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Academic Group 5Flextronics International Ltd.

Abhinav PandeyAbhishek KumarRahul HansSushant MittalZainul KhanLuv Rustagi1Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones

Board Stuffer- Labor intensive - Higher Margins Contract Manufacturer- Turnkey Solutions Global CorporationFull box Assembly- of the finished electronics system Phone 4First to be designed and manufactured Approached Motorola, Nokia, Sony Ericsson to buyFIND THE RIGHT STRATEGY!!! 2Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones Electronics Manufacturing Services (EMS) Industry Began by performing manufacturing task i.e. board stuffing By 1990s, expanded capabilities to handle assembly, testing & packaging of final product VIRTUAL FACTORIES for OEMsWHY OEMs OUTSOURCE TO EMS PROVIDERS ?focus on Core Competencies Strong in product design and marketing, hence product differentiationOutsourcing production enabled EMS firms to be more efficientbenefit from Economies of Scale Serving multiple OEMs enabled EMS firms to leverage fixed asset more efficientlyTake advantage in purchase of raw materials and componentsbroad Geographic Presence Manufacturing facilities spread across multiple countries & continents EMS firms could reduce risk faced due to concentration in single region 3

Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones Rapid Growth in the 90s for EMS industry with much of it coming through Acquisitions39.1%67.6%GLOBAL OUTSOURCING TRENDSFig-1: Communications Market (including handsets)Fig-2: Computer Electronics Market47.5%68.6%THE ACQUISTION STORYPurchase of under-utilized mfg. assets from OEMsStipulated condition by the OEM before awarding outsourcing contract to the EMS firmAcquisitions were generally made in the areas of manufacturing or product designSuch acquisitions helped EMS-Increase existing scale of manufacturingEnlarge scope of capabilitiesMost acquisitions involved companies from countries like China with low labor costs (75 % cheaper than US or Europe) Large no of Acquisitions by Flextronics from 1997-2002 with majority for their manufacturing capabilities6 major EMS companies controlled the entire market [Flextronics, SCI systems, Celestica, Solectron, Jabil circuit etc.]Rapid growth was mainly due to 2 reasons:Strong growth for many OEMsIncreased focus on Outsourcing by OEMs

Enalarge scope of capabilities that can be offered to the customer

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Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones With the growth of the EMS industry, 3 major Business Segments emergedCONTRACT MANUFACTURING (CM)Traditional & most common form of business in the early 90sEMS firm received a completed product design from the OEMEMS firm focused only on manufacturing, assembly and sometimes packaging & distribution of final goodsLow margin modelManufacturing was done using component suppliers specified by OEM; Only manufacturing by EMS firm; model referred to as BUILD TO PRINTCONTRACT DESIGN & MANUFACTURING (CDM)Margins began to decline for CM in mid-90sEMS firms migrated to a more integrated CDM structureAdditional services like product design, SCM and logistic support were providedDesigning done by EMS firm as per specifications by OEM; IP rights remained solely with OEMEMS firm decided the component supplier & not the OEM line in CM modelBetter purchasing power with preferred vendorsORIGINAL DESIGN & MANUFACTURING (ODM)Increased competition from ODMs; mostly from AsiaODM would initiate a new design on its own & shop the finished product to the OEMODMs responsible for developing the necessary IP and licensing Colocation of design & manufacturing capabilities gave a cost advantage to the ODMsDespite colocation, ODMs couldnt match low mfg. cost of CM firms like FlextronicsODMs often sub-contracted mfg. to CM firmsSome firms operated in multiple segments whereas some restcited themselves to just the one5

Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones Wireless handset was a new market altogether with 2 major competing technologiesGSM vs CDMAGlobal System for Mobile communications (GSM)

Benefitted from a head start on CDMA

By 2001, stronghold over western Europe with 450 mil users

Offered international roaming throughout Europe

Mature technology with a large installed base; more reliable than CDMACode Division Multiple Access (CDMA)

Popular in North America & Asia with 82 mil users

Faced tough competition from GSM in its core markets

Greater security in transmission of cellular data

Lower Power requirements than similar GSM modelsWIRELESS MARKET OVERVIEWIncluded cellular phones (Digital & Analog), Pagers, Personal communication services (PCS) & other electronic devicesCellular & PCS contributed vast majority to the salesGlobal market for wireless in 2002 was estimated at $60 bilMotorola & Nokia dominated market with > 50 % shareHealthy Operating Margins through differentiation in design & marketingDeclining Average Selling Prices (ASP) of handsets forced OEMs to outsource more to reduce costsEMS firms were forced to continually lower their costs of servicesBattle emerged between 2 technologies for transmission of cellular data

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Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones AdvantageSynergy with the design experience in Pam pilotDesign reduces unforeseen cost due to manufacturing processesTrendsCDM- a small but increasingly growing segmentDesign was becoming an important attribute for Customer retentionThreat of CompetitionThreat of ODMs Though Flexotronics had design experience still lost Taiwan competitor original designTaiwanese manufacturers scaling their PC design experienceBuilding the TeamFlexotronics poached designers freed from divestment by Philips 10 more were recruited from ChinaStrategic OutlookLesser gaps in Skill set Manufacturing experience had bridged the gap from the ODMsOrganic growth Flexotronics was looking to leverage the experience in cellular phonesUnderstanding customersTargeted customers with small share of existing CM and CDM businessExtensively spent time to understand requirementsCompanys Strategic Position7

Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phonesCustomer meetingPrototype Demo: In less than 2 months with $2 lesser target priceReceived feedback of need to reduce sizePlanningFocus was on leveraging the learning curve of designers & Manufacturing understanding Target of 9-12 monthsExecutionReduced phone size in less than 3 weeksOther technical feasibility and completion of Project in less than 10 monthsReasonAll key capabilities from concept design through manufacturingThe new design team had no bureaucracy and less inertiaBudgetDevelopment cost : $ 5mn. to $ 6mn. compared to industry average of $ 8mn. to $ 12mn.ChallengeThere was constant cost pressure on designProject Management8

Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phonesNew Projects and CapabilitiesRestructuring required to accommodate newer posts created. Flow of activities and reportingIssues and RisksFlextronics Current Business ModelEMS shift from designing initiated by the OEM to developing indigenous designs and marketing themOrganizational StructureRisk bearing shift from ODM to EMSBoth the technical and the market risk sit on the shoulders of the EMS9

Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phonesNew Projects and CapabilitiesAsh BharadwajSr. VP, ODM ProductsConducting market analysis required to determine if Flextronics should pursue specific ODM projectsDetermine the correct balance between right technology and getting the product to market on time at the right placeNicholas BrathwaiteChief Technology OfficerDetermine the technological architecture for potential productsSelect reference designsStock design for componentsInteract with potential customers to understand their preference for various featuresSnyderSr. VP, ODM Design ServicesIncorporating designs in to final product designsReported by ISBMs (Industry Segment Business Mangers) Each ISBM possessed design expertise w.r.t. a particular areaMajor Focus Points Identified

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Flextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones11

Some tough decisions need to be taken concerning the future of the ODM model in Flextronics A shift to ODM projects would cannibalize companys existing CDM and Cm business A bigger concern was that existing may feel threatened and move their CDM or CM business for phones to competing EMS firms But future of ODMs looks bright not only in phones but in other electronic businesses too If Flextronics doesnt manufacture phones on ODM basis then someone else will

Future of Cell Phones and ODM Model at FlextronicsFlextronics IntlEMS IndustryWireless HandsetPhone 4 Future of cell phones12

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