Flextronics Mum on Earnings from Ericsson Deal.

Since January 26, 2001, when Bob Dykes, chief financial officer of Flextronics (San Jose, CA), held an Internet press conference on the company's deal with Ericsson (Stockholm, Sweden), the details on the amount of earnings and production have been kept quiet. As Valerie Kurniawan, director of marketing communications for the Asia Pacific region for Flextronics recently stated, "We have signed an memorandum of understanding (MOU) with Ericsson that calls for no further release of information."

Nevertheless, Flextronics began managing Ericsson's operations side of their mobile phone business in April. The MOU, signed in January, called for Flextronics to assume the management of several Ericsson facilities and provide increased Asian production. To quote Dykes, "[Flextronics] will be assuming responsibility for new product introductions, supply chain management including the selection of many suppliers, manufacturing and logistics management. [We] will also provide PCBs and plastics, primarily from our Asian operations."

Flextronics will also provide global logistics management, process customer orders and configure and ship to end customers. Working with Ericsson should optimize production and logistics locations to reduce costs to a minimum.

Ericsson announced that Flextronics will be taking over a number of production and logistics locations, but, even though Flextronics is taking over facilities, they do not plan to buy any buildings. Flextronics will also be increasing production in their Industrial Park in Southern China-their primary Asian location for consumer products. The bulk of Ericsson's production will eventually take place in low-cost locations.

How did Flextronics get the deal? According to Dykes, Flextronics was chosen as a result of discussions, over many quarters, on the relationships between original equipment manufacturers (OEM) companies and their electronics manufacturing services (EMS) partners, and their increasing significance. "The size and scope of business awarded continues to expand, and Flextronics and Ericsson have a long-standing relationship covering many types of businesses in countries around the world. This made it a natural to extend their relationship in this manner."

Also, the dramatic change in the mobile phone market has shifted from complex, technical products to a fast-moving and high-volume consumer electronics business. Many OEMs serving this market have been struggling to meet the changes; however, Flextronics has a large EMS presence in low cost markets, particularly Asia, and this provided the company's edge. Flextronics also has a well-established business in mobile phones, personal organizers, inkjet printers and other high volume consumer products. Dykes feels these facts make Flextronics the perfect choice for Ericsson.

Over the years, Flextronics has built a broad service offering and invested in Web-based software companies to help manage their supply chain. The company has also vertically integrated into key components, such as plastics and PCBs, which are critical in cost and logistics to the supply of this type of product. Flextronics has successfully expanded into the logistics management market, enabling product supply costs to be cut from manufacturing lines and the savings to be passed on to the end customer.

Dykes confirmed the revenue from the program will be substantial and that the company expects the program to lead to an improvement in EPS. Nevertheless, no numbers have been released so far, as details are still being worked out.

Flextronics expects revenue to grow over multiple quarters, beginning in the June quarter. Dykes said that, "EPS is expected to be neutral in that first quarter, but then becomes increasingly positive thereafter. Within four quarters, margins are expected to reach company norms for this type of business. Certain working capital and equipment will be transferred at book value. The exact amount is not yet known, but is likely to be in the range of $300 to $800 million." Dykes summed up the deal as, "... an awesome day for this company. This is the culmination of efforts that have been underway at Flextronics for many years."

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Copyright [copyright] 2001 Miller Freeman LLC