As an electronics manufacturing services (EMS) company, Singapore’s Flex International which is managed from its San Jose California headquarters, may be an unfamiliar name to many. That said, Flex produces and delivers printers for other well-known companies such as Hewlett-Packard, cell phones for Sony Ericsson and Motorola, Xboxes for Microsoft, just to name a few of its customers. Previously known as Flextronics, Flex’s net sales in the Fiscal year 2020 declined eight per cent from fiscal 2019 to USD $24.2 billion due to the economic and operational challenges posed by the COVID-19 Pandemic, with 42 per cent from the Americas, 39 per cent from Asia and 19 per cent from Europe.[i] Its manufacturing facilities are dispersed over 30 countries across four continents.[ii]
Originally founded by Joe McKenzie and his wife in California in 1969, Flex initially soldered components into printed circuit boards (PCBs) for electronics firms in Silicon Valley. In 1980, the McKenzies sold Flex to a group of private investors, who expanded the firm’s business from a mere ‘stuffer’ to a contract manufacturer. When Flex was just a ‘stuffer’, its customers shipped PCBs and components to Flex, which then soldered components into the PCBs and then shipped the finished PCBs back to the customers for further assembly. In contrast, when Flex became a full-service, original equipment manufacturer (OEM), its customers provided only the PCB design, and Flex took on the responsibility of purchasing the components and manufacturing the board.
In the 1980s, Flex expanded internationally. Setting up a facility in Singapore in 1981, it became one of the first American manufacturers to move offshore. By 1989, Flex’s sales had reached US $202 million, with several operations in Asia and the US. However, the Silicon Valley downturn in the early 1990s seriously reduced the demand for Flex’s services. A complex buyout privatized the firm in 1990, and the new owners moved the formal home base to Singapore and shut down US operations. Flex went public again in 1994.
Acquiring a global presence
Michael Marks became Flex’s Chairman in 1993 and its CEO in 1994. He decided to rebuild the international presence of Flex through an aggressive strategy. Flex acquired manufacturing assets from well- known, brand-named firms and then used these assets to provide electronics manufacturing services, often to the very same firms. For example, Flex acquired manufacturing assets in Canada, Brazil, Malaysia and Mexico from Xerox, and then used these assets to manufacture copiers for Xerox. Flex moved aggressively, acquiring 53 operations between 1993 and 2001. Major acquisitions included the printed circuit board assemblies (PCBA) business from the Astron Group Ltd in Hong Kong in 1996, the assembly for industrial automation from ABB in 1999 and the systems assembly for GSM cell phones from Bosch Telecom in Denmark in 2000.[iii] Marks retired in 2006, appointing Michael McNamara as new CEO of Flex. McNamara served for 12 years and played an essential role in guiding Flex to reach USD $25 billion in revenues, while having operations in over 30 countries.[iv] Revathi Advaithi was then appointed as the third consecutive CEO of Flex in 2019, and she is focused on “driving technology innovation, supply chain, and responsible, sustainable manufacturing solutions across various industries and end markets.”[v]
Until the mid 1990s, Flex simply classified its manufacturing plants according to the complexity of PCB assembly and the technologies involved. In 1996, Flex manufactured complex PCBA by using the traditional pin-through-hole (PTH) technology, the more advanced surface mount technology (SMT) and the emerging multi-chip module (MCM) interconnect technologies. It had ten manufacturing facilities in 1996: one in Singapore, one in Malaysia, two in China, one in Hong Kong, four in the US and one in Wales. The plant in Singapore, for example, provided services with a “complex, high value-added PCB assembly using primarily SMT technology”; the Wales plant provided services with “medium complexity PCB assembly using both SMT and PTH technology”; and one US plant provided “advanced packaging and MCM design and fabrication”.[vi]
The large number of acquisitions led to a global network of manufacturing plants. In 1999, Flex started to report its facilities using a classification that included industrial parks, regional manufacturing facilities, product introduction centres and manufacturing and technology centres.
Industrial parks are located in low-cost areas close to major electronics markets. With facilities ranging between 0.1 and 5.7 million square feet,[vii] these industrial parks contain both Flex’s manufacturing and logistics operations and a number of its major suppliers, thereby reducing transportation costs, manufacturing costs, and turnaround times in the manufacturing process. These parks were designed for fully integrated, large-volume manufacturing. According to Flex’s 2020 Annual Report, Flex held approximately 81 per cent of its manufacturing capacity within various emerging markets. This includes Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Romania and the Ukraine.[viii]
Regional manufacturing facilities engage in medium and high-volume manufacturing in locations close to strategic markets.
Product introduction centres provide low-volume manufacturing services and a broad range of engineering services.
Finally, the manufacturing and technology centres, are a combination of regional manufacturing facilities and product introduction centres. Regional manufacturing and technology centres were set up to launch new products, transform new products to mass production, and conduct medium and high-volume manufacturing. Such regional centres include product introduction centres with advanced technological competencies, see below.
Industrial parks in focus
Industrial parks have been a major driver for the fast growth at Flex; former CEO Marks has even commented that “the future is big locations like these.”[ix] Since 2001, Flex has started to consolidate more of its production into its industrial parks. Already one year later, 30 per cent of Flex’s business was performed through the parks.[x] Flex’s approach has been to purchase extra land adjacent to its manufacturing facilities and then to attract suppliers and distributors to set up facilities in the park, where the supply of water, electricity and other services is readily available. Flex sometimes even takes responsibility for government relations, or puts up buildings and leases them to suppliers. Such services are especially crucial to its suppliers, many of whom are small American firms lacking Flex’s recombination abilities.
While some industrial parks face internal competition, others do not. For example, the present, three industrial parks in the Chennai area of India have positioned Flex to become the “preeminent EMS provider in the burgeoning India market.”[xi] In contrast, other parks have already experienced internal competition. The Guadalajara industrial park in Mexico and the Hungarian industrial parks mainly targeted the North American market and European market respectively, due to their proximity to these markets. However, some of the jobs done at the Mexican and Hungarian parks were subsequently moved to the Doumen industrial park in China.
The Doumen industrial park quickly moved from making simple mobile phone chargers, to advanced miniature printed boards, to Microsoft’s sophisticated Xbox. Tony Capretta, Flex’s former resident general manager, acknowledged the technical capability and experience of the plant’s workforce: “We can do anything here that we make anywhere else … . The learning curve is a fast ramp.”[xii] The Doumen industrial park enjoys the proximity of a dense local supplier network, as almost all materials Flex needs are available from thousands of suppliers within a two-hour drive of the park. In contrast, many materials and components needed by the Guadalajara industrial park in Mexico and the Hungarian industrial parks have to be sourced from the Far East. Therefore, lower labour costs at the Doumen industrial park, strong local suppliers and rising technological capabilities have made the Doumen industrial park very competitive within Flex.
However, not all production was being moved to China. In a later comment on the disruption of its supply chain (including maritime shipping) in China caused by the SARS virus, former CEO Marks said, “Some companies are moving stuff to China that really doesn’t belong there. It makes sense to make cell phones in China because they are inexpensive to air-freight. But personal computers don’t travel well. If you start to air-freight PCs because of a supply disruption, your cost-savings disappear instantly.”[xiii] In the case of Xbox game consoles, Flex initially centralized production for the European market in Hungary and production for the US market in Mexico, but one year later it shifted all production to China. However, after the shutdown of the Xbox production line in Hungary, Flex ramped up other production lines at its Hungarian industrial parks, hiring personnel to make other products such as TVs for France’s Schneider Electric.[xiv] From 2015 to 2020, Flex further diminished its dependence on China by approximately 50 per cent while expanding in other locations, like the United States, to service regional customers opposed to a single global chain.[xv]
Flex experienced a comparable phenomenon due to the COVID-19 pandemic outbreak in 2020, causing it to adapt the configuration of its manufacturing operations. During this time, Flex was forced to shut down many of its manufacturing operations in China, which dramatically disrupted its supply chain. In response to these operational setbacks, Flex deployed a set of improved remote-enabled technologies that were heavily reliant on digital data to provide specific information regarding its extended geographic reach. As cited by the Washington Post, CEO Revathi Advaithi summarized how COVID-19 developments influenced Flex’s manufacturing: “you may see a permanent change in terms of where things are made and why they’re made in a certain place… being closer to a customer may be important in terms of your location of manufacturing.”[xvi]
Restructuring the global network of plants after 2001
The many acquisitions resulted in a wide variety of plants spread around the globe. With a booming EMS business in the 1990s, such a huge, internationally dispersed network met demand very well. However, since 2001, the slower growth of advanced economies and the duplication of manufacturing have triggered restructuring efforts.
In 2001, Flex decided to consolidate its production by closing (or exiting from) some duplicate plants and concentrating similar activities into fewer locations. In mid 2001, Flex decided to lay off 11,168 employees.[xvii] At the same time, it shut down around 20 per cent of its factory space.[xviii] For example, it shut down its manufacturing plants in Singapore and changed the Singapore operation into a competency centre in design.[xix]
However, this restructuring did not mean simply moving all manufacturing to low-cost countries. CEO Marks commented that “it’s a great simplification – and a lot of people fall into this trap – to say that all manufacturing is going to get done in Mexico, Hungary, and China. Consumer products will be made there. But the infrastructure products – technically complex value-added products – are easy to manufacture in developed countries. That’s why we also have big operations in the US, Germany, France, and Sweden, where you have high capabilities in engineering. The [clients] like us to be everywhere.”[xx]
As noted by Marks, Flex does operate plants in some high-cost locations, either to stay close to key customers or to gain advanced technological capabilities. For example, though shutting down 26 of its 40 regional plants in electronics enclosures, Flex still kept 14 regional plants to be close to customers and to offer specific value-added activities, focusing on new product introduction and design.[xxi]
Gaining technological competencies was the other reason to stay in some high-cost locations. This is reflected in Flex’s revised acquisition strategy, whereby acquisition activities have focused primarily on companies that have the recombination capabilities to offer technological solutions adapted to customer needs. One example of this strategy was the acquisition of US-based Instrumentation Engineering, Inc. (IE, based in Oakland, New Jersey) in 2001, a systems test equipment developer and manufacturer. IE had experience in designing and building custom test systems for optical and wireless network equipment, which would enhance Flex’s capacity and capabilities in the functional test market. IE’s president took on a global role within Flex’s test operations worldwide.[xxii]
After the recession in 2008, Flex took on another round of restructuring to cope with the impact of lower demand facing its customers. This time, the restructuring focused on cost cutting and improving operational efficiencies. Flex aimed to save around US $230–260 million by shifting operations to more efficiently run locations and laying-off some of its workforce.[xxiii] The company also consolidated its suppliers to leverage its economies of scale and develop more strategic relationships. In 2018, it was reported that Flex set out a target of having 80 percent of its purchases with just 20 per cent of its suppliers.[xxiv]
Flex in Asia
Asia continues to be a stronghold for Flex’s operations with an estimated 52 per cent of manufacturing being performed there in 2021.[xxv] Production locations can be found throughout China, India, Japan, Malaysia, Singapore and Korea. Each location has developed specific strengths derived from the environment it operates in. For example, in Singapore, where the country is known for its advances in healthcare, Flex has established a medical manufacturing facility to help benefit the firm from innovative medical technologies. In China, the future largest auto market in the world, Flex operates a product design centre to assist automotive clients with product development. As of 2021, Flex’s Chinese operations consist of 19 facilities, employing over 50,000 employees.[xxvi]
Target markets in China often consist of smaller, locally based customers, as opposed to the large multinational corporations that make up the majority of customers in western markets. To meet the needs of these smaller customers, Flex has developed the ‘Flex Supplier Portal’, which allows customers to effectively track supplies to better meet end user needs. Furthermore, Flex has also developed human resource practices aimed at retaining local workers in an industry that typically experiences high turnover after the Chinese New Year. By responding to local pressures in China, Flex may have been able to develop successful practices that can be transferred across Asia.
Despite Flex’s apparent success in resource recombination in China, US trade policy created significant challenges for the company in 2019. Flex’s relations with its Chinese client, Huawei Telecommunications, became strained after the United States placed Huawei on a trade blacklist. It was reported in the media that Flex withheld Huawei’s goods (e.g., parts, goods in process, or finished goods) within its Chinese factories following the latter being barred from purchasing American products and services.[xxvii] As a result, Flex has been removed from Huawei’s supply chain – a client that contributed approximately 5% of Flex’s total revenue in the third quarter of 2018.[xxviii]
Crafting Flex’ future
In 2021, Flex continues to operate regional manufacturing and technology centres in Austria, Brazil, Canada, China, Denmark, Germany, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, Spain, Switzerland, The Netherlands, Poland, Romania, Singapore, the Ukraine and the United States. These centres were distributed across both high-cost and low-cost manufacturing locations in Europe, the Americas and Asia. In 2020, roughly 81 per cent of production was performed in low-cost manufacturing locations to provide customers with a variety of solutions in their locations of origin.[xxix]
Flex “has one of the world’s most comprehensive geographic footprints, service offerings, and sets of capabilities”,[xxx] which has allowed it to play a valuable role in its customers’ success. This role has continually allowed the company to garner industry awards and recognition, including the Emulex supplier of the year award, the Cisco Smart award for operational excellence and the prestigious Business Superbrands Award in 2011.
QUESTIONS
- How did Flextronics classify its plants before the mid 1990s? What was the drawback of such a classification?
- Define the strategic roles of the following plants mentioned in the case: the Chennai industrial park in India, the Guadalajara industrial park in Mexico, the Doumen industrial park in China, regional manufacturing and technology centres, and the plants acquired from IE.
- Why does Flextronics still have manufacturing activities in some high-cost regions?
- What changes happened at the Singapore operations? What changes happened at the Doumen industrial park in China? What was expected for the Chennai industrial park in India?
- What lessons have globally disruptive events had regarding the strengths and weaknesses of selecting where to manufacture? How might this influence determining an effective role for each factory?
- Can you provide an update on the strategic role of Flextronics’ plants, using materials available on the Web?
Notes
[i] Flex, Annual report (2020), 35.
[ii] Ibid.
[iii] Flextronics, Annual report (1996–2006).
[iv] ‘Slack Appoints Former Flex CEO Mike McNamara to Its Board of Directors,’ Business Wire, (4 December 2019).
[v] Flex company information, 2021: https://flex.com/company/our-leadership/revathi-advaithi
[vi] Flextronics, Annual report (1996), 9.
[vii] Ibid, 1.
[viii] Ibid, 1.
[ix] Kerry A. Dolan, ‘The detour economy’, Forbes 169 (2002), 52.
[x] Ibid.
[xi] ‘Flextronics Launces Industrial Park in Chennai, India,’ BioSpace, (3 November 2006).
[xii] Peter Wonacott, ‘Talent Pool – China’s secret weapon: smart, cheap labor for high-tech goods – beyond toys and garments, country raises the bar again in manufacturing – view from Mr. Li’s balcony’, Wall Street Journal (14 March 2002), A.1.
[xiii] ‘Weathering the tech storm: How Michael Marks boosted efficiency at contract manufacturer Flextronics’, Business Week (5 May 2003), 24B.
[xiv] Geri Smith, ‘Wasting away despite SARS, Mexico is still losing export ground to China’, Business Week (2 June 2003), 42.
[xv] David J. Lynch, ‘Business Unusual: How a little-known company navigated the shortages and shutdowns of the pandemic while pointing the way to a less China-centric future,’ The Washington Post, (30 July, 2020).
[xvi] Ibid.
[xvii] Flextronics, 3rd Quarter Report (2001).
[xviii] Dolan, ‘The detour economy’, 52.
[xix] Claire Serant, ‘Singapore no longer an EMS magnet – Mainstay Flextronics latest to look for lower cost destination’, EBN (2001), 3.
[xx] Gene Bylinsky, ‘Heroes of U.S. manufacturing’, Fortune 141 (20 March 2000), 192A.
[xxi] Claire Serant, ‘Flextronics consolidates EMS empire’, EBN (2001), 1.
[xxii] John Shedd, ‘Flextronics to acquire Telcom, expands business unit’, Circuits Assembly 12 (2001), 16.
[xxiii] ‘Flextronics announces restructuring plans’, Flextronics press release. http://news. flextronics.com/phoenix.zhtml?c=235792&p=irol-newsArticle&ID=1469515&highlight=(10 March 2009).
[xxiv] ‘Flex Purchases Help Reduce Cost and Risk by James Carbone,’ Electronics Sourcing, (30 April 2018).
[xxv] Flex company information, 2021: https://flex.com/connect/global-locations. Retrieved August 1, 2021.
[xxvi] Flex company information, 2021: https://flex.com/careers/locations/china-en. Retrieved August 1, 2021.
[xxvii] Sijia Jiang, ‘Electronics maker Flex ‘seized’ $100 million of Huawei goods in China: Global Times,’ Reuters, (25 July 2019)
[xxviii] Ibid.
[xxix] Ibid, 1.
[xxx] Flextronics, Annual report (2011), 2.