Contract manufacturing: Big competition for custom molders

The tremors we've heard over the past few years, as contract manufacturers began moving from electronics assembly into fully integrated manufacturing solutions that include injection molding, have of late become full-blown earthquakes. And it promises to shake up the world of custom injection molders, creating a new environment of triangular relationships and changing the direct path molders once had to OEMs. 

Large players in the world of contract manufacturing, such as Celestica Inc., Flextronics International Ltd., Solectron Corp., and Jabil, have raced to the forefront to supply a broad pallet of manufacturing services, freeing OEMs to do what they do best: R&D for new products, marketing, and sales. 

"We're doing what the OEMs always wanted someone to do," says Paul Santina, vp, business development and global plastics for Flextronics International. "It's a matter of capital. Is it smarter to take $100 million and build a manufacturing facility, or take $100 million and develop new products to capture greater market share? OEMs don't want to be good at everything." 

Of course, that wasn't always the case. Many OEMs tried to be good at everything by vertically integrating during the expansion of the 1970s and early 1980s. Many brought every manufacturing function in-house including printed circuit board manufacturing, plastic component molding, moldmaking, and assembly. Control was a big issue and the more the OEM did in-house, the more it felt in control of its destiny. 

Santina, who recalls those days, points out that vertical integration for an OEM had a costly downside: unused capacity. This is not a problem for the contract manufacturer, he says. "When one customer gets slow we have four more waiting in the wings to take up that capacity," he explains. 

Motorola's recent announcement that it will cease production of mobile phones at its Harvard, IL campus as of June 30, 2001 is a prime example of the downside of vertical integration. Although the plant managed to lower production costs and improve quality, Mike Zafirovski, president of Motorola PCS, says the company "cannot competitively manufacture products when there is surplus global capacity at Motorola's lower-cost sites." The work will be consolidated into lower-cost Motorola locations and to the company's outsourcing partners, presumably Celestica and Flextronics. 

One OEM's Strategy 
Motorola's shift from vertical integration to outsourcing became evident in 2000. In May, the company announced a global strategic alliance with Flextronics, a deal with an estimated value of more than $30 billion over a five-year period. Central to the alliance with Flextronics is the streamlining of Motorola's Communications Enterprise (CE) supply chain across multiple product lines, including wireless consumer devices, network equipment, and set-top boxes. 

In December, Motorola announced another strategic manufacturing alliance, this one with Celestica. The deal has a total estimated value of $1 billion over a three-year period. Under the terms of this agreement, Motorola has agreed to sell its manufacturing operations in Dublin, Ireland and Mt. Pleasant, IA to Celestica for approximately $70 million, and will outsource the manufacturing of some cellular phone handsets, messaging devices, two-way radio products, and accessories to the company. 

Motorola's Boynton Beach, FL manufacturing facility will be converted to concentrate on software applications, product design activities, and administrative support. Pager manufacturing will shift to Celestica in Dublin, which will also continue to manufacture cellular phone handsets for Motorola. Celestica will also continue manufacturing messaging devices, two-way radio products, and accessories for at least three years at the Mt. Pleasant facility and two years in Dublin. 

Supplier Reaction 
So how does this shift affect Motorola's current suppliers? Some feel that it doesn't have to be entirely bad. Security Plastics Inc. (Miami Lakes, FL) has long supplied pager components to Motorola, and the company's president, Norman H. Cohan, sees Motorola's decision as an opportunity. "We still have business with Motorola and it's growing, but it also gives us an opportunity to make relationships with these contract manufacturers," he says. "It raises awareness [of Security] with another whole group of customers, so we see it as more of an opportunity than a threat." 

Few molders, if any, could take on the amount of work that Flextronics and Celestica have just captured from Motorola. "Five or six years ago, contract manufacturers weren't even capable of serving these big OEMs," notes Santina. "They moved to become global players and have been waiting for us to catch up with them." 

Five years ago, notes Santina, Flextronics was a $200 million company. Today, it's at the $13 billion/year mark and growing at a tremendous rate, purchasing some capabilities such as molding and printed circuit board (PCB) manufacturing, and expanding through outsourcing. 

Flextronics currently has 675 injection molding presses located in various countries worldwide, and is rapidly moving toward 1000. "We really want to change the role of plastic injection molding on this planet," says Santina. "Typically, injection molders sell plastic parts to engineers and buyers on a tactical basis. We feel this needs to be a global strategic event. 

"Instead of selling plastic parts, we offer total product solutions in which plastics becomes a strategic aspect of that program. Instead of getting a PO for parts, we go in and find out their sourcing requirements for the entire product and make the deal to be the supplier, tying it all together and managing the program on a global basis for them long before we quote. This is the most fundamental change in the plastics industry we've seen in 20 to 30 years." 

Identity Crisis 
Overall, the shift in focus of OEMs like Motorola has left molders unsure of their position within the framework of this triangular relationship. It makes even the largest custom molder with global capabilities look like small potatoes compared to one of the big contract manufacturers. Bill Hoffer, vp of operations for Hoffer Plastics Corp. (Elgin, IL) has been closely involved with Motorola for many years. Hoffer Plastics molds for several Motorola manufacturing plants including Boynton Beach, Libertyville and Harvard, IL, and Mexico. 

He is not certain anyone understands completely the impact on molders as OEMs opt out of the manufacturing game. "There's no question that the big contract manufacturers are getting more involved," notes Hoffer. "The relationship between the ultimate customer and the molder really hasn't been very well defined yet." 

Where molders stand in all this, Hoffer believes, depends on the specialization developed by OEMs for the various platforms. "If they can make some parts a commodity item then it would be easy for them to turn those over to Celestica to source," says Hoffer. "Other components of a specialty nature have a better chance of staying with the OEM-developed source." 

The engineering development side, however, is still wide open, Hoffer says. "Who will develop the platforms and how will tools be placed? It's moving quickly but is still up in the air as to how they'll do it. It's always more complicated when it's a triangular relationship rather than a direct one." 

If the contract manufacturer takes over the purchasing function for the molded components, obviously that changes who the customer is for the molder. And, if the CM has its own stable of developed sources near its manufacturing plants, there's a chance the OEM's molder could lose the work. "If Motorola maintains the engineering and purchasing functions, chances are we'll maintain our supplier status," says Hoffer. But, he's not willing to speculate on how his business will be impacted if Celestica takes those responsibilities. 

Hoffer notes that his company has not been impacted so far by the Motorola/Celestica deal, but he has seen some effects on the company from Ericsson's agreement with Solectron for that company to acquire the manufacturing assets of Ericsson's telecommunications infrastructure equipment operations. That deal was announced in March of last year. More recently, Ericsson announced a decision to outsource its entire mobile phone production to Flextronics, a move that Ericsson says "will lead to a rapid improvement of economies of scale, a much smaller capital exposure, and reduced risk." 

All of this change is being driven by the same problem for OEMs in the marketplace: how to lower costs to manufacture and increase market share in a slowing economy. For custom molders, the questions loom large and coming up with an answer is not easy, admits Hoffer. "What we don't know is how sourcing decisions will be made and where we'll ultimately stand in the equation," he says. "Every situation is different depending on what you supply. Everyone's trying to find his place."