That way, a wily contract manufacturer can both save money and gain additional capacity for serving other clients. Last year, for instance, Solectron took over factories from IBM, NCR, Ericsson, and Mitsubishi while signing production contracts with the former owners. Contract manufacturers also have expanded their role beyond production. While in the recent past, a typical outsourcing job was limited to noncritical components, contractors are now often called in as design partners for new products. Cementing those types of ties with companies such as Hewlett-Packard to Cisco bodes well for companies that can pull it off.
Analysts also say the group has plenty of room to expand.
Of course, it's wise to remember that a contract manufacturer is only as bulletproof as its clientele, with its earnings following the same peaks and troughs as those of its customers. With PC demand iffy right now, for instance, the greater a manufacturer s exposure to the sector, the more difficulty it s likely to have hitting Wall Street s earnings projections. That was certainly the case with SCI Systems, which alerted analysts earlier this year that it would fall short of revenue and earnings expectations in its March and June quarters. Francois prefers companies such as Solectron, which in addition to making PCs turns out network equipment, mobile phones, and telecom equipment. Analysts also like a couple of niche players, companies that have homed in on high-margin projects such as backplanes, the sandwiched circuit boards that are a component of switches and other telecom equipment.