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Flextronics Has Designs on Networking

Flextronics' recent mega-contract from Nortel is most often described as an outsourced manufacturing deal.

And indeed it is. Flextronics will take over Nortel factories and inventory in Brazil, Canada, France and Northern Ireland and build Nortel's networking products for the next four years.

But a key element of the agreement, and one Flextronics negotiated hard for, involves design. With the help of engineers who will transfer from Nortel, Flextronics will oversee development of a portion of Nortel's optical product line.

It's a noteable expansion of Flextronics' duties, and one that CEO Michael Marks thinks makes sense for his company and customers.

Before the outsourced manufacturing industry existed, companies did their own design and manufacturing. Gradually, Flextronics, Solectron and others built or bought international plants to churn out PCs, servers and other gear.

Eventually, the companies got more involved with the design of the products they built, although complex networking gear such as routers stayed on the corporate campuses of industry heavyweights. Marks said some of the benefits of having these two parts of the production process occur under the same roof were lost.

"What we're doing is taking design and manufacturing and tying them together with our supply chain," Marks said in a conference call discussing the Nortel deal. "We're integrating to get faster-time-to-market and overall lower cost."

Flextronics' ability to sell Nortel on the move may nudge other network equipment makers to take a harder look at the idea. Without naming names, Marks said he's talked with executives from other network equipment companies and they acknowlege that there are aspects of design work that are best integrated with the manufacturing piece.

But acknowledging and acting aren't the same. Nearly all companies in the sector outsource production. Three contract manufacturers -- Celestica, Jabil and Solectron -- manage the a bulk of Cisco's outsourced manufacturing, spokeswoman Mojgan Khalili said. But most of the industry leader's design work is done in-house, she said.

Mary Ward, a Lucent spokeswoman, said nearly all company products have been built by contractors for several years. Using Celestica, Sanmina, Jabil and Solectron has helped Lucent become reduce overhead and be more flexible when demand picks up or slacks off.

Citing the brainpower in its Bell Labs research and development unit, Lucent Technologies handles design of its optical products in-house. The company recently announced a multi-million initiative to build a lab in Ireland and team with universities there.

"With a resource like Bell Labs available to us we naturally drive the design and engineering of our optical solutions," Ward said.

Still, Lucent does does solicit input from suppliers and contract manufacturers about design or process moves that could lower costs or risks, Ward said, adding that the firm will continue its collaborative approach with its partners.

Flextronics' Marks predicts a change int the way networking gear goes from drawing board (CAD screen) to finished product and credits customer Nortel with "taking a fairly dramatic step to get there before the competition."

"We believe that all these products are on some kind of transition from very complex products to relatively simple products that can be bought off the shelf," Marks said. "Obviously, optical products are at the far end of that spectrum."

But he's seen the evolution before, most recently with cell phones. "It may be five to 10 years before that happens with wireless and optical," Marks said. "But we're going down that path."