In the first week of September, Microsoft officials will watch proudly as the first batch of Xbox game machines begins rolling off seven 280-ft.-long assembly lines at a new industrial park outside Guadalajara, Mexico. There may not be any Frisbees flying around, but the 124 landscaped acres could be any Microsoft campus back in Washington State. There is a screening room larger than the local movie theater and a cafeteria that includes a steak grill and a sushi bar (lunch price: $3)--all crowned by a glass-and-stone headquarters. Inside Building 12, engineers are working to make sure that unlike last year's Sony PlayStation 2, the new Xbox will be in plentiful supply at stores everywhere come Christmas.
But the real beauty of the Guadalajara plant--and the Xbox facility in Zalaegerszeg, Hungary--is that they are not owned by Microsoft. The Xbox is being made by Flextronics, a company that few consumers have heard of but that computer and telecommunications-equipment makers are eager to do business with. Indeed, near Building 12 are 16 production lines for Cisco Systems digital network routers. Other buildings produce Palm Pilots and DirecTV set-top boxes.
It's all part of the grand empire of Michael Marks, the amiable, fast-talking chief executive who since 1993 has driven Flextronics, based in Singapore and San Jose, Calif., from also-ran to pacesetter in the so-called electronics-manufacturing services (EMS) business.
This industry is nobody's new new thing. For several years it has done for companies such as Microsoft what basic contract manufacturers did for such old-economy companies as Nike and Sara Lee--relieved them of the gritty business of making things so they could focus on product development, marketing and brand building. What is stunning is that the EMS industry is booming even amid the smoking ruin of today's tech economy. As they acquire their smaller competitors and buy more of their customers' factories--at fire-sale prices--big players like Flextronics and Sanmina stand to emerge from the tech slump stronger than ever.
For computer and telecom-equipment makers now facing rebellious shareholders and piles of inventory, the prospect of a cash infusion from the sale of their factories to EMS companies is especially appealing. "We used to have to fight and plead for companies to divest assets to us," says Dave Fargnoli, a director of finance at Flextronics. "Now we're in the driver's seat because they are rushing to off-load them." Marks, a salesman to the bone, tells potential customers: "You can be a market-leading company and not make a single thing." Why not, he adds with a grin, let Flextronics make your products for you? "The venture-capital guys won't even give you money for a factory these days," boasts Marks. "They'll tell you to go to Flextronics."
The divestiture trend is a boon to the entire EMS industry, but Flextronics is growing the fastest. It has inhaled 39 suppliers and competitors in less than two years, and its $12 billion market capitalization hovers near that of industry leader Solectron, based in Milpitas, Calif. Both, though, face tough competition from Sanmina, which is based in San Jose and which last month agreed to buy rival SCI Systems, in a stock swap worth about $, 4 billion, plus assumption of $1.5 billion in debt.