Flextronics Relocates Xbox Manufacturing Facility

In an effort to cut manufacturing costs and allow Microsoft Corp. to offer its game console at a lower price
point, electronics manufacturing services (EMS) provider Flextronics Corp.
will relocate its Hungarian Xbox
manufacturing operation to Doumen, China.

The facility in Hungary supplied the European market, while another Flextronics facility in Guadalajara, Mexico supplies the North
American market. But while the Hungarian operation had injection molding facilities — Xbox manufacture uses a fair bit of molded
plastic, according to Flextronics’ Jim Sacherman — it did not have such ready access to other important components.

Flextronics’ 2 million sq. ft. facility in Doumen, however, offers injection molding facilities as well as a sheet metal operation
and circuit board fabrication and assembly — all on the same campus. Also, the facility is close to other component suppliers. For
instance, Sacherman said the supplier of the console’s cables is only an hour from the facility.


The Doumen facility will supply both the Japanese market and the European market.

“Our manufacturing facilities in the Far East are some of the best operations anywhere in the world, and we are confident that our
industrial park in China will meet the production demands of Xbox moving forward,” said Michael Marks, chairman and chief executive
officer of Flextronics. “Further, we are confident that through the local supply base and our substantial buying power we can help
Microsoft reduce product costs and assist in meeting the growing worldwide demand for Xbox.”

Todd Holmdahl, general manager of Xbox Hardware at Microsoft, added, “The Doumen facility will enable Flextronics to manufacture
Xbox consoles under ideal production circumstances. It is a large facility with a strong infrastructure and flexible production
capacity that will result in significant cost efficiencies.”

Those efficiencies are extremely important in the console business, where companies like Sony and Microsoft lose money on each box
sold. The model assumes a loss on the hardware, and also assumes that loss will be made up by selling games and licenses for games
on the platform.

Microsoft started off selling the Xbox six months ago at a $299 price point in order to stay level with Sony’s market-leading
PlayStation 2 console, which had already been on the market for more than a year. At the time, analysts estimated the Xbox —
costlier to produce than the PlayStation 2 because of its many PC components — cost the company about $450 per box to produce.

Skip forward to the present, and Sony has had two years to create manufacturing efficiencies. That allowed it to shave the price of
its box by $100 on Tuesday, dropping it to a $199 price point and putting pressure on Microsoft to do the same.

Microsoft had been widely expected to announce a price decrease on its Xbox at the Electronics Entertainment Expo (E3) in Los
Angeles next week, and criticized Sony for jumping the gun Tuesday. But by Wednesday, Microsoft bowed to the pressure and announced
that it too was willing to pay in the price reduction arena, lowering the price to $199.

“As part of our long-term strategy to broaden the reach of Xbox and make it accessible to more consumers, we’ve been working for
several weeks with our key partners to make this announcement as seamless and high-impact as possible,” said John O’Rourke, director
of worldwide Xbox marketing at Microsoft. He added, “This new, lower price makes the Xbox the best value among all competing video
game systems.”

The decision to move production facilities to China was some time in coming. The two partners had been planning an Asian facility
for a while when they decided that moving Hungarian operations to the Doumen campus would mean additional efficiencies.

“It’s all part of their plan,” said Gartner Research Director P.J. McNealy. “One of their main goals is to get the cost of the
hardware down. If they can save some margin on having more regional production, it has to help.”

Flextronics has already begun the transition.

“We are starting our move out of Hungary now, and we’re currently working to start up operations in China,” Sacherman said. The
Doumen facility should be online in July or August.

McNealy said the downtime should not hurt sales, as the Guadalajara facility should suffice during the summer lull and the Doumen
facility should be up and running in plenty of time to produce boxes for the peak holiday season.


Microsoft is also planning an additional Asian facility in the future, though it has not announced which EMS provider it will
partner with to create it.

The current economic environment appears to be a healthy one for EMS providers. In January, IBM Corp. sealed a $5
billion outsourcing deal with EMS provider Sanmina-SCI Corp., under which Sanmina will manufacture IBM’s NetVista desktop computers.
As part of the agreement, Sanmina took over IBM’s manufacturing facilities in Research Triangle Park, N.C., and in Greenstock,
Scotland.

And Tuesday brought a win for Flextronics, as it forged a $1.5 billion agreement with Casio Computer Co. Ltd. to manufacture a
variety of Casio’s electronic products. The agreement included Flextronics’ purchase of Casio’s production facility in Shah Alam,
Malaysia. Flextronics will also pick up Casio’s manufacturing operation in Aichi Japan (though not the land and building), and
certain equipment from Casio’s factory in Kluang, Johor, Malaysia.

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