Linux demand forces VA Research to outsource

VA Research will soon hand off more of its manufacturing to Flextronics, according to a VA Research executive.

Flextronics, which has been making VA's Linux-based workstations for two months, is in the process of taking over server production as well, said Daniel Shore, VA's vice president of operations. The company's unit shipments have increased more than 300 percent since November, and by the end of the year VA will have manufacturing capacity for tens of thousands of machines per month, Shore said.

VA's current manufacturing employees won't be laid off, but instead will continue making more powerful "multiprocessor" Linux machines, he said.

The alliance with Flextronics, along with Intel's investment in VA, gives the company an anchor of stability amid the choppy seas of the Linux market as the Unix-like operating system grows in popularity. It could also reduce the time needed to deliver custom-configured Linux systems to customers to three to five days after they order.

Meanwhile, Flextronics, which builds all Palm Pilots as well as some Cisco routers, further taps into companies' increasing desire to let others deal with the intricacies of building electronics. Flextronics is already one of the top "contract manufacturing" firms, according to financial analysts.

The growth of Linux took off in 1998, driven in part by its popularity in the Internet world and by the fact that it can take advantage of older hardware too slow for Microsoft Windows. VA Research has supplied Linux machines since 1993, but in recent months, it's been joined by major hardware manufacturers such as Hewlett-Packard, IBM, Compaq, and Dell.

VA has benefited from this boom, quadrupling its staff in the last four months to more than 60. The Mountain View, California, company also is in the process of moving to new headquarters with four times the floor space. The last stage of the move, transferring the computer assembly operation, is scheduled for completion April 17.

The benefits of contract manufacturing
Many large companies, including IBM, Compaq, and HP, rely on contract manufacturers for a variety of their products.

Contract manufacturing will give VA the ability to respond more quickly to the surging demand than the company could on its own, Shore said. To reach its monthly capacity goals of tens of thousands of units, VA Research itself would have required 8 to 10 times its current number of employees, he said.

When VA first started with Flextronics, the average production time was 14 days, Shore said. The current average is 8 days, and the company has a goal of 3 days--an ambitious target given the 24-hour "burn-in" time to make sure the processor works as well as accommodate the ordering and credit approval steps in the process. Some time is saved because orders are automatically plugged into Flextronics' computer system and Flextronics ships systems directly to the customers.

Contract manufacturing also gives VA Research the ability to enter European and Asian markets more easily, Shore said, since VA won't have to pay duties on the importation of assembled systems. VA will push into Europe in the third quarter of 1999, then into Asia in the second quarter of 2000, he said.

Further, the Flextronics alliance should help lower costs because Flextronics has access to high-volume discounts for hardware components and uses manufacturing facilities in countries with low labor costs, he said. Flextronics uses a Guadalajara, Mexico, facility for North and South America, a Hungarian facility for Europe, and Malaysian and Chinese facilities for Asia.

In a report on contract manufacturing, NationsBanc Montgomery Securities found hourly contract manufacturing labor costs of 70 cents in China, $1.80 in Eastern Europe, and $1.80 in Mexico. U.S. costs are higher.

VA Research doesn't expect quality control problems, though. Flextronics is a good manufacturer, and Shore said he had good luck with the company in his previous job, where he oversaw Flextronics' construction of WebTV computers for Philips.

Building Linux boxes is similar to building more mainstream machines, he said, although in some cases plug-in cards have to have switches or "firmware" changed from their default Windows settings to Linux-specific configurations.