Planting for the Future

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) are in various stages of shedding some manufacturing plants worldwide -- to the greater glory of their balance sheets, they hope, if not their labor relations.

Alcatel this morning announced an intent to sell its 320,000-square-foot, 450-employee manufacturing facilities in Richardson, Texas, to Sanmina Corp. (Nasdaq: SANM), a contract manufacturer based in San Jose, Calif. The companies hope to close the deal (terms undisclosed) by September 2001 (see Alcatel Selling Texas Plants).

For its part, Lucent is reportedly in talks to sell or lease two plants, including a 5,300-employee, 2-million-square-foot facility in Columbus, Ohio, which makes wireless gear; and a 3,700-employee, 1.8-million-square-foot plant in Oklahoma City that makes Lucent's 5ESS and AnyMedia Access System.

Today's Wall Street Journal reports that contract manufacturer Celestica (NYSE, Toronto: CLS) has bid between $600 million and $900 million for the plants, after Lucent turned down a deal with Flextronics International (Nasdaq: FLEX).

Lucent, Celestica, and Flextronics declined to comment on the story or the rumors.

Both Alcatel and Lucent's deals point to a trend in the telecom market to outsource manufacturing to third parties.

"A major driver [for the contract manufacturing business] is divestiture opportunities that exist with major OEMs -- the Nortels, the Lucents, the Alcatels," says David Parrish of RBC Dominion Securities/Dain Rauscher Wessels. The telecom slowdown hasn't had a marked effect on this trend, he says, which has proven strong for a couple of years and will probably continue for the next several years.

Both Alcatel and Lucent have been talking for months about outsourcing various manufacturing efforts in order to raise money and save ongoing expenses. Now, though, it looks as if the plans have become more urgent.

Lucent is under enormous pressure to restructure itself and to raise money by September in order to complete its spinoff of Agere Systems (NYSE: AGR). And Alcatel's CEO Serge Tchuruk recently stressed plant divestitures as part of Alcatel's ongoing restructuring plans to meet the challenge of the recent telecom slowdown (see Alcatel: What's Next?).

As part of its plan, Alcatel already has sold an 800-employee mobile handset manufacturing facility in Laval, in western France, to Flextronics. Alcatel says it is now converting a second mobile handset plant in Illkirch, in eastern France, into a facility for manufacturing Alcatel's optical components.

Analysts think the plant sales will work for both Alcatel and Lucent. "These companies are dying to have someone take these plants off their hands," said one Wall Street analyst, who asked for anonymity.

"It's a great idea -- sell the factories and lease back what they need," says Fredric Russell, principal of Fredric E. Russell Investment Management Co., a $50 million fund headquartered in Tulsa, Okla.

But one glitch has surfaced. Both Alcatel and Lucent have contracted unions at the plants in question, and analysts say that could affect the deals. "Having labor contracts implies that management may not have as free a hand in firing people and slashing wages," the unnamed analyst says. "And face it, that's what Wall Street likes to see."

Alcatel says its plans are to include all employees as part of the package sold to Sanmina. But employees in the union with which Alcatel has its Richardson plant contract -- the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers, AFL-CIO, Local 787 -- say they haven't been contacted by either company to discuss the sale. About 370 of the 450 workers in Alcatel's Richardson plant are IEU members.

"We have two years left on the Alcatel contract, but that's no guarantee. Frankly, it's hard to tell what's going to happen. We hear that Sanmina doesn't have collective bargaining agreements in the U.S. But we're here to talk to them if they want to talk to us," says a union spokesperson.

Sanmina did not respond to calls at press time.

Lucent also has agreements in place with unions in Oklahoma and Ohio, which did not return calls at press time.

Parrish of RBC says the union contracts are a factor to be considered. "It's a challenge... The price of a plant has to reflect that."

- Mary Jander, Senior Editor, Light Reading
johnjohn 12/4/2012 | 8:11:13 PM
re: Planting for the Future I read that Flextronics balked when Lucent demanded that they pick up the tab on the inventory in the two factories.
Fhunton 12/4/2012 | 8:10:46 PM
re: Planting for the Future being a Lucent employee and having seen these big manufacturing houses in the US, it is sometimes hard to believe that you are working in a leading tech company.They are basically in the dark ages, have the capacity to turn to industry needs like a ship. These places are so out dated, they need to be got rid of and soon. They hold the company back. Outsourcing is the way to go, not having a building with 6000+ people in it that has been there since 1800's, get rid of it, get the unions out and get the Contract manufacturers in.......PLEASE LUCENT.........
fatchance 12/4/2012 | 8:10:15 PM
re: Planting for the Future LU & Alcatel are desperate, survival is the name of the game for them. Let's look out 12-18 months, the market heats up again for telecom products, will they be competing for limited manufacturing space (with the new firms). If they can't run plants at a profit it will be a good move but strategically will it make them weaker in the long term? As far as the plants being out of date, LU has modernized old plants before, Atlanta made copper cable (a dirty, industrial age technology)& it was redone a a state of the art fiber optic facility. This trend begs the question, how far can you go in outsourcing. Why not have product design outsourced? Core values include customer relationships around the globe, why not out source everything else?? Then why the hell do we need Bell Labs, outsource R&D. What is the synergy in a large telecom equipment firm? If you get lost along the way and your products and strategy are not part of a valid global focus that meets customer needs then why be big? The real issues always come back to the vision, and its' execution, by management. If you don't got it, punt!
Sign In