As the cliche has it, whenever a door closes, another one opens up.As cell phone maker Ericsson announced it was closing the door on its own cell phone production today, a very big door opened up for contract electronics manufacturer Flextronics ( FLEX - Get Report), which was named the sole producer of handsets for the Swedish company. In today's action, Ericsson was down 14.4% to $11.13 and Flextronics was up 6.3% to $38.50. "It may be the most stunning award in the history of the business," said Alex Blanton, directory of equity research for Ingalls & Snyder. It's a monster deal for several reasons. One is the size, of course -- Ericsson sold about $5.8 billion in handsets last year, although Flextronics was already a major supplier. Another implication is the scope of responsibility. The announcement would appear to give Flextronics control of the whole supply chain. And it feeds the accelerating trend that has big electronics manufacturers outsourcing their production as a way to save money. Ericsson, for example, expects Flextronics will save $1.6 billion yearly on the handsets. It also appears that the move takes business away from other contract manufacturers who are Flextronics' rivals, including Solectron , the world's largest contract manufacturer. Solectron shares were little changed by the news, recently off 0.8% to $39.22 While it appears that Ericsson took business in one area, it may give it back in another, Blanton said. Solectron will likely get enough of the outsourcing business for Ericsson's cell phone base stations to make the Flextronics deal a wash, he said. (Ingalls & Snyder has not done any underwriting for Flextronics, Solectron or Ericsson in the past.) But Elcoteq, a Finnish contract manufacturer, announced this morning that it would likely have to phase out production because of the Ericsson deal. Probably aiming to reassure investors, Solectron put out a press release early this morning reaffirming its guidance for the current quarter and for the year. It's the second announcement about outsourcing this week by a telecom giant. Lucent reported Wednesday that up to 50% of its North American manufacturing would be outsourced in 2001, growing from 10% in 1999. In recent action, Lucent's beaten-down shares were off another 0.7% to $17.88 "If you connect the dots between Lucent's announcement last week you can see the acceleration of the trend," said ING Barings analyst Pat Parr. "As the global telecom market gets a bit softer, you're going to see more of these deals." (ING Barings has done no underwriting for the companies mentioned.) In fact, it isn't even Flextronics' first big outsourcing deal with a major cell phone maker. It announced an agreement with Motorola last May that was to reach $10 billion a year by 2006 for the production of cell phones and other communications equipment. Production for Motorola is supposed to start in April and increase by $2 billion a year, Blanton said. Other contract manufacturers also are preparing for an expected increase in the business. Sanmina ( SANM - Get Report) announced today that it was offering to buy a Swedish electronic manufacturer. The purchase would put it in a better competitive position for more telecom deals. Sanmina shares were up 2.9% to $49.13. "They see the acceleration of outsourcing," said Parr.
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