BASKING RIDGE, N.J. -- With a contractual stroke of the pen, Celestica (
www.celestica.com) has added 1,375 new employees and three new facilities in Arkansas and Colorado. That same pen stroke meant that Avaya (
www.avaya.com) would downsize itself by three facilities and 1,375 employees.
The deal will also mean projected savings of US$400 million over five years for Avaya, which makes enterprise communications systems and software. Part of those savings, however, will come from closing Avaya's historic, 900-employee plant in Shreveport, La., which once built more than half of all U.S. pay telephones.
The transaction, in which Basking Ridge-based Avaya agreed to outsource most of its manufacturing to Toronto-based Celestica, represented part of the growth tsunami in outsourced manufacturing (OM). Though often largely ignored by the press covering corporate facilities, the OM sector is growing at a clip that's both torrid and lucrative. The five-year deal, for example, calls for Avaya to pay Celestica $4 billion for its OM services.
Different tales for two cities: The Avaya-Celestica agreement means that 1,055 employees in Avaya's plant in the city of Westminster, Colo. (above, inset), will become Celestica employees. For the city of Shreveport, La. (above, background), the economic impact is more traumatic, with Avaya closing the 35-year-old plant that once made most U.S. payphones.
"Avaya's agreement with Celestica completes a key part of our restructuring and begins a new chapter in our strategy for reinvestment and growth," said Don Peterson president and CEO of Avaya, spun off late last year in Lucent's efforts to unload slower-growth businesses.
According to Peterson, Avaya's decision to concentrate on core competencies drove the deal.
"Avaya's move to contract manufacturing with Celestica . . . allows us greater flexibility and focus on designing and developing the next generation of enterprise solutions and services, such as converged voice and data networks, customer relationship management and unified communications," he explained.
Avaya's Peterson (above left) said the Celestica deal "allows us greater flexibility and focus on designing and developing the next generation of enterprise solutions and services."
Avaya's Employees Become Celestica's
Celestica's portfolio growth curve is running on a markedly opposite track.
The No. 3 player in electronic manufacturing services (EMS) will take over Avaya's 1,055-employee plant manufacturing large business systems in Westminster, Colo., plus Avaya's 320-employee repair and distribution facilities in Little Rock, Ark. And Avaya's employees at the affected Arkansas and Colorado operations will become Celestica employees.
The deal continues the Canadian company's growth surge: Celestica's 2000 revenues of $9.75 billion marked an 84 percent annual spike up, while its 29,000 employees represent an almost 50 percent upsurge. The new Avaya facilities will bring Celestica's portfolio of manufacturing and design facilities to 37, located in North America, the Asia-Pacific, Europe and Latin America.
The Avaya pact also positions Celestica for further expansion, said Chairman and CEO Eugene Polistuk.
"Not only does this relationship with Avaya add a new senior communications customer to Celestica, but it brings with it a highly skilled employee base, experienced in manufacturing mission-critical communications programs," Polistuk explained. "This intellectual asset base will further leverage Celestica's plans for future growth in data and voice communications."
Polistuk should know. In 1993, he was facing non-core obsolescence, managing a Toronto IBM plant that was going be shuttered as part of Big Blue's shift toward software and services. Instead, Polistuk, a 24-year IBM employee, convinced Big Blue to create Celestica as a wholly owned subsidiary in 1994.
Celestica's Polistuk (above left) said that the Avaya deal "brings an intellectual asset base [that] will further leverage plans for future growth in data and voice communications."
The firm's growth since has mirrored the OM sector's feverish pace. Toronto-based Onex Corp. (
www.onexcorp.com) acquired Celestica in 1996 for $750 million. By July of 1998, Celestica had generated the then-largest IPO in EMS history, raising $414 million.
The Electronics OM Surge: A $260 Billion
Market by 2004, Researchers Estimate
Though Avaya officials mentioned it only tangentially, cost-cutting also drove the Celestica deal.
Avaya expects to realize its $400 million in pre-tax net savings over the contract's five-year term, with $150 million coming in the final year. Avaya will also receive some $200 million for the assets it's transferring to Celestica.
Similar savings are spurring jackrabbit growth in electronics industry OM. Market researchers at Technology Forecasters (
www.techforecasters.com) estimate that the total electronics OM market will skyrocket from $78 billion in 1999 to $260 billion in 2004, a annual growth rate of 28 percent. By comparison, the electronics industry's annual growth over that timeframe is projected at only 8 percent.
Some researchers are even estimating that OMs will ultimately capture as much as 80 percent of the entire electronics OEM sector.
Shreveport Plant Once Employed 3,000
That sea change is what's adding 1,375 employees at Celestica, which has drawn analysts praise for its non-bureaucratic, team-oriented
modus operandi.
But the OM juggernaut also means a Sept. 30 closing for Avaya's 35-year-old Shreveport plant, which employed 3,000 at its peak. Avaya, however, isn't phasing out the small business systems made in Shreveport. Other existing Avaya facilities will take on manufacturing the systems, company officials said.
"This is an economic decision, a very difficult one, and we know that it's a very difficult time for our employees," said Avaya spokesman Kevin Stewart. Shreveport employees will "have the opportunity" to apply for positions with Celestica, Avaya or Lucent, he added.
Avaya's other 4,150 other Colorado employees, primarily in R&D, sales and service workers, will be unaffected and remain with the firm, officials reported.
The Avaya-Celestica agreement will close in phases that are projected to begin in 3Q 2001. The deal must still secure regulatory approvals, and Celestica must reach a labor agreement with the International Brotherhood of Electrical Workers (
www.ibew.com).