Executive Briefings

Flextronics Chief Sees Rough Road Ahead as Companies Struggle with Debt, Credit, Budgets and Waste

The current economic crisis is more than a cyclical slump whose impact will be erased with the next recovery. So believes Mike McNamara, chief executive officer of Flextronics International. Speaking at the Microsoft Global High-Tech Summit in Santa Clara, Calif., he predicted "a fundamental change in how we'll end up doing business." Far from sugarcoating the situation, McNamara described "a fight for survival" among companies as they struggle to cope with the global downturn. Against that Darwinian backdrop, he outlined six key themes for 2009:

1. The credit crunch will change who survives. Until now, McNamara said, the spread between the cost of credit for various companies has been relatively small. That gap will widen as a select group of businesses are given preferred interest rates and the rest are left in the cold. "In the future," he said, "banks are going to pick the winners."

2. There will be an accelerated "oligopoly." With fewer companies in the marketplace, business will be controlled by a shrinking number of players-at least until the next form of disruptive technology comes along. In the old days, weaker companies would have access to funding, albeit at higher interest rates. Now, "even profitable businesses might not get money." McNamara urged companies to pick suppliers that they believe will survive the current crisis.

3. B2B credit issues will dominate. Suppliers regularly extend credit to buyers in the form of extended payment terms. For whatever reason, such credit hasn't yet dried up, but "I believe it will," McNamara said. The result: a higher cost of capital and the demise of weaker suppliers, especially in the second tier. "It's going to hit us in the next couple of quarters," he warned.

4. It could take until 2011 for business to return to the conditions of 2008. Cost-cutting will dominate corporate agendas, yet managers won't have the "easy out" they enjoyed in the last downturn, when they could outsource manufacturing to China and business processes to India. Last year's levels of installed capacity might not be consumed until 2011, McNamara said. In the meantime, companies will be faced with high levels of debt, declining productivity and the possibility of inflation.

5. Design cycles will slow. Companies will cut funding for research and development and delay the introduction of new product models, especially those that offer only incremental improvements. "Why spend the budget on that?" McNamara asked. At the same time, managers will have to make optimum use of their limited R&D money and speed up deployment to market.

6. Good supply chain management has never been more important. Companies will proceed on two levels, McNamara said. From a strategic standpoint, they will work more closely with suppliers to reduce waste and adopt a system level view of global processes in order to increase competitive advantage. Others will focus on tactical issues such as finding the lowest-cost suppliers and eliminating redundant processes. Bottom line, said McNamara: "We need to work to get waste out of the system."

Visit www.flextronics.com

The current economic crisis is more than a cyclical slump whose impact will be erased with the next recovery. So believes Mike McNamara, chief executive officer of Flextronics International. Speaking at the Microsoft Global High-Tech Summit in Santa Clara, Calif., he predicted "a fundamental change in how we'll end up doing business." Far from sugarcoating the situation, McNamara described "a fight for survival" among companies as they struggle to cope with the global downturn. Against that Darwinian backdrop, he outlined six key themes for 2009:

1. The credit crunch will change who survives. Until now, McNamara said, the spread between the cost of credit for various companies has been relatively small. That gap will widen as a select group of businesses are given preferred interest rates and the rest are left in the cold. "In the future," he said, "banks are going to pick the winners."

2. There will be an accelerated "oligopoly." With fewer companies in the marketplace, business will be controlled by a shrinking number of players-at least until the next form of disruptive technology comes along. In the old days, weaker companies would have access to funding, albeit at higher interest rates. Now, "even profitable businesses might not get money." McNamara urged companies to pick suppliers that they believe will survive the current crisis.

3. B2B credit issues will dominate. Suppliers regularly extend credit to buyers in the form of extended payment terms. For whatever reason, such credit hasn't yet dried up, but "I believe it will," McNamara said. The result: a higher cost of capital and the demise of weaker suppliers, especially in the second tier. "It's going to hit us in the next couple of quarters," he warned.

4. It could take until 2011 for business to return to the conditions of 2008. Cost-cutting will dominate corporate agendas, yet managers won't have the "easy out" they enjoyed in the last downturn, when they could outsource manufacturing to China and business processes to India. Last year's levels of installed capacity might not be consumed until 2011, McNamara said. In the meantime, companies will be faced with high levels of debt, declining productivity and the possibility of inflation.

5. Design cycles will slow. Companies will cut funding for research and development and delay the introduction of new product models, especially those that offer only incremental improvements. "Why spend the budget on that?" McNamara asked. At the same time, managers will have to make optimum use of their limited R&D money and speed up deployment to market.

6. Good supply chain management has never been more important. Companies will proceed on two levels, McNamara said. From a strategic standpoint, they will work more closely with suppliers to reduce waste and adopt a system level view of global processes in order to increase competitive advantage. Others will focus on tactical issues such as finding the lowest-cost suppliers and eliminating redundant processes. Bottom line, said McNamara: "We need to work to get waste out of the system."

Visit www.flextronics.com