A Leader Behind the Scenes

Solectron Corp. might be the most thriving high-tech firm that isn’t a household name, but neither the company nor its investors is complaining.

The Milpitas, Calif.-based company is the world’s largest “contract” manufacturer of computers and other electronics for some of the biggest tech companies around, which then stamp their own labels on the products.

Solectron’s biggest customers include Hewlett-Packard Co., Cisco Systems Inc. and Sun Microsystems Inc., just to name a few. They hire Solectron to make their personal computers, cell phones, printers, networking gear, modems and a host of other items.

And Solectron isn’t alone. A host of other companies also have exploited the boon in high-tech outsourcing, or “stealth” manufacturing, including SCI Systems Inc., Jabil Circuit Inc. and Flextronics International Ltd.

The overall industry now generates more than $90 billion in annual sales globally, and it’s expected to keep growing at a 20% annual clip for at least the next three to five years, according to the research firm Technology Forecasters in Alameda.

“We’re basically in the third or fourth inning of a nine-inning game; there’s still a tremendous amount of growth going forward,” said analyst Keith Dunne of the investment firm BancBoston Robertson Stephens in San Francisco.

But Solectron has emerged as the industry’s dominant player, and it’s been growing like wildfire at a pace that often exceeds even its clients’ rapid growth. Earlier this month, the company said revenue for its fiscal year ended Aug. 27 totaled $8.4 billion--nearly a sixfold increase from five years ago. Fiscal 1999 profit, meanwhile, soared 48% from the previous year.

“Solectron is the leading provider by any measure: sales, profitability, balance sheet and quality,” analyst Jerry Labowitz of Merrill Lynch & Co. in New York said in a recent bulletin to clients.

One reason: a spree of nearly 20 acquisitions that Solectron has made in the 1990s, which has swelled its work force to 33,000 people. And two weeks ago, the company announced its biggest deal yet--an agreement to buy Smart Modular Technologies Inc., a maker of electronic components and devices, for $2 billion in stock.

And that stock is valuable currency these days, having skyrocketed in response to Solectron’s growth. The shares have nearly tripled in price in the last 12 months--to give Solectron a current market value of $20 billion--and have soared more than tenfold over the last five years. The stock closed Friday at $68 a share, down 88 cents, in New York Stock Exchange composite trading.

To be sure, Solectron’s sizzling growth raises concerns that the company will become too big, too bureaucratic and thus lose its edge as a nimble outside manufacturer.

“We do worry about the ability to keep up our pace of growth,” said Susan Wang, Solectron’s chief financial officer. But she said Solectron should manage because the market is growing so much, and because Solectron gives local division managers the autonomy to keep customers happy.

“We have been very deliberate about the way we grow our business,” she said.

The force behind Solectron is its chairman and chief executive, Koichi Nishimura, 61, who prefers to be called Ko. He had spent 23 years with IBM Corp. when he was recruited by Solectron’s first chief executive, Winston Chen, to join the company in 1988. Nishimura became CEO in 1992.

A second-generation Japanese American, Nishimura was born in Pasadena and spent five childhood years in the internment camp of Manzanar, in California’s Owens Valley, during World War II. He didn’t learn English until the first grade, and ultimately earned a doctorate degree in materials science and engineering from Stanford University.

Solectron was started in 1977, making gear for solar energy equipment, and its name is a combination of “solar” and “electronics.” But it eventually grew by assembling circuit boards for the growing number of tech companies in Silicon Valley, then spreading out into the manufacture of all types of electronic products.

But why do companies use Solectron? Because the company offers an efficient and often lower-cost alternative to producing the equipment in-house. In fact, Solectron often buys manufacturing plants from the tech companies themselves and rolls out the goods more cheaply.

That relieves the companies “from having the expense of capital equipment and fixed personnel” at their own plants, and enables them to focus their people and money on product design and marketing, said Charlie Mullen, consulting director at Technology Forecasters.

Solectron provides “lower cost, very good quality and has a consistent delivery performance,” said Phil Faraci, head of manufacturing for Hewlett-Packard’s inkjet-printer business. Solectron typically can produce HP’s printers for 10% to 15% less than Hewlett-Packard can internally, he said.

Solectron achieves its cost savings in part because its plants are running far more often than those of its customers--mainly because its plants are doing work for several customers at once.

“It can utilize its plants more effectively, particularly during [the customer’s] product changeovers, when their own plants go idle,” analyst Dunne said.

Also, many of Solectron’s biggest plants are on U.S. soil, enabling customers to make changes in product development more quickly than if the plants were overseas. At the same time, though, Solectron’s global production sites give clients quick access to overseas markets if they don’t already have plants in those regions.

And Solectron works on volume, because its lower prices keep profit margins exceptionally thin. For years the company hasn’t earned more than 4 1/2 cents for every $1 of revenue. However, Solectron’s bulging size enables it to buy electronic components for low prices, and the company works to keep its overhead costs to a minimum.

That includes relatively low wages for newly hired assembly workers, who are often immigrants or first-generation Americans who start at less than $10 an hour, according to published reports.

Solectron spokesman Michael Donner said the company doesn’t disclose salaries, but noted that its workers’ pay can rise rapidly because of bonuses, promotions and stock-purchase plans. Solectron also provides a range of free training courses, including English classes.

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Solectron’s Ride

Solectron Corp.’s stock has soared as more high-tech companies hire the contract manufacturer to produce their goods, and because Solectron has made several acquisitions to expand its growth.

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Friday: $68.00

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Source: Bridge News