Celestica slashes 5,500 jobs

Celestica Inc. plans to slash 5,500 jobs, reducing its global workforce by 10 to 15 per cent – or approximately 5,500 people – over the next 15 months.

The news came in the wake the Toronto-based electronics manufacturer’s decision – announced last week – to restructure operations by closing down plants in high-cost regions. Some work previously done by these plants will be moved to two new facilities in low-cost locations – Romania and China – within the next six months.

This is the fifth round of restructuring for the company since 2001. The previous one was announced in April 2004.

A Celestica spokesperson contacted Monday said she wasn’t sure to what extent the layoffs would affect Celestica’s Canadian employees. The company has two factories in Canada: in Toronto and Kirkland, Que. The spokesperson also declined to comment on other restructuring or offshoring details, stating that the appropriate spokesperson was traveling for the rest of this week. She said all information her company had to offer was contained in press release issued on the subject and discussed at the analyst conference call and Web cast last Thursday.

During the conference call, Celestica CEO Stephen Delaney justified the job cuts saying returns are still below where they need to be.

“After evaluating the needs of our customers and assessing the best roadmap to sustain…acceptable levels of profitability, we have made the decision to significantly reduce the amount of excess capacity in our system.”

Anthony Puppi, Celestica’s executive vice-president and chief financial officer, said it is necessary for the manufacturer to move more production offshore because customers increasingly want manufacturers to “ship more production to low cost regions in order to compete in their own highly competitive marketplaces.” He said Celestica’s new offshore locations would receive work from both new contracts and existing customers. Delaney said approximately 85 per cent of firm’s operations are already in low-cost regions such as Mexico, Asia and Central Europe.

Andy Efstathiou, an analyst with Boston-based The Yankee Group, said the computer hardware industry is facing much higher degrees of margin compression than software or professional services industry, which is why hardware manufacturers began moving their work offshore years before overseas application development became popular.

One of the problems manufacturers must face when sending hardware work offshore has to do with lengthening of the supply chain time, he said. “By the time you put in an order, it takes a longer time before you get the product.”

He said the reason some Japanese manufacturers have been so successful with just-in-time inventory is because in many cases, they have located themselves next-door to their suppliers. “But if you put your suppliers’ factories around the globe, you have to ship around the globe,” which takes longer, he said. Lower cost shipping — by boat, for example — is slow, and even higher-cost airline shipping would never be as fast as local shipping, he said.

According to Efstathiou, moving into new regions might pose an infrastructure dilemma as well. “If you are moving into a geography with an installed manufacturing base, this is much less of an issue, but if moving to a place where you are the first ones putting in a manufacturing plant, there (may) be issues of product quality, politics and outage…that may cause a factory to go (temporarily) out of service.”

Although moving work offshore may help cut costs in the short term, Efstathiou said the best bet for Celestica would be to develop new or unique production capabilities that would help reduce expenses.

“It’s just a labour arbitrage,” he said about Celestica’s decision to move its plants offshore. ‘It does not provide a distinct cost advantage.” He said if currency values shift or the political situation changes in an offshore location, the value of that location would diminish and Celestica would have to seek yet another geography.

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