Solectron Corp. Business Information, Profile, and History

History of Solectron Corp.

Solectron Corp. is a leading worldwide independent provider of manufacturing services to electronics equipment manufacturers, including IBM, Apple Computer, and Hewlett Packard. Examples of equipment for which Solectron manufactures circuit boards and other assemblies include computers, telecommunications gear, medical electronics, avionics, and various industrial devices. Recognized as a global leader in service and quality, Solectron has achieved stellar growth, particularly during the early 1990s.

Roy Kusumoto started Solectron in 1977, and was joined about one year later by Dr. Winston Chen. Kusumoto and Chen formed the company to take advantage of an opportunity that they saw opening up in the burgeoning solid state electronics market. They noted that many manufacturers of electronic equipment were often burdened by temporary periods of work overflow, during which they had trouble making or acquiring enough circuit boards or other assemblies to complete their components. Through Solectron, Kusumoto and Chen hoped to provide manufacturing services to companies that were experiencing shortages.

Most of Solectron's growth and success during the 1980s has been credited to Chen. During Solectron's first full year of operation Kusumoto lost $150,000. Then a friend put him in touch with Chen. Chen, a manufacturing expert with doctorates from Harvard, was employed at International Business Machines (IBM) at the time. Kusumoto, also a former IBM employee, became interested in Chen's ideas and asked for his help. Chen joined the tiny Solectron as executive vice president in 1978 and was named president twelve months later. The company generated a profit of $400,000 during the first year under his leadership. From that point forward Solectron's earnings grew steadily. In 1984, Chen succeeded Kusumoto as chief executive.

By the time Chen joined Solectron, the 36-year-old already had acquired a reputation within his industry peer group as a highly intelligent, hard-working innovator. Chen was born and raised in a middle class family in Taiwan. His father owned and managed a construction firm and impressed a strong work ethic on his children. Influenced by his family's construction background, Chen studied civil engineering at National Chang Kung University in Taiwan. He finished first in his class of 130 and earned a fellowship to study at Harvard in 1965.

Chen's chance to travel to the United States came at an opportune time because he had become dissatisfied with the political climate in Taiwan. Specifically, Chen was frustrated by barriers to economic and social mobility that existed in the country. "We were one of the lucky families in Taiwan," Chen recalled in the Business Journal-San Jose. "... but that just made me realize how unfair the political system could be. It was terribly self-perpetuating." Chen had become one of the more outspoken students at his college and had seen some of his friends arrested. After studying at Harvard Chen decided to remain in the United States while most of his family stayed in Taiwan.

Chen earned two doctorates, one in applied mechanics and the other in applied physics, in less than five years at Harvard. "There's no secret to success in school or business: Hard work," explained Chen in the Business Journal-San Jose. Chen's accomplishments are additionally impressive because of the hurdles posed by learning the English language. An amusing episode related to a thesis Chen wrote on the theories of the relative strengths of certain materials illustrates Chen's struggles. He titled the piece "Necking in a Bar" before a professor suggested changing the name to "Necking of a Bar." Despite Chen's difficulty with word choice, his paper became influential in his field of study; he had utilized a new computer program that was subsequently adopted by many other researchers. Also while at Harvard, Chen discovered billiards, which became his hobby and escape as a student, and he married another Taiwanese doctoral student.

IBM recruited the 27-year-old Chen upon his graduation in 1969. He worked in New York for three years before he was transferred to San Jose, California. During his nearly ten years at IBM, Chen was exposed to both the manufacturing and marketing sides of the computer business. He was involved in several major projects, including the development of IBM's ink-jet printers and creation of various tape-head technologies. Also, Chen had developed an intense interest in the teachings of W. Edwards Deming, whose ideologies and techniques related to manufacturing and quality were being widely embraced in Japan and other parts of Asia. He believed in Deming's methods but was frustrated by IBM's failure to recognize their validity. So Chen was already open to the idea of starting and running a new company before Kusumoto asked for his help in 1978.

During the early and mid 1980s, Solectron found a willing market for its manufacturing services. Because of the founders's ties to IBM, much of their work came from that company. But Solectron slowly diversified and was able to parlay its experience serving IBM into manufacturing contracts with several other major electronics companies. Furthermore, as its clients became familiar with its service and style, Solectron began to shift away from its early emphasis on overflow, production-oriented jobs. Eventually, customers started coming to Solectron for help with entire manufacturing programs and development projects.

Solectron's quick success during the early and mid 1980s stemmed from Chen's management techniques, many of which were grounded in Deming's philosophies. Deming is generally credited with inspiring the Total Quality Management philosophy that was adopted during the mid 1900s in Japan and became popular in the United States during the 1980s. Deming, an American, was sent to Japan to help rebuild that economy after World War II. His ideas were generally ignored in the United States until Japan began to pose a serious threat to the American manufacturing sector. In short, Deming developed a people-focused management strategy designed to achieve continual increases in customer satisfaction and quality at continually lower costs. He advocated the use of comprehensive quality management techniques that saturated an organization, involving all departments and employees and extending backward and forward to envelop both the supply and customer chains.

"Dr. Deming's philosophy is simple: improvement doesn't happen by itself," Chen told the Business Journal-San Jose. "It must be a well-thought-out process, with everyone participating." Indeed, Solectron was among the first U.S. companies to truly implement Deming's basic philosophies into its environment. Deming's works became required reading for all Solectron managers. In addition, the company set up an elaborate computerized quality control system that could track every stage of a project. Furthermore, when other companies later rejected some popular quality initiatives, such as quality circles, as unworkable trends, Solectron continued to tinker the programs until they produced measurable results.

Chen's quality focus permeated Solectron from the start. For example, Chen had rules about the number of times that a telephone could ring before it was answered. He even set the example by answering his own telephone. And he required all Solectron managers to wear beepers so that their customers could access them at all times. Most importantly, Solectron tried to hire only the best people, paying them the best wages and treating them with respect. Although he set strict standards, Chen allowed his managers to operate autonomously and to make key decisions on their own. That independence and autonomy was a welcome change for the many Solectron managers who had been hired away from IBM. "IBM hires the cream of the crop and trains people better than anybody else, but they underutilized their people and micro-managed them," Koichi Nishimura, a Solectron employee since 1988, noted in the Los Angeles Times. As a result of its personnel policies, Solectron enjoyed one of the lowest employee turnover rates in the industry throughout the 1980s and early 1990s.

In addition to its innovative management philosophy, Solectron benefitted from Chen's and his fellow managers marketing strategies. Chen focused the firm's long-term efforts on the surface-mount style of circuit board manufacturing early in the mid 1980s before most of Solectron's peers recognized the importance of the technology. Surface-mount circuit boards represented an improvement over more conventional through-hole boards because they were (eventually) less expensive to produce, lighter in weight, smaller, and could be printed on both sides of the board, among other advantages. Solectron's decision to emphasize surface-mount technology would pay off handsomely in the early and mid 1990s, when demand for that technology exploded.

Solectron prospered as a result of its sound management and marketing initiatives during the 1980s. But the company also benefitted from a strong trend toward outsourcing by major manufacturers. Indeed, many producers learned that they could benefit significantly by hiring outside manufacturers, like Solectron, to handle specialty manufacturing activities. The potential benefits were numerous. As electronics markets became increasingly competitive during the 1980s, original equipment manufacturers (OEMs) were faced with constantly shrinking product life cycles, which meant that they had to reduce the amount of time they took to bring a new product from the concept stage to market. Specialists like Solectron were able to drastically reduce that time span.

In addition to "reduced time to market," another benefit that Solectron offered to its customers was reduced capital investments. Rather than having to invest the large sums of money necessary to develop production facilities for a particular type of circuit board, a company could pay a much smaller fee to have Solectron build the board. The OEM could then invest its resources in other activities. Solectron's technological advantage allowed it to produce circuit boards and other electronic assemblies for its customers at a much lower cost and at a much higher level of quality than its customers could achieve themselves given their limited resources and technological know-how.

By the end of the 1980s, Solectron was generating more than $100 million in annual revenues--1989 profits topped $4.5 million from sales of about $130 million, up from sales of just $88 million in 1988. Although the company had realized momentous growth since its inception not much more than ten years earlier, it was about to experience a five-year growth spurt that would outstrip even Chen's expectations. The expansion started in late 1989 when Chen took Solectron public in an effort to generate capital for expansion. Solectron sold stock for six dollars per share in November. By July of 1990 the stock price had nearly doubled to ten dollars. Chen considered his success at taking Solectron public the achievement of his life.

At the same time that Solectron went public, the company began to benefit from extremely strong demand for its services related to surface-mount technology. As orders and contracts poured in from manufacturers around the globe, Solectron began to leave its two major competitors, Flextronics Inc. and SCI Systems Inc., behind. Surface-mount work represented 22 percent of Solectron's billings in 1988 before rising to 36 percent during 1989. As surface-mount sales soared, Solectron's revenues passed $200 million in 1990 and then rose to $265 million in 1991. Solectron's growth was largely the result of more then five years worth of large capital investments in new surface-mount equipment.

Awards bolstered Solectron's public image as a quality manufacturer. In 1991, it received the coveted Malcolm Baldridge National Quality Award in recognition of its system of ensuring customer satisfaction and quality products. Solectron had won more than 35 other quality awards since the early 1980s, including ten in 1990. But the Baldridge Award, which is awarded to a maximum of two companies annually in the manufacturing category, was a crowning achievement. It reflected Solectron's incredible quality and service advantage over its industry peers. By the early 1990s, Solectron had surpassed even its Japanese competitors in most award categories.

Solectron's quality of customer service could be seen when comparing its performance to a good Japanese outsourcing company. While a good Japanese outsourcing company typically took six weeks to create a prototype of a circuit board for a new disk drive in 1991, Solectron could handle the task in 13 days. Likewise, most Japanese companies would not permit any schedule changes 30 days prior to delivery. In contrast, Solectron would often accept changes the day before production. Furthermore, Solectron delivered the highest quality product available. Indeed, by the early 1990s Solectron had become a global model for manufacturing quality and service. Although the company was already an industry leader in quality by the mid 1980s, it had reduced it defects-per-shipment by more than 50 percent between 1987 and 1992, to less than 233 defects per million parts manufactured. And its on-time delivery rate was nearly 98 percent.

As Solectron's customers began to rely on its services, the company's sales rose. To keep up with increasing demand, Solectron drew on its large capital base and began acquiring other production facilities. Early in 1992, Solectron purchased a circuit board assembly operation in North Carolina from IBM. The acquisition fit neatly into Solectron's organization because Solectron's managers, many of whom had worked at or with IBM, were already familiar with the new company's existing labor and production environment. Solectron even retained the plant's president, Hank Ewert. Ewert was known as a hard driving, resourceful manager. He welcomed the chance to leave IBM's shrinking organization, and to participate in Solectron's plans to build the facility into one of its major production arms. Solectron nearly doubled the plant's work force in one year to about 300, and planned to eventually add as many as 2,500 more workers.

Encouraged by the success of its North Carolina plant acquisition, Solectron went on a buying spree between 1993 and 1994, acquiring facilities from Hewlett-Packard, Phillips, Apple and other major electronics producers in locations ranging from Scotland and Malaysia to France and Washington state. Although many of the plants incorporated leading edge technology, they had failed to generate profits in the increasingly competitive electronics market. Solectron, with its proven management and production techniques, was able to move into the facilities and return them to profitability. In addition, Solectron would usually benefit by getting contracts from the previous owners of the facilities to produce circuit boards and related assemblies for their televisions, computers, and other goods.

Solectron's sales rose to $406 million in 1992, $836 million in 1993, and then to a $1.46 billion in 1994, making Solectron one of the fastest growing companies in the nation. Profits parallelled sales growth as net income almost quadrupled from $14.5 million in 1992 to $55.5 million in 1994. All the while, Solectron's debt load remained sparse as cash poured into the manufacturer's coffers. Hopeful observers heralded the success as a example of America's renewed manufacturing prowess. And Solectron's rise did reflect a general trend toward increased U.S. competitiveness in high-tech industries. But Solectron's success also mirrored the efforts of a vastly diverse, multicultural, multilingual work force representing more than 20 foreign cultures.

Solectron entered the 1990s without the guidance of Chen. Since 1991, Chen had been gradually removed himself from command of the company, and, by 1994, he had ceded his chairmanship of Solectron's board to Charles A. Dickinson, who had served as director of the company since 1984. Prior to that, Chen had handed off his president and chief executive positions to Kiochi Nishimura, who had been hired away from IBM in 1988. The still-young Chen left the company to spend more time with his family and to pursue other interests. The management team he left in charge was committed to the same initiatives that had built the company from a fledgling start-up with a few hundred thousand dollars in sales to a leading, billion-dollar-plus global contender. Analysts expected Solectron's growth to persist throughout the mid 1990s, though at a slower pace than that achieved between 1991 and 1994, when sales nearly doubled every year.

Principal Subsidiaries: Solectron Asia; Solectron California Corp.; Solectron Europe; Solectron France, S.A.; Solectron Japan, Inc.; Solectron Scotland Limited (United Kingdom); Solectron Technology, Inc.; Solectron Technology SDN. BHD (Malaysia); Solectron Washington, Inc.