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Flextronics International is the world's largest outsourcer of electronics manufacturing jobs. The company is based in Singapore and has established a devised sophisticated logistical, supply and design series of methods that allow the customers to reduce fixed assets and product development time. Although Flextronics is not just a company based on low-wages labor, it currently has 9,000 employees in 29 countries, with half of them being concentrated in China, while the others work in low-wage centers such as India, Poland and Mexico.
Flextronics' clients are a different story: they are all from the United States: Microsoft, Dell, Motorola, Palm, Hewlett-Packard and Xerox. There is a high chance that many Americans have used a Flextronics'-built product, thrown on the market under a more popular brand.
Michael Marks, the man who runs Flextronics International, is the one responsible for the increasing outsourcing trend in the hi-tech industry, as it has currently reached the value of $100 billion. Former market leader, the $11 billion U.S.-based company Solectron, has been surpassed by Flextronics two years ago. The activity at Flextronics is best captured by an article in the July 2004 version of the "Chief Executive": "To see Flextronics' speed to market, visit one of the company's factories in Senai, Malaysia, just next to Singapore. Young Muslim women m headscarves tend five neat rows of machines spitting out about 1 million radios for the XM satellite radio company, its entire annual output. At one end, the women feed in various parts, while at the other emerge radios ready for shipment via a deepwater port 10 minutes away. "Our defect rate is less than onetenth of one percent," beams factory supervisor S. Parameswaran. This is one of three electronics factories in the area, producing items such as PDAs, cell phones and printers."
Although customers are not aware of that fact, there are a lot of major companies who buy components or even the complete product, test it in order to check its compliance with requested quality standard, and then sell it to clients under a company name. Practically, many people pay more for a mobile phone that is not actually produced by the company they buy it from. Consider the case of Pascall Electronics Ltd., a small company from the Isle of Wight, established in 1991, which sales cell phones, laptops, GPS equipment and TV's. With an approximately $4 million income each year, the company sells components, sub-systems, microwave amplifiers and other telecommunications equipment to whomever wants to buy it.
Constant demand for rare materials, such as tantalum, used in the production of electronic circuits in cell-phones and computers has even lead to wars, such as the one in Congo, as an article from the Industry Standard Magazine reports: "Tantalum is extracted from the ore by processing companies such as H.C. Starck, which produces 50% of the world's tantalum powder, and Cabot (CBT), the second-largest mineral processing company. These firms - which buy from international trading companies and also directly from large mines and local trading concerns - in turn sell refined tantalum powder to capacitor manufacturers - the largest of which are AVX (AVX), Epcos, Hitachi (HIT), Kemet, NEC (NIPNY) and Vishay.
Their products go to the cream of the high-tech industry. Alcatel (ALA), Compaq, Dell, Ericsson, Hewlett-Packard (HWP), IBM, Lucent, Motorola (MOT), Nokia and Solectron (SLR) are all major buyers of tantalum capacitors. Chip firms such as AMD and Intel are also increasingly buying tantalum powder in its raw form to use in manufacturing semiconductors." It is easy to notice that there are many producers of cell-phone components who depend on these materials, and their need is fuelled by the constant consumer pressure for innovations in personal telecom technology.
The sector will surely grow, and Flextronics will probably go with the wave. Optimistic estimates present the outsourcing industry at $200 billion in 2007, double than the current value. Another trend is the expansion of the market in two directions: first in the direction of technology unrelated areas, such as medicine, aerospace and defense, and second into pure technology, which has still a lot of potential.
The need for cell-phone components is huge. It is enough to see how many no-name companies from Taiwan are offering such equipment. PowerPack offers chargeable, rechargeable and disposable cell phone batteries, UWT sells cell phone accessories, (hands free car kits, portable hands-free, wireless portable hand free. universal holders, portable hands-free earphones, smart phone mobiles, car audio connection kits, auto retractable earphone sets- wires, microphones, standard plug-ins, earphone, cellular phone headsets, earphone connectors, batteries and others. So do Cellware Interantional, Lung Tien or Holly Hand enterprises, all based in Taiwan. And similar no-name companies concentrate their operations in China.
The cell-phone design market is also an interesting business for these small companies, Flextronics, for instance, used acquisitions to enter the design market. The company paid in 2003 $80 million for Microcell, a cell phone designer. However, there are differences between the manufacturing cell-phones and designing them: manufacturing is all about managing factories while design is more about managing creative designer types.
Despite the huge offer, the buyers still face problems: Motorola was experiencing supply problems with its wireless camera phones. As an article from Forbes magazine reports: "Supplies of a critical component in camera phones -- a type of chip called a charged coupled device -- is in short supply around the world. Only those companies who have locked up their supplies of CCD prior to the onset of the shortage are able to build their camera phones. Meanwhile consumers are buying them in ever-increasing numbers."
Companies making cell phones needed CCD chips, but the suppliers, including Sony, Sanyo, Sharp Electronics, Fujifilm and Matsushita were caught off guard. Most mobile phones with integrated cameras use CCD chips. ISuppli analysts estimated at the time (March, last year) that 58 million phones and digital still cameras would be based on CCD technology.
In order to solve the cell-phone manufacturers' problem, including Motorola, chip companies as diverse as Micron Technology, National Semiconductor, Amkor and Omnivision Technologies have built new businesses around CMOS sensors, a technology that would cover for the shortage of CCD. This shortage hit hard several cell-phone producers, and Motorola was the hardest hit, as it had to wait several months before it could release its new models on the market.
The industry is very shaky: A 2000 Flextronics deal with Motorola (yet again) illustrates the difficult nature of the relationships between electronic contract manufacturers (ECM) and OEMs. In the spring of 2000, Flextronics had announced a $30 billion, five-year contract with Motorola for cell phone, pager and switch production.
The deal captured the media's attention, especially since $30 billion was a large sum for a company that sold only $4 billion in products in the prior fiscal year. However, according to the 10Q form, the deal was not exclusive and required Motorola to buy Flextronics products in order to obtain $400 million worth of Flextronics' equity warrants for which Motorola paid $100 million. As David Tice has put it, "in other words, Flextronics is paying Motorola for the pleasure of doing business!"
The bargaining power situation on the market
The market is dominated by a few buyers and also few suppliers, which translates into balanced power or protection. A buyer or supplier has a more or less balanced choice in selecting its business partners and protecting its business.
Buyers may use two suppliers or even more than two in order to protect themselves against shortages, strikes, and other unforeseeable emergencies that may be traced to the difficulties of a single supplier. In a similar manner, suppliers use to protect themselves against loss of business that may be caused by a buyer's bankruptcy or a decrease of the sales volume. One method available to buyers of maintaining competition among existing suppliers…[continue]
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