Networking vendors abandon manufacturing

When France-based networker Alcatel SA announced its plans Wednesday to sell most of its manufacturing facilities by the end of 2002, it was the latest hint of a growing trend among the vendor community: to streamline operations by outsourcing production.

Alcatel chairman and CEO Serge Tchuruk said that the company plans to slash the number of plants it operates from 120 to a dozen or fewer. “We are going to be a fabless company pretty soon,” Tchuruk said in an interview with The Wall Street Journal.

On Monday, Alcatel announced that it had signed a letter of intent to sell its 320,000-square foot plant in Richardson, Tex. to Sanmina Corp., a San Jose, Calif.-based contract manufacturer.

Moreover, the company has already begun outsourcing its mobile telecommunication manufacturing. In April, the company announced plans to contract Singapore-based equipment maker Flextronics International Ltd. to handle the European production of its GSM (Global System for Mobile communications) handsets.

Several of Alcatel’s competitors are taking the same path. Most notably, Lucent Technologies Inc., in Murray Hill, N.J., is reportedly in advanced talks to sell its plants in Oklahoma City and Columbus, Ohio to Canadian electronics manufacturer Celestica Inc. And earlier in the week, another major European player, Koninklijke Philips Electronics NV, said that it would outsource the production of its mobile phones to joint venture partner China Electronic.

To some observers, the outsourcing trend in networking is no different from long-established practices in PC and wireless manufacturing.

“It looks like a direct analog” to the PC industry, said Richard Cunningham, an analyst at research firm Cahners In-Stat Group, headquartered in Scottsdale, Ariz.

Cunningham noted that the decision to outsource is based simply on plant usage. Hence, the move toward contract manufacturing is being driven by the sales slump hitting the networking industry.

“You want to keep the plants busy,” Cunningham said. “If you built a plant three years ago and you’re getting good utilization out of it, it’s probably not worth selling it. But if utilization goes down, then maybe it’s time to hand it off to somebody else who’s in the contract space already.”

That decision is made easier by the fact that several new companies have emerged with photonics manufacturing as their core strategy. For that reason, contract manufacturing should not affect the quality of networking equipment, according to Cunningham. But he added that “there is a learning curve” to producing optical-networking equipment, due to the complexity and precision involved.