Solectron's Acquisition Strategy Pays Off Big in Revenue Growth / It had fastest sales growth rate among big Bay Area companies in '98
How do you keep revenue growth above 50 percent year after year?
If you're Solectron Corp., you do it by making one strategic acquisition after another. A high-tech version of "Let's Make a Deal" has enabled the Milpitas company to increase its revenue at an average annual rate of 53 percent during the past seven years.
Last year's sales grew 57 percent as Solectron added nearly $2.5 billion to its top line. That was the fastest one-year growth rate among the Bay Area's largest 25 companies, ranked by sales.
Solectron is a contract manufacturer, which means other companies pay it to make products they can sell under their own brand names. The products include everything from cellular phones to entire computer systems, and the customers include heavy hitters such as IBM, Mitsubishi, Hewlett-Packard and Ericsson.
Solectron's modus operandi is to acquire a manufacturing plant from a big company, then use the facility to make products for that company. At the same time, Solectron gets to use the plant to make products for other companies that don't have enough manufacturing capacity of their own.
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Everybody wins. The computer and electronics companies don't have to worry about manufacturing, while Solectron gets the resources that have enabled it to become a global powerhouse in the fast-growing electronic manufacturing services industry, which accounts for some $90 billion in annual sales of computer and electronics gear.
Solectron has completed 16 such acquisitions since 1992. During the past year alone, it acquired two computer components facilities from IBM, a cellular phone factory from Mitsubishi, a global positioning satellite plant from Trimble, and NCR's computer systems operation.
Solectron's strategy has dovetailed nicely with a growing desire on the part of computer and electronics companies to outsource manufacturing and concentrate instead on research and developing new products.
For the 12 months ending in February, Solectron's sales rose to $6.8 billion from $4.4 billion the previous 12 months, and its net income jumped to $234 million from $183 million. Its stock soared from $20 a share at the start of 1998 to about $46 at the end of the year. Since then, it has gone up another 8 percent, closing on Friday at $49.88.
"They're definitely a company that's in the right place at the right time, and they're executing extremely well," said analyst Louis Miscioscia of Lehman Brothers, who thinks the company is on track to grow 56 percent again in fiscal 1999, with revenues hitting $8.25 billion.
At its present rate of growth, Solectron probably will pass SCI Systems of Huntsville, Ala., this year to become the largest EMS company in the world.
"Accolades for Solectron go far beyond mere size," SG Cowen Securities stated in a recent research report. "The company has twice won the Malcolm Baldrige Award for quality and is adept at 'thinking outside the box,' with innovative programs for managing its supply chain and monitoring customer satisfaction."
Founded in 1977, Solectron began life by assembling electronic components using parts designed by its customers. It had one plant, in Silicon Valley, and fewer than 100 employees.
Today, it still assembles components, such as circuit boards, but it also manufactures computer systems, cell phones, pagers, modems, fax machines and other electronics devices for other people. It also designs and distributes many of the products, taking over even more of the work for customers.
"As time went by, customers began asking us to design things for them," said chief executive Koichi Nishimura. "Then they said, 'Buy my parts for me.' And then, 'Plan for the future of buying those parts.' And then, 'Build my boxes.' "
Solectron today has 21 sites around the world, and some 31,000 employees, including 5,200 in the Bay Area.
Nishimura, a second-generation Japanese American who was born in Pasadena in 1938, sums up Solectron's approach like this:
"When my mother died, a Buddhist priest taught me three lessons to live by: Nothing in life is still, nothing in life is eternal, and everything in life is good.
"These philosophies can also apply in business. Technology changes every minute. Your customers may not stay with you forever. There are opportunities everywhere you look."