3G Phones A Non-Event This Year

DAVOS, Switzerland (Dow Jones)--Consumers and telecommunications operators expecting third-generation phones to make a big splash in 2003 will have to wait a bit longer, the chief executive of Flextronics International Ltd. (FLEX) said Monday.

"3G phones are a non-event this year," Michael Marks said in an interview with Dow Jones Newswires at the annual meeting of the World Economic Forum. "The phones that people are making are physically large, they're battery hogs, and the interoperability you need isn't there yet."

Marks added that "3G will definitely happen," but probably not until 2004 or 2005.

Flextronics may not be a household name, but as a major provider of outsourced electronics manufacturing, its products end up in millions of homes around the world. The company makes Microsoft Corp.'s (MSFT) Xbox games console; mobile phones for customers like Siemens AG (SI) and Motorola Inc. (MOT); and computer hardware, set-top boxes, telecom equipment and other products for companies worldwide.

The 3G handset orders Flextronics is receiving from its customers are so small, Marks said, that "you can't even see them." Nevertheless, mobile phones in general are one area that's booming this year, he said, thanks to demand for features like color screens.

Printers are also strong, Marks said. However, orders for most types of telecom and data communications equipment remain extremely depressed. That's because companies are sitting on their wallets during the current economic downturn, Marks said - and Flextronics is no exception.

"My company does 15 billion dollars of business, we have 100,000 people, and we operate in 30 countries," Marks said. "We are totally information-intensive, and we haven't bought a server or a router in, like, two years."

But Flextronics expects to be in a gradual upgrade cycle by the end of 2003, he added.

Flextronics is based in Singapore but is listed on Nasdaq. The company manufactures about one-third of its output in China - it has 28,000 workers there - and Marks expects this proportion to grow further in coming years, as China siphons the manufacturing base for mass-market electronics away from other countries.

Flextronics recently moved Xbox production to China from Hungary, but Marks said the company's Hungarian plants are fully staffed again, churning out mobile phones, printers and set-top boxes. And he pointed out that China isn't the answer for every manufacturer looking to cut costs.

"Hungary is more expensive than China, but not when you're delivering into Europe," Marks said. "In Hungary you put it on a truck, and it's in France the next day. It costs you three bucks a product."

Flextronics started its own research and development operations in 1999. Marks said the company has 2,000 R&D workers - 1,300 of those came aboard in 2002 - with plans to add a further 1,000 R&D staff this year.

-By Jack Grone, Dow Jones