Celestica CEO talks internal changes, acquisitions, EMS

VentureOutsource.com speaks with Craig H. Muhlhauser, president and CEO with global EMS provider Celestica. (www.celestica.com)

Celestica has not made any major acquisitions since Muhlhauser took over as CEO in 2006. Things are much different today. Muhlhauser and his team did a good job of managing profitability during this last downturn. However, more revenue is needed to drive profitability higher and acquisitions that properly fit Celestica’s roadmap just might be the answer.

As a former executive at Ford and Visteon Automotive Systems, plus having worked in a number of industries ranging from automotive; consumer, industrial, utility, and aerospace and defense, Muhlhauser brings to Celestica a strong dose of both business scope and depth when it comes to establishing and managing successful corporate environments with global footprints.

In this exclusive interview, Muhlhauser talks about his leadership style; EMS industry value propositions, acquisitions and strategic partnerships, competing with industry rivals, changes he’d like to see at Celestica, and more.

Transcripts from that discussion follow.

VentureOutsource.com: What important leadership lessons have you learned?
Muhlhauser: Talents. The emphasis on talent. And, talent development. The responsibility of a leadership position is to unleash the talent in an organization.

To develop a framework to allow people to work together is a major value, obviously underpinned by integrity and, finally, to empower the individuals in the organization to have the accountability and authority to deliver on their commitments.

VentureOutsource.com: What’s the basic message you have for all of your employees?
Muhlhauser: I would say connect so that no individual in this organization can get everything they need done for our customers on their own.

Communicate effectively, which means both speaking and listening; and collaborate to achieve the full potential of what each and every one of us has to offer, but more importantly — what we can do together.

VentureOutsource.com: How has your leadership style changed?
Muhlhauser: Over the many, many years I’ve been working, certainly I started off thinking that much of what I needed to accomplish I could achieve on my own.

I was also more judgmental of individuals that were not as much like me or my approach.

I’ve become much more open to new ideas and certainly I’ve placed much more recognition on the importance of the values and the culture and the behaviors that drive the results rather than the specific individuals. So it’s less about “I” and more about “we”.

VentureOutsource.com: You’ve said Celestica is focusing on higher margin business. Can you discuss the type of programs Celestica is targeting for higher margins?
Muhlhauser: We are moving from a contract manufacturing role to a supply chain solutions company.

The engagements we have range from design collaboration and the development of solution accelerators at the beginning of the product introduction process all the way through the value stream to service and support of customer’s products, not only with the objective of fixing the breaks but also understanding why it breaks and to recommend design improvements and supply chain alternatives to prevent that from happening in the future.

VentureOutsource.com: What impact will this higher margin requirement have on Celestica’s ability to attract new program wins?
Muhlhauser: Well, we are trading off what we call the value that we deliver versus the risk that a customer is prepared to assume in the selection of a supplier…the development of the supplier relationship.

So, the risk is that we don’t focus on the areas of the market that make those tradeoffs, and we do get involved in businesses or in markets where there is little or no value based on the services that a company provides, and therefore it’s viewed as purely a price decision.

VentureOutsource.com: What is Celestica doing to look for stronger top-line growth in the face of more challenging incremental margin improvements?
Muhlhauser: We’re investing in resources in the market. We are significantly increasing our investment in sales coverage, globally. We are hiring new leadership in the areas of sales and solution development. We are expanding our application engineering, or solution architects, throughout the world in support of our sales team and our customers.

We’re also strengthening our relationships at all levels of the customers’ organization and dramatically improving the execution of our base business. We are also investing in a significant amount of corporate development activity to identify competencies or capabilities that we would need to acquire to continue to build a stronger value proposition.

VentureOutsource.com: Better focus on inventory management and other cost controls seem to be the norm these days for most EMS providers in this recovery. What’s different in the way Celestica is competing against other EMS companies in this economic environment?
Muhlhauser: Well, we’re leading the industry in inventory performance, so we have recognized the opportunity at least for the past two or three years. We’re investing in information technology; tools that allow us to connect with our supply base on a real-time basis, so we can place, change, or cancel orders on a real-time basis.

We are also increasing our investments in inventory management tools that we’re using to provision inventory throughout the supply chain.

We are hiring new expertise in the area of business analytics to leverage information more effectively in making decisions on inventory purchases; and we are improving our quality and reducing our lead times to minimize the amount of working capital we need in process, along with reducing scrap associated with the products we produce.

VentureOutsource.com: We speak with a lot of OEM executives. Many OEMs still subscribe to the thinking that the lowest cost EMS provider is the best choice. What are your thoughts on the EMS industry’s current value proposition regarding how EMS companies market themselves to OEMs?
Muhlhauser: Well, I think it’s important that we all understand what customers want and what customers are prepared to pay for.

Then, it’s separating the conversation from low price to low cost, and using this information to get into a conversation about cost, or price, in the case of the customer versus risk to help obtain a better understanding in our mind, and in the customer’s mind, what are the important criteria they’re using to make these determinations.

So, for example, a large part of the cost of a product could be hidden to the customer if it’s going to appear in service and in warranty.

We’ve seen a number of our large customers take major provisions due to epidemic failures in the field after the product was produced, largely based on the fact that much of the design of the product did not involve companies like ourselves up front.

For instance, when a customer that is not a typical hardware company produced a product, the lead-free qualification did not uncover all of the issues, and therefore resulted in the substantial downstream warranty cost. So it’s this type of total cost of ownership. Complexity drives cost.

We have eight mega-sites. Other EMS companies have ten, 12, 60 facilities. If we have a simpler network, if we have fewer…less complexity with the products we produce, by and large we can offer a more cost-effective solution.

The question becomes, does the pricing a customer is prepared to pay reflect the total cost we believe represents that which they should take into consideration?

VentureOutsource.com: What changes would you still like to see at Celestica?
Muhlhauser: We’d like to see greater emphasis on the engineering services we provide, as potential opportunities for us to further reduce the cost, or improve the quality for customers.

We’d like to see customers begin to think of us differently in the mind of the potential we bring. We also want to become more involved in the downstream service and support of our customers’ products, so we can learn from the experience they’re having in the field and do a better job of recommending design solutions, to prevent those problems from occurring in the future.

And finally, we’d like to strengthen our relationships with our suppliers, to help us work together more collaboratively as an eco-system, to make our customers successful.

VentureOutsource.com: Let’s talk about partnerships, roadmaps, and future strategy.  Aside from acquisitions, does part of Celestica’s long-term strategy involve any type of strategic partnerships?
Muhlhauser: We’d like to expand our relationships with many of our core customers and existing customers to a partnership level. So, I would say yes in the sense we would like to have more intimate and deeper relationships with our customers throughout their supply chains, and throughout their lifecycles of product.

We’d like to develop deeper and long-lasting relationships with a few of our core suppliers that represent the opportunity for investment in the future, and are aligned with the strategy of our company.

We’d also like to consider, on a selective basis, broader partnerships with possibly some of our competitors or other companies that are competing in the same space, where the combination of our two companies might make more sense than the individual companies competing on their own merits.

VentureOutsource.com: Its common knowledge Celestica is looking for acquisitions within the healthcare sector, primarily plans for buying intellectual property, technology, or market position. Can you share more insight into the types of acquisitions you see as attractive? Would you want to preserve cash, and look at a combination of cash and debt for some of these acquisitions?
Muhlhauser: Well, as I mentioned, we have a series of activities underway that have identified about 12 to 14 companies that represent capabilities or competencies or in some cases customer relationships that would allow us to accelerate our progress in the healthcare market, so we’re looking selectively at those.

These opportunities tend to be small, what I call “tuck-in” acquisitions, that would enhance our current healthcare business that would expand our capabilities to take on more scale in healthcare, or might bring certification. Those would be well within the ability for Celestica to fund that as part of our internal funding.

Obviously, as Celestica continues to grow, we will be looking at our capital structure, and evaluate – continue to evaluate — various forms of capital to continue to enhance the growth of the company. As you know, Mark, we’re well positioned with our balance sheet, having a strong net-cash position. (See, also: How to measure key metrics and financial indicators inside EMS providers)

We have a signification number of new opportunities – for now, we think we’ve got the internal financing capability, but as time passes, we would obviously look at other forms of capital to continue to allow us to grow.

VentureOutsource.com: What impact will Celestica’s healthcare roadmap play in the types of services, or changes in these services, the company offers or plans to offer to customers?
Muhlhauser: I think it would be an expansion of the services that we’ve offered to the leading technologies in the technology industry. We will be working to enhance our technology; our technical position, our certifications, and our competencies to be able to take on the most technically challenging, complex areas of the healthcare business, and offer total cost of ownership benefits; access to developing markets, and the same type of benefits we’ve brought to various OEMs in the tech industry…the ability to customize their products to particular requirements, manage the complexity, and at the same time offer a significant cost advantage as well as a lead-time advantage.

VentureOutsource.com: What growth opportunities do you see for Celestica in 2010?
Muhlhauser: We see a broad range of growth opportunities across most of our major markets. In particular, we see emerging opportunities in the IT enterprise space, as in storage systems and servers. We see this expanding into various aspects of data center solutions.

We see broad based opportunities in healthcare, commercial aerospace and defense, industrial and cleantech or alternative energy, and we see continuing opportunities in various segments of the communications business, especially in the areas of optical, as well as access.

Looking more broadly in consumer we see set top boxes…the connected home, the convergence of video, data, voice and the various aspects of communication as well as continued growth in the smartphone space.

VentureOutsource.com: What trends do you see emerging in the EMS industry and how do you see the industry changing five years from now?
Muhlhauser: One of the major trends is OEMs are continuing to consolidate so purchasing power is continuing to fall into the hands of fewer and fewer companies. Obviously, financial strength and the ability to invest to support those companies are going to be critical.

I see a continuing challenge from the emerging Asian competition. Asian companies are continuing to look for opportunities to enhance their business portfolio into higher margin segments.

I see the developing markets of Asia as well as countries like India and possibly Brazil, becoming a more significant part of the future growth of the industry, and I also see more pressure on the industry to assume higher levels of risk, to support the requirements of the OEMs. (See, also: Challenges facing India’s EMS industry)

There are many trends, but those are a few.

VentureOutsource.com: What do you think about Foxconn’s announcement to launch retail stores in China to possibly help Foxconn win manufacturing business via ways such as enticing OEMs with a Chinese retail presence to further help OEMs promote their electronics brands in China?
Muhlhauser: Obviously I have a lot of respect for Foxconn. I can say that they, like us, are looking at expanding their services, and apparently have chosen the retail opportunity as an outlet for their business. That’s certainly a unique opportunity for a company that’s based in China…to give market access to companies that are interested in gaining share in the China market. (See, also: How China’s labor wages are impacting EMS)

So one way or another, I can understand the rational, but for a company like ours – we’re very much clear on the things that we do well and the things that we don’t do well, and one of the things that we’ve never done is attempted to be successful in the retail market.

VentureOutsource.com: Is there anything else you’d like to share with readers?
Muhlhauser: I think Celestica has gone through a fairly dramatic transition in a short period of time. One of the things I would like readers to remember is that Celestica is a very young company; we’ve only been in business for 13 years. We think our best years are ahead of us.

We’ve made a lot of progress in the last three years.

We’re well positioned among the top companies in the industry. We certainly have a high level of respect for our competition, but recognize that our customers remain very demanding, and will continue to be very demanding, but we’re confident there will be a strong market opportunity for a company that delivers the value we believe Celestica delivers.

(Interviewed January 25, 2010)