Announces plans to outsource manufacturing; is in discussions with Flextronics to transfer $500M of manufacturing and inventory assets

January 23, 2004

3 Min Read

TORONTO -- Nortel Networks (NYSE:NT)(TSX:NT) took another major step today in the evolution of its supply chain strategy by announcing its intention to focus its supply chain resources and investments on those areas which can provide true competitive differentiation and offer the most value for its customers. These include the introduction of new products, and the deployment, integration, and support of complex, multi-technology network solutions.

As part of this strategy, Nortel Networks announced its intention to divest substantially all of its remaining manufacturing activities, including product integration, testing, and repair operations carried out in the Company's Systems Houses in Calgary and Montreal (Canada), Campinas (Brazil), Monkstown (Northern Ireland), and Chateaudun (France), as well as certain related activities, including the management of the supply chain and related suppliers for these locations.

Nortel Networks is in discussions with Flextronics (NasdaqNM:FLEX) about the activities being considered for divestiture. The successful completion of these discussions with Flextronics could result in Flextronics undertaking and managing in excess of US$2 billion of Nortel Networks annual cost of sales on a go forward basis and involve the transfer from Nortel Networks to Flextronics of more than US$500 million of manufacturing and inventory assets. In return Nortel Networks anticipates receiving from Flextronics proceeds in excess of US$500 million in cash, over a nine-month period, for primarily inventory and certain manufacturing assets, as well as an additional amount for certain intangible assets. At this stage, however, there can be no assurances that these discussions will lead to a binding agreement.

Over the last five years, Nortel Networks has divested to electronic manufacturing services (EMS) suppliers most of its manufacturing activities - a strategy that has enabled the Company to tap into new best-in-class manufacturing technologies, leverage tens of thousands of resources globally and quickly adjust to meet changing market needs.

"By continuing to leverage the growing supply-chain capabilities of the EMS industry, we expect to take Nortel Networks supply chain to new levels of performance and competitive differentiation, for the benefit of our customers," said Chahram Bolouri, president, global operations, Nortel Networks. "Flextronics has the supply chain capabilities to meet our time-to-market, quality and cost-reduction objectives. They also have substantial resources and presence in many of the countries where we do business, which will enable us to rapidly scale globally. At the same time, divesting the remaining parts of our manufacturing operations would enable us to focus on the core capabilities required to deliver converged networks to our customers."

As part of this strategy, however, Nortel Networks intends to retain in-house all strategic management and overall control responsibilities associated with the Company's various supply chains, including all customer interfaces, customer service, order management, quality assurance, product cost-management, new product introduction, and network solutions integration, testing, and fulfillment.

"This proposed operating model is an evolution of one that has already been implemented successfully by Nortel Networks in Raleigh, North Carolina and Billerica, Massachusetts," said Bolouri. "For example, three years ago in Raleigh, we divested the majority of our manufacturing activities related to the product integration, configuration, and testing of our DMS circuit-switching products, as well as the management functions related to that supply chain. By implementing this model, we have been able to drive reduced inventory and improved customer service and responsiveness, and to focus on those areas of the supply chain of most importance to our customers."

The successful completion of these discussions with Flextronics could affect up to approximately 2,500 Nortel Networks employees. As noted above, at this stage of the discussions, it is premature to discuss any details of the discussions or the potential effects of this initiative on employees. However, it has been Nortel Networks experience in similar past divestitures to EMS suppliers that a significant number of Nortel Networks employees have become employees of the EMS supplier.

Nortel Networks Corp.

Flextronics Corp.

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