Contract manufacturing is the open secret of the hardware world. Increasingly, brand name manufacturers are outsourcing manufacturing, product design and even customer support functions to massive, yet relatively anonymous, companies with space-age names like Celestica and Flextronics that specialize in low-cost assembly.
The contract manufacturing industry will rake in $49 billion in revenue this year and will grow to $81 billion by 2002. An acquisition takes place approximately every other week. Solectron is currently the market leader.
To date, Japanese companies have been more reluctant than U.S. makers Compaq Computer and Hewlett-Packard to adopt contract manufacturing, according to analysts.
For Sony, the deal will let the company cut internal costs and offload inventory and manufacturing worries that come with fluctuations in demand, Kunitake Ando, president and chief operating officer of Sony, said in a statement.
Under the deal, Sony will transfer plants in Japan and Taiwan, along with 2,050 employees, to Solectron. The plants cover approximately 490,000 square feet. In turn, the two companies have entered into a series of manufacturing agreements. Currently, Sony makes automobile satellite navigation systems, car audio systems, and lithium-ion battery packs at the two factories. Financial terms and other details of the contracts were not disclosed.
For Solectron, the deal allows the company to increase its presence in Asia. It also gives the company an opportunity to move into the market for designer consumer electronics. Historically, Solectron and other contract manufacturers concentrated on PCs, notebooks and communications equipment.
"This initial cooperation represents a significant decision by a major Japanese company to utilize the EMS (contract manufacturing) industry in Japan," Koichi Nishimura, CEO of Solectron, said in a statement. "It also represents an important strategic step in further strengthening both our Asia/Pacific presence."