phones and consumer electronics, outsourcing looks set to grow even further.

‘It’s very difficult to manufacture handsets profitably. Margins are very thin, and it’s getting more difficult all the time, so outsourcing could be the way forward,’ Mawston said.

Alcatel is just one of a number of telecommunications firms that are outsourcing manufacturing operations. Ericsson has sold off much of its production to Flextronics, while Siemens outsources about 20% of its mobile phone manufacturing.

Telecommunications giants Cisco Systems and Lucent Technologies also contract out production work, and in January Marconi announced plans to outsource the majority of its communications equipment manufacturing to US firm Jabil Circuit for $390m.

Under the deal, believed to be worth $4bn over its three-year lifetime, Jabil Circuit agreed to take over five of Marconi’s manufacturing operations worldwide, including a plant at Coventry in the UK.

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