Signifying a strategic shift away from infrastructure manufacturing, Nortel Networks Ltd. reached an agreement last week to divest certain production operations and related activities in Canada and Brazil as well as options on its facilities in France and Northern Ireland to Flextronics Inc. for about $700 million in cash, expected to be paid in installments during the fourth quarter and throughout 2005. As part of the sale, Flextronics also signed a four-year supply agreement for manufacturing services and a three-year supply agreement for design services with Nortel.
Under terms of the agreement Flextronics will acquire nearly all of Nortel’s remaining manufacturing operations, including product integration, testing and repair operations in its Canada and Brazil facilities as well as management of supply chain, related suppliers and third-party logistics. In addition, Flextronics has made an offer to purchase similar operations at Nortel’s European facilities, once information and consultation processes with employee representatives are completed. Flextronics also will acquire Nortel’s global repair services and design assets in Canada and Europe related to hardware and embedded software design, and related product verification for certain established optical products.
In all, the acquisitions are expected to include the transition of 2,500 Nortel employees to Flextronics, comprising 1,650 employees in Canada, 30 employees in Brazil and 770 in Europe once the deal closes early next year.
Nortel said the deal concludes discussions that began earlier this year between the two companies and will provide Flextronics with control over approximately $2.5 billion of Nortel’s annual cost of sales and have as much as a $100 million positive impact on Nortel’s net earnings within four years. Prior to the deal, Nortel outsourced about 75 percent of its operations.
Chahram Bolouri, Nortel’s president of global operations, explained the deal completed the company’s five-year plan to divest “substantially all of our manufacturing activities to world-class electronics manufacturing service companies,” which has allowed the company to lower costs of sales, reduce fixed cost infrastructure, and reduce inventory levels and associated carrying costs.
“Most importantly, this strategy will continue to enable us to respond with increasing effectiveness to significant ups and downs in market demand and customer needs,” Bolouri added.
For Flextronics, which works with a number of infrastructure providers including L.M. Ericsson, Sony Ericsson, Siemens AG and Motorola Inc., the deal bolsters the company’s growing worldwide manufacturing capabilities and is expected to further its lead as the world’s largest contract electronics manufacturer, or CEM.
“The Nortel Networks manufacturing and design people who work within these activities bring intimate knowledge and experience with complex, carrier-grade-quality products and processes,” explained Michael Marks, chief executive officer of Flextronics. “This know-how and capability is absolutely critical to the future of Flextronics.”
Analysts applauded the deal, noting it would allow Nortel to commit more resources to developing technology rather than worrying about manufacturing.
“I think it’s a good move for Nortel as it will allow them to focus on technology development,” said Paul Dittner, mobile communications analyst for Gartner. “Technology leaders like Nortel need to focus on the development side of the business.”
Dittner added that while a number of infrastructure providers already have begun moving away from the manufacturing side of the business, he expected the trend to increase.
“I think you are going to see more of this in the industry as companies need to make the decision as to whether they are going to be a technology development company or a technology manufacturing company,” Dittner said.
While there was some concern regarding Nortel giving up control of the manufacturing process, the company said it was confident Flextronics’ experience will prove invaluable.
“We are excited about expanding our relationship with Flextronics, and about the competitive advantages this relationship will bring to Nortel Networks,” Bolouri said. “We believe that Flextronics has the necessary vertical supply-chain expertise, resources and global presence to meet our time-to-market, quality and product cost reduction objectives and to take our supply chain to new levels of performance and competitive differentiation.”
In an unrelated announcement, networking infrastructure provider U.S. Robotics Corp. said its management team had acquired a majority stake in the company from Solectron Inc., providing the team with majority ownership in the company. U.S. Robotics said it will retain its employees, including its executive and account management teams, as well as maintain current supply chain infrastructure and existing distribution channels.
U.S. Robotics added that 3Com and Accton Technology Corp. have maintained their minority interest in the company.
