Flextronics Follows the Vertical Leader

Electronics manufacturing services firm Flextronics (FLEX Quote - Cramer on FLEX - Stock Picks) is following the lead of a Taiwanese powerhouse by offering customers a one-stop outsourcing shop to attract customers and fuel growth.

And so far, the strategy, called vertical integration, seems to be helping Singapore-based Flextronics at a time when many of its EMS peers are struggling. Bit by bit, Flextronics shares have added about 12% this year, after a precipitous 24% drop last October on disastrous quarterly results. Its shares closed Thursday at $11.79.

Vertical integration offers a range of services beyond typical EMS, such as assembling printed circuit boards. For instance, a cell-phone handset maker will outsource the entire integration of components such as plastic casing, printed circuit boards, lens and camera modules, antennae, power adapters and chargers to Flextronics, says Citigroup analyst Jim Suva.

Other EMS companies take a virtual integration approach, where the company will help the customer design a cell phone, but then the parts come from other vendors, he says. (Suva does not own Flex stock, but his firm has an investment-banking relationship with the company.)

"The ability to provide vertically integrated EMS services from our industrial parks remains a big competitive advantage for Flextronics," CEO Mike McNamara said on the company's most recent conference call in July. "We remain fully committed to the concept of vertical integration and the competitive advantages we will realize from it."

Analysts believe the strategy should pay off in the long run.

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