Google Inc. is fast becoming the hottest must-have partner for many supply chain service providers in the electronics manufacturing industry. With the Web search engine provider expanding its roster of electronics hardware, sales and profit opportunities running into billions of dollars have opened up at the company for semiconductor makers and other component suppliers, distributors, contract manufacturers, logistics providers and independent design firms.
Contract manufacturer Flextronics International Ltd. is one of the companies that expects to benefit richly from its engagement with Google as the company accelerates the ongoing transformation into a full-fledged technology company with extensive interests in software and hardware. It’s not alone, however. Google’s purchasing of electronics manufacturing services is surging and as its costs of goods sold increase with each venture into a new or existing hardware market, so will the value that supply chain companies see as they wring out further engagement with the company.
Mike McNamara, CEO of Flextronics, believes strongly in the Google vision. So strongly, in fact, that one year ago he tightened the bonds between the two companies by agreeing to provide manufacturing services to Motorola Mobility, the wireless handset vendor Google acquired in 2011 for a hefty $12.5 billion. The ecosystem Google is building will require a lot of support from the electronics industry and is in line with similar opportunities opening up at Microsoft and Apple, according to McNamara.
“The world changed,” McNamara said in a presentation at the Citi Global Technology Conference in early September. “These companies have a lot of money and software. Now they are integrating hardware and content into a big ecosystem. It creates a different kind of opportunity for us and that’s something we didn’t see just 18 months ago.”
That Google – and rivals Apple and Microsoft – are building a new ecosystem for the electronics and wider technology market is indisputable. Google and Microsoft started out as software firms but they have since morphed into electronic hardware designers and marketers. Between them, the two companies now account for a huge chunk of global semiconductor spending and their combined procurement power in the IC market will within a few years run into tens of billions of dollars. Microsoft, alone, will purchase about $6 billion worth of semiconductors in 2014, making one of the Top 5 global chip buyers, according to IHS Corp. (See: Nokia Acquisition to Boost Microsoft’s Buying Clout).
To take advantage of the evolving hardware-software combo, Flextronics last December purchased Motorola Mobility’s manufacturing operations in China and took over management of the wireless OEM’s Brazil facility. The move increased the electronics manufacturing service (EMS) provider’s exposure to the low-margin wireless handset market, violating its long-term objective to avoid price-sensitive businesses. But as company executives have repeatedly asserted since then, the deal made sense for Flextronics because it puts the contract manufacturer in a prime position to benefit from future outsourcing opportunities at Google.
“The objective was not to be in Motorola’s cellphones,” McNamara said during Flextronics’ latest quarterly conference call on Sept. 4. “The objective was to be in a big ecosystem where the core company had tens and tens of billions of dollars and the desire to create systems that use multiple parts of their technology to win in the marketplace.”
The gamble is paying off already. Flextronics is currently the sole contractor for Google’s Chromecast, a USB device that allows consumers to seamlessly link several devices to play online video and music on televisions. Flextronics is also salivating over the prospects of getting signed to handle other pending Google hardware products and futuristic ones the company is developing in several adjacent markets, including the automobile sector. The group of current Google hardware includes search appliances for corporate data, smartphones, Google TV, tablets, Chromebook laptop PCs, Chromebox desktop PCs, and Google Glass, a head-mounted optical display that the company plans to roll out to the mass market next year. (Click here for a list of Google hardware and software products.)
“We went into Motorola Mobility to gain a foothold into the Google relationship for whatever products they make, whether it’s a car or anything else,” McNamara said. “That’s happening and we are very pleased with our ability to expand there and hopefully we’ll be able to add a lot of value to Google-Motorola that they [would] want to keep us for a long period.”