Motorola, Flextronics end outsourcing deal

Motorola and Flextronics nixed a five-year outsourcing deal signed in May 2000 that called for Flextronics to manufacture $30 billion to $32 billion worth of Motorola products, including wireless phones, pagers, infrastructure equipment and set-top boxes.

The alliance originally was expected to affect about 15% of the total manufacturing for Motorola’s Consumer Enterprise unit over the five-year period. Flextronics was scheduled to make both components and complete units, providing Motorola with finished assemblies, plastics, printed circuit boards, backplanes, enclosures and engineering services.

The relationship will continue, with Flextronics serving Motorola as a contract manufacturer, but the companies will remove the volume threshold and five-year timeframe parameters from the deal. The sharp downturn in the high-tech sector overall coupled with weaker forecasts for the wireless industry led to the decision.

“When we struck the deal with Flextronics, the industry outlook was a lot different than it is today,” said a Motorola spokeswoman. “When we signed the agreement, we thought it was realistic, but since then, the market conditions have changed incredibly. We just know that the $30 billion to $32 billion that we projected the deal would be worth isn’t going to be achievable.”

Motorola indicated the relationship with Flextronics would continue to be an important part of its corporatewide strategy to simplify its supply chain and to reach “a balance of internal and external production.” Despite the reworking of the deal, Flextronics expects that Motorola will be one of its top five customers this year.

As part of the new relationship, Motorola has agreed to let Flextronics repurchase a $100 million “equity instrument” it had sold to Motorola as part of the supply agreement reached last year. The instrument was convertible over time into 11 million shares of Flextronics stock. The repurchase will be accounted for as an equity transaction, with Flextronics paying what it described as a “modest premium” to transfer the instrument.

According to Michael Marks, Flextronics chairman and CEO, Motorola was under no obligation to do so.

“Motorola graciously allowed us to buy back the equity instrument [and] we appreciate this tremendously as it enables us to remove barriers that have limited our progress with other suppliers,” he said in a statement.