The fallout from Research In Motion Ltd.'s downward spiral has rippled beyond its home base of Waterloo, Ont., killing a contract that accounts for nearly one-fifth of the revenue of Toronto-based electronics manufacturer Celestica Inc.
RIM, which is preparing for the launch of a new line of smartphones in the second half of the year, has seen sales of its current BlackBerry 7 devices drop off sharply, and is in the middle of a global restructuring aimed at shaving off roughly $1-billion (U.S.) in costs by the end of fiscal 2013.
Although the termination of the contract can't be directly tied to the failure of a particular RIM device, it is understood that Celestica mainly made BlackBerry components in Mexico for the North American market – the region where RIM's sales have declined the most. The BlackBerry has ceded large chunks of market share in the United States to Apple Inc.'s iPhone and phones running Google Inc.'s Android software.
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RIM accounted for 19 per cent of Celestica's $1.69-billion (U.S.) in revenue in the first quarter. Despite that, Celestica shares went up slightly on Monday's news, rising 3.7 per cent to $7.89 (Canadian) in Toronto. Celestica management had warned Bay Street analysts that the company's relationship with RIM could end, and they are trying to shift focus to higher-margin services.
Celestica makes components and provides other services to a variety of companies, including makers of computers, mobile devices and other consumer products. But it has been hit by fierce competition from Asian rivals, and suffers from exceedingly thin profit margins. Last year, Celestica earned just 1.6 cents in profit for every dollar in revenue.
So the company has hatched a new strategy, one that would see it make up for the loss of RIM by focusing on selling its services to aerospace and defence, medical, industrial, green technology and semiconductor equipment firms, where it believes it can make bigger profits. This group, which Celestica calls its "diversified" unit, represented 14 per cent of the company's $7.2-billion (U.S.) in revenue last year and currently accounts for about 19 per cent. The diversified business offers profit margins in the 5- to 7-per-cent range, much higher than in its consumer unit.
On Monday, as Celestica announced it was winding down BlackBerry production in the next three to six months, RIM issued a statement, breaking with its usual practice of not commenting on its supply chain relationships. "We are making changes to our supply chain as part of wider efforts to improve the efficiency and cost effectiveness of RIM's operations," a RIM spokesperson said.
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RIM declined to elaborate on its supply chain, but is now said to be left with three main electronics component manufacturers: Quanta Computers, a Taiwanese company that makes RIM's PlayBook tablet and reportedly implemented large layoffs in Taiwan after the device failed to sell as well as expected; Jabil Circuit Inc., a U.S. company with dozens of locations across Europe, Asia, the U.S., Mexico and Brazil; and Flextronics, a Singapore-headquartered firm with some plants in Asia and the Americas, but with most facilities in Europe, where BlackBerry production was focused, according to one former RIM executive.
Todd Coupland, a technology analyst with CIBC World Markets, said the loss of the RIM contract is "not a shortcoming of Celestica," and that it was simply a cost-cutting move on RIM's part as it seeks to streamline during rough times. "It's just a function of lower volumes, you consolidate suppliers and get scale," Mr. Coupland said.
Over the past year, RIM has lost roughly 75 per cent of its value, shook up its top management with the appointment of new CEO Thorsten Heins, and has essentially staked its future on new lineup of BlackBerry 10 smartphones, due out either in late summer or early fall. Until those devices come out, and perhaps for a while after as well, industry observers expect to hear more bad news from RIM as its top managers attempt to rally a shrinking work force and try to orchestrate a turnaround.