Nortel may sell off manufacturing business

Nortel Networks announced Thursday it is in partnership discussions with Singapore-based Flextronics International Ltd. to offload its manufacturing interests, which cost the Brampton, Ont.-based network gear maker approximately US$2 billion in production costs.

As part of its strategy, Nortel said it intends to transfer all of its remaining manufacturing activities, including product integration, testing, and repair operations carried out in the Company’s Systems Houses in Calgary, Montreal, Brazil, Northern Ireland and France. Other related activities, including the management of the supply chain and related suppliers for these locations will be transferred to Flextronics provided the deal goes through.

But, Nortel said it will keep its supply-chain operations’ strategic management and control responsibilities in-house, including customer service, order management and new product integration.

According to a statement from Chahram Bolouri, president, global operations for Nortel, by implementing this operating model, the company will be able to drive reduced inventory and improved customer service and responsiveness. It will also be able to focus on those areas of the supply chain of most importance to its customers.

If discussions with Flextronics are successful, approximately 2,500 Nortel employees could be affected. However, the company said it is too premature to talk details of the potential effects on employees. But, judging from other divestitures, the company said it is likely that these workers will become Flextronics employees once the deal is settled.

In a separate statement, Flextronics said it is pleased to be recognized by Nortel for its supply-chain capabilities and for its ability to meet Nortel’s time-to-market, quality and cost reduction objectives. The company also said the proposed transaction would solidify it as the leader in the infrastructure market.

“I think the point is that the strength of Nortel is really in the carriers. They really haven’t had huge success in the enterprise space. They’ve done fine in PBXes (private branch exchanges) and will do fine in IP (Internet protocol) PBXes, but the point is that their bread and butter has always been finding out what the telecom industry is going to do next,” said Brownlee Thomas, a Montreal-based analyst at Forrester Research Inc. “The area of the world where the telcos have not suffered is in Asia/Pacific. What I am assuming Nortel is doing is positioning itself for China.”

She explained that North American and European companies are in the middle of positioning themselves to take a piece of the Chinese telecom market.

“That is the market that everyone is looking at. China has more than two billion people. Singapore is not China, but Nortel can’t get into China,” she said. “All of the Western and European players have tried to get into China but you can’t. You have to be local. Singapore has a huge population. If you want to get close to China, Singapore is a great place to be.”

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