Nortel Networks will shift the last of its manufacturing operations to Flextronics when a deal announced Tuesday is completed next year.
The vendor of carrier and LAN equipment, which five years ago built all of its own products at 26 locations, has outsourced those operations so it can more quickly shift its manufacturing mix and get products to customers, as well as to cut costs, said Chahram Bolouri, president of global operations at Nortel.
Nortel's five-year outsourcing process reflects an industrywide trend, according to Frank Dzubeck, president of Communications Network Architects. Rival Cisco Systems has also offloaded much of its manufacturing over the last several years. Equipment makers want to focus their own resources on developing the next generation of hardware and software, Dzubeck said.
Under the deal announced Tuesday, Flextronics will acquire operations and some assets at Nortel Networks Systems Houses in Calgary and Montreal as well as in Brazil. Flextronics also has offered to buy similar operations in Monkstown, Northern Ireland, and Chateaudun, France. Singapore-based Flextronics also will acquire Nortel's global repair services, which it will manage with employees of Flextronics and third parties carrying out repairs, Bolouri said. The European transactions are subject to information and consultation processes with employee representatives.
In addition, Flextronics will take over some design operations in Ottawa and Monkstown for existing Nortel optical products; Nortel will focus on developing the next generation of gear.
Nortel plans to set up Solutions Operations Centers collocated with the Calgary and Montreal facilities and, once the deal closes, in Monkstown and Chateaudun. At these facilities, Nortel will configure sets of products that may include equipment from several vendors, according to Bolouri.
In all, about 2,500 Nortel employees will transfer to Flextronics, the statement said. About 900 in Montreal, 650 in Calgary, 100 in Ottawa, and 30 in Campinas will move to Flextronics. Under the terms of the European deals, an additional 440 employees in Monkstown and 330 in France will transfer.
The parts of the deal related to manufacturing in Montreal and optical design in Ottawa and Monkstown are expected to close in the fourth quarter of this year, with the rest of the deal closing in the first half of next year.
Rather than maintain its own factories and manufacturing workforce, Nortel is turning to specialized companies such as Flextronics and Solectron Corp. that can respond to changes in customer demand by shifting resources, Bolouri said. In addition, having manufacturing in different parts of the world lets Nortel get products out to customers in those areas more quickly, he said. For example, in China, Nortel already uses a joint venture operation and several Flextronics facilities to do manufacturing for local customers, he said.
In all, Flextronics would take charge of operations accounting for about US$2.5 (AU$3.6) billion of Nortel's cost of sales. As part of the deal, Nortel will receive about US$675 (AU$977) million to US$725 (AU$1,049 ) million in cash.
Nortel should be able to maintain quality control so that customers have nothing to worry about, according to Dzubeck.
"Nothing changes; it's just that they've caught up with everybody else," he said.
"It's something that a company like Nortel was slowly but surely doing, but had to accelerate it due to its economic problems," Dzubeck said. The company was hit hard by the recent telecommunications slump and is now reviewing its financial results for 2000 through the first half of 2003. In April it fired President and Chief Executive Officer Frank Dunn and delayed reporting its results for the first quarter of 2004.
The company, a mainstay of Canada's high-tech industry, has changed significantly in the past 10 years, Dzubeck said.
"Nortel used to have a pride in the fact that, being a Canadian company, they had a tremendous amount of the manufacturing ... that they would do under their own roof, and they were very large employers in Canada because of that," Dzubeck said.