Global Electronics Giant Makes Play for U.S. Defense, Aerospace Market

5/7/2012
By Sandra I. Erwin
U.S. defense and aerospace firms — saddled with inefficient manufacturing operations that dampen profits — could benefit from the lean, mean, production techniques of the consumer electronics industry.
So says Tim Malac, vice president of aerospace and defense at Flextronics, a global electronics manufacturing services company.
Flextronics, the world’s second largest EMS supplier — after iPhone manufacturer Foxconn — sees the defense and aerospace markets ripe for outsourcing, even at a time when outsourcing is a taboo issue in Washington. It also considers the defense market an attractive target despite projected Pentagon budget cuts.
Precisely because of financial pressures on the federal budget and on corporations to compete in the global economy, manufacturers of major weapon systems, satellites, aircraft, and other military and commercial hardware are searching for ways to slash cost and increase productivity, says Malac. The economic case for contracting out manufacturing operations is strong, he contends.
Flextronics, a $30 billion company based in Singapore, is aiming at Pentagon suppliers and commercial aerospace firms that manufacture high-tech components in-house.
“We are looking to provide manufacturing services for major defense contractors, or take over their supply chain,” Malac says in an interview. Companies might not realize the potential cost savings that could be achieved by contracting out manufacturing to commercial firms that have industrial efficiency down to a science.
Even military contractors that are required to assemble their products domestically can benefit from outsourcing, he says. Flextronics, which operates in 30 countries, has several plants in the United States, with its U.S. headquarters in Milpitas, Calif. Its customers include original equipment manufacturers in the consumer electronics, telecommunications and medical device industries.
Malac, a former defense industry executive who joined Flextronics in 2011, says the company today sees aerospace and defense as its “highest growth” sector. “Customers are looking to cut cost, they are rationalizing their portfolios,” he says. Discussions with defense and aerospace industry executives in recent months hint at a growing demand for lower-cost manufacturing, he says.
As part of its foray into the U.S. defense sector, Flextronics in March acquired a California-based electronics manufacturer, Stellar Microelectronics.
Malac says a concerted effort to penetrate the aerospace market began about a year ago when Flextronics senior management reorganized the company and created a “high reliability solutions” group to focus on aerospace, medical and automotive products. This sector caters to customers that are subject to unique requirements and regulations and that generate $10 million or less in sales. “You still get the benefits of our $30 billion operation,” he says.
Contrary to conventional wisdom, commercial firms such as Flextronics are not shunning the notoriously complex U.S. defense business. Bidding for Pentagon contracts tends to scare off some suppliers because of the red tape and a byzantine procurement process.
“That’s how things were,” says Malac. “Things have changed. Companies have seen there’s a lot of value in these markets.”
A large Pentagon “systems integrator” such as Lockheed Martin would be a prime candidate for Flextronics’ services, Malac says. “We could cut their supply chain cost, we could drive cost out of lower tiers. … We have done it in other industries and achieved double-digit savings.”
Growing concerns about network intrusions and use of counterfeit electronics in military systems are seen as a business opportunity to bring cybersecurity know-how into the defense sector, Malac says.
In the electronics industry, companies protect their intellectual property as zealously as the Pentagon safeguards its weapon blueprints, he adds.
Flextronics’ Chief Information Officer David Smoley says EMS firms pour significant resources into protecting data as “we operate in parts of the world that are perceived to be challenging from a security perspective, such as China, Eastern Europe and parts of Latin America.”
Regulations that crack down on counterfeit electronics and other defense-unique rules don’t faze Flextronics executives.
It is not unlike other regulatory challenges that EMS firms routinely must tackle, Smoley says. Environmental regulations are a case in point. Each country where Flextronics assembles electronics puts out a steady stream of legislation, and the company has to continuously adapt, he says. “It’s part of doing business in the global economy: Being aware of legislation.”
The ponderous Pentagon procurement cycle is not a deterrent either, he says. In the global economy, companies are reacting 24/7 to changes in technology. If aerospace and defense customers prefer a slower cycle, that is not a bad thing, he adds. “It gives us more time for planning, more time for testing.”

Topics: Business Trends, Defense Contracting, Infotech, Manufacturing

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