Should Flextronics Be Broken Up?

The findings of a new study by Boston Consulting Group suggest that, over time, many tech companies are guilty of mission-creep, especially large ones.  And when that happens, those companies do not provide the shareholder value they could if they were leaner and more focused.

As part of its study, BCG analyzed total shareholder return, defined as the bottom-line return from capital gains and cash flow contribution. When it did so, it found little distinction between large-cap and small-cap companies:

“The clear takeaway is that regardless of company size, the more diverse the portfolio, the more difficult it is to generate high TSR—and the greater the set of management skills a company needs in order to handle that diversity. Companies must therefore be more deliberate and more explicit in rationalizing each element of their portfolio.”

BCG likens the strategy to the 3 R’s, in this case, Resize, Reform and Rejuvenate.  Marc Andreessen, the founder of Mosaic (later Netscape), put it this way: “If they’re more than 20 years old, then [companies will] probably benefit from being broken up, and many of them will probably be forced to break up if they don’t do it voluntarily.”

So for the EMS pseudo-conglomerates (Foxconn, Flextronics, Sanmina, etc.), what this means is there are arguments to be made — indeed, being made — that having bare boards, assemblies, design services, box build, ODM products, and a host of other products and services under a single umbrella is not an optimal  strategy.

There’s always been some debate over whether publicly traded EMS firms should be compared to other tech firms like Cisco and Microsoft or to traditional manufacturing companies (say, Caterpillar). It’s tough for a mid-size or larger contract manufacturer to attain repeated organic double-digit topline growth, and their margins are never going to be Wall Street pretty. Dumbing down the peer group makes sense.

But the bigger question being asked is whether their size is actually a hindrance. There must be a point at which that happens. Can the data analysis pinpoint that yet? And will market impatience make all of this moot?

 

Boston Bulls

To the list of those bullish on the prospects for US manufacturing, add the Boston Consulting Group.

The consultancy group has issued a report that, in essence, gives China about five years before the gap between the two nations is closed.

The report contains few surprises. BCG points to steady increases in China’s wage rates and logistical costs, coupled with higher productivity in the US, as reasons for its optimism. Automation in China will have a deleterious affect on manufacturing there, as it will further reduce any labor rate advantage.

Moreover, any shift to other lower-cost nations such as Vietnam or Brmitl will be mitigated in part by those nations’ weaker infrastructures.

Pointing to past successes in fending off Taiwan and Japan, BCG says that US manufacturing sector in well into a period of adjustment and retrenchment, and “conditions are coalescing” for another American factory resurgence.

Worth a read.