Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
Flextronics International’s announced acquisition of Solectron, for $3.6 billion in cash and stock, certainly commanded TFI’s attention this week as our consultants tried to understand the meaning of this mega-merger. Maybe it commanded yours, too.
“Is Flextronics still sore about Foxconn passing them up in size?” one of us asked. Even for the less skeptical among us, it was hard not to take a Freudian perspective.
Here are some other thoughts we had-nothing definitive. Like you, we’re still scratching our heads. We’d like to know your thinking, so please weigh in.
The best thing might be if some new business model evolves from this. The contract manufacturing (CM) model has long needed an overhaul, but it is hard to see how the merger of two low-margin companies leads to a business model with higher margins.
We are ready, willing and waiting to see if the new Flextronics can do that. In its announcement, Flextronics said it would be able to cut $200 million in costs when the integration is completed, but that will take two years — a lifetime in this business.
One TFI client declared that the new company could be more profitable than the two separate companies were. Years of profitability studies comparing CMs by size, conducted by TFI and others, would seem to dash this hope. Quarterly Forum Members can hear what Niti Agrawal says at next week’s Chicago event. She’ll provide this year’s update on this EMS-ODM financial productivity research.
If the merger signals a new round of consolidation among Tier 1 CMs, ultimately leaving, say three companies with greater pricing leverage, then that would not be great news for OEMs. On the other hand, such a situation could also make Tier 2 CMs look a lot more appealing to OEMs.
May you live in interesting times, goes the Chinese proverb, which brings us back to Foxconn (Hon Hai). Fo-lex-tron-ics will be larger than Foxconn, but it won’t be as profitable until it gets a handle on the supply chain. And one thing in Foxconn’s favor is its two decades of component manufacturing, which means it can – and does — do everything in the supply chain.
That’s the brain dump from us on the matter. What are your thoughts on the Flextronics and Solectron deal? Let us know by posting a comment below.
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Hello Bill,
Interesting perspectives…made me think that perhaps Flex would have been smarter to spend their money on vertical integration as FoxConn has done or…build the best, most competitive virtual value (supply) chain possible. Flex may benefit from Solectron’s new medical supply chain reach but this may not be enough to make this move a good one.
Very interested in observing how this one plays out!
I don’t quite get all the hoopla around this. The EMS industcy has always thought itself special and unique, so maybe it thought that consoldation among the top tier players would not occur. But as we all discovered with the 2001 recession (in that case that the EMS industry was not a recesssion proof industry as many people had postulated), the EMS industry is not unique as it is subject to the same issues that plague and benefit all other industries. In the case of Flex-SLR, I’d say it’s about time someone took control of that floundering relic of its former self and try to milk the goodness out of it. In order for this acquisition to be successful, Flex will need to cut fast and deep. In business, EMS or other, 2 years is an awfully long time so I don’t think they have that long to manage the integration. To paraphrase Freud , “Sometimes an acquisition is just an acquisiiton.” This should be basic business 101 at this point.
I had been surprised that consolidation in this sector had stagnated since the SCI-Sanmina merger. In a business where material margins acount for profitability, Solectron was a weak player. Flextronic’s expertise in supply chain managment, now energized by increased spend (leverage), should give the component suppliers pause. I think this is good move for Flextronics assuming they don’t stumble on the business integration side - but they have several people on board that struggled with that issue with the DEC/Compaq merger so perhaps they know how to do it this time.
My impression is that Flextronics has always been Nimble and Solectron the Behemouth. Seems not like a marriage made in heaven.