Flextronics gets dialed in: in an exclusive interview, the world's largest ODM/EMS takes aim at BoM costs.

When we spoke last to Flextronics chief technology officer Nic Brathwaite, in April 2003, he mentioned the company's development of camera modules as complementary components for its booming cellphone manufacturing business. Today, the company has become one of the largest producers of camera modules in the world.

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It's all in a day's work for the world's largest original design manufacturer and contract assembler. Under the lead of its Corporate Technology Group, which Brathwaite heads, the company is performing something of a case study for the ages on how to leverage its formidable lead in cellphone technology to drive out costs for its customers--and develop new markets for itself.

In July, Brathwaite spoke with CIRCUITS ASSEMBLY about Flextronics' direction. Excerpts from the exclusive interview (read the entire transcript at circuitsassembly.com/cms/content/view/1945).

CA: Nic, what's happening on the technology front at Flextronics?

NB: A lot is actually happening, I think, certainly since the last time we talked. Our technology strategy is actually a simple one which, if executed well, will create significant value for our customers and an enviable competitive advantage for Flextronics. In the Corporate Technology Group, the fundamental basis of that strategy is actually the thesis that creating value and a competitive differentiation in the EMS industry today requires an independent ability to affect product cost, beyond the normal transformation cost. Everything we do from a technology perspective is grounded by that basic principle.

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CA: That ties into the idea of influencing as much of a percentage of the BoM cost as possible?

NB: Absolutely. That ties into a lot of things. If the only way of differentiating yourself as a company in terms of cost is your ability to convince a supplier to give you a slightly better price than he gives somebody else, that is not a sustainable competitive advantage. That's my personal belief. The only real way, in my opinion, to create that independent ability to impact cost is to figure out how you can impact the BoM cost by significantly taking cost out of the BoM. You have to be able to basically attack every element of cost. In some cases that means very creative and strategic partnerships. In others it means leveraging Flextronics' own capabilities to create components and subsystems and modules.

CA: When we talked last you were doing several analyses of total cost from design through distribution. What if anything did Flextronics change in its logistics and its thinking based on what you learned?

NB: We are definitely continuing to do this. One thing we have learned is that in many cases there's a lot more savings that can be accomplished at the back-end through distribution and the logistics chain than you can find in manufacturing. We've been able to get our customers to pay more attention to cost savings in those areas than we might have previously done, and to recognize the value that Flextronics brings in that area and leverage that value more. From those perspectives, that's been very successful. And the logistics business has continued to grow for us; well over $1 billion.

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CA: What is the Corporate Technology Group is doing?

NB: Let me first talk about what our responsibility is. Our responsibility is to leverage technology and create value and competitive situations. The group includes process technology development, product technology development (ODM, component technology) and product assurance. Part of our responsibility is to drive the technology roadmaps of the company and make sure all of the businesses have technology roadmaps that are complementary and that serve the purpose of the end-products and applications of our customers. That has continued to play a very important role in the company. I think that the Corporate Technology Group continues to drive a lot of very significant initiatives. The ODM initiative for cellphones came out of these activities. The camera module business, one of the most successful businesses in the history of Flextronics, came out of them. We have a lot of other initiatives in things like power supplies and Ethernet switches. I'd say that's working very well. We've been able to make sure that our technology strategies and roadmap of the different businesses are aligned and our customers are starting to give us very high marks in terms of our quarterly customer service.

CA: How do you protect the IP of your customers from one company to another?

NB: That's a very good question and something that has to be taken seriously by all of us in this business. You have to protect IP. You have to create suitable firewalls to make sure that doesn't happen. In the software areas, for example, we have teams that are dedicated to customers and in some cases in completely different buildings and even locations. In many cases we have what are called "cool off" periods where there are several months between when a person working on one project for a company can work on a project, similar or not, for a competitor. You have to make sure you have the appropriate sensitivities within the design centers and monitoring of these capabilities. We've actually published our position on IP and how we go about protecting IP on our Website. It is not trivial, by any means.

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CA: Tailing onto that, lead-free initiatives have reached a fever pitch. How is Flextronics developing and distributing data on lead-free processing and initiatives throughout the company?

NB: Let me start by saying Flextronics is one of the pioneers in pushing this in the industry. We started doing lead-free manufacturing in the mid 90s. We recognized once the EU directives were launched that this was going to be a challenge. We launched initially the EMS Forum to help get other EMS companies to understand the impact of this and help us work together in the supply chain and address this in the appropriate way. This is a huge job. It's more than just developing the processes, which we've had and optimized and implemented in our factory for quite a while. We've had the processes ready. But the whole supply-chain management is very, very difficult. Take RoHS compliance: This is more than just saying this is lead-free or a reduction of cadmium and hexavalent chromium in materials. This is fundamentally ensuring that the supply chain understands what the directives mean and ensuring that your product has none of these hazardous substances, because ultimately the OEMs have started to push the liability onto the EMS companies and it's putting us in a tough, tough situation. It's a challenge, and primarily not so much a technical challenge, because we've done a good job addressing most of those technical challenges. There are other issues around product assurance, like lead-free solder joints, like ensuring we have data to write test methodologies to ensure we have reliable interconnects. In general, I think the challenges facing us today are primarily supply chain and factory implementation.

CA: The Corporate Technology Group is never far away from these supply chain issues. There's no R&D wall. Does that suggest that the technology group is searching out solutions for logistics problems?

NB: When I worked in manufacturing I thought the technology guys were far removed from reality and threw things over the wall that never really quite worked. When I worked in technology I thought the people in manufacturing weren't very smart. When we started this group in Flextronics we decided we were not going to have that kind of arrangement. In everything that the Corporate Technology Group does, you could almost call us project leaders that drive the development and implementation. On the project team are all these multidisciplinary elements, so when we are doing process development as a team most of the people actually come from the factories. The Corporate Technology Group is the leader and driver.

CA: Michael Marks has said he will step aside from day-to-day operations come January. The two of you have come across publicly as very much on the same page insofar as the vision of what Flextronics could be.

NB: A lot of the vision you see executed by Flextronics is actually a shared vision. Certainly Michael Marks and I have a very close working relationship and talk a lot. Michael is a visionary and has been a driver and key supporter of the technology strategy we have in place. But [current COO and CEO in waiting] Mike McNamara and I have worked a lot together. I started working at Flextronics 10 years ago reporting to Mike McNamara. Mike is committed to growing our company and will continue to do the things necessary to create additional value and competitive differentiation. That doesn't mean there won't be some change. But even if Michael stayed there'd be some change. The company has to change all the time in order to keep moving in the right direction.

CA: In the area of components, what is Flextronics doing in trying to influence the use of particular packages?

NB: We do not play as big a role as I would like. I think with some key semiconductor guys, we get involved early with several at the second-level package qualification. We would work to with them to evaluate new package development and new package design and technologies and perform the board/bump evaluation and qualification for them. But I would not consider that a major influence. We do influence them because we do these qualifications and analyses and come back to them and say, let's make these changes, do this or do that, to get improvement. As we get more into the component business, as we have with camera modules, we are starting to be able to influence some of the semiconductor guys a bit more. In camera modules we definitely play a major role in influencing their packaging roadmap.

CA: Is component packaging an area where you see potentially huge gains for leveraging?

NB: I think it's an area where there are huge opportunities. The issue is, How do you leverage to take advantage? Some people have suggested that one of the things the EMS companies need to be looking at is getting into semiconductor packaging to be able to do that. I believe that the EMS companies will over time have to get more involved in chip-and-wire and flip-chip technologies but for different reasons. I don't necessarily believe that that means you have to become a semiconductor packaging company.

CA: One of the things you mentioned during the May 12 investor meeting was TV tuners. Why is Flextronics so hot on that technology?

NB: We are hot on looking at the components of some of the product categories that are big for us. Handheld, mobile communications is one of those things. We believe that mobile television is going to be a big area, not just for cellphones but laptops and mobile media players and even the automotive industry; instead of having a monitor hooked up to a DVD player we'll start seeing TVs in cars. In general, I believe the market supports that position. I look at this as another module opportunity, just as we looked at camera modules a few years ago. There's going to be a TV tuner in many products in the future, be it a notebook or cellphone or multimedia player. We think it's going to be huge. That's an opportunity for Flextronics to be able to provide a component into these products and again be able to influence BoM costs.

CA: So would we see a Flextronics branded tuner that would be used across multiple platforms?

NB: We don't actually brand stuff, but just the same way today Flextronics is the largest provider of cameras for cellphones I would expect Flextronics would one day be the largest provider of tuners for mobile applications, which is expected to be a big market if you believe the analysts' numbers.

CA: Any other message you want to point out?

NB: There are a couple of messages I want to get out. I read a lot about how "Flextronics is going down this strategy of investing in design capabilities" and people call me and say, "None of your competitors are going that direction and they think you are crazy." It is not uncommon to have multiple companies in an industry with slightly different strategies. Pay attention to those strategies: They are very simple. Does it make sense or not?

Certainly, we have not lost business in general as a result of these strategies. Flextronics continued to grow revenues even during the worst downturn years, versus some of our competitors who were much bigger than Flextronics 10 years ago and today are half our size. Instead of looking at your competitors and saying that's the wrong strategy, look at the result. I think if we continue to execute well, it's a strategy that will continue to keep Flextronics as a key choice for many OEMs. It doesn't mean it will be the only choice--although we'd like it to be.

Mike Buetow is editor in chief of CIRCUITS ASSEMBLY.