Two years ago it was a loading dock. Today, this secured, orderly section of Celestica’s Toronto headquarters has been transformed into a torture chamber for solar panels. In various highly specialized chambers, panels are showered with water, rapidly heated and cooled, or pelted with simulated hail. Until recently, Celestica (TSX: CLS) had never made a solar panel. Lab results led Celestica to conclude the ones it’s building now will last decades and degrade more slowly than those made by competitors. “From a standing start, we’re producing the highest-quality solar panels in this hemisphere,” enthuses Craig Muhlhauser, the company’s president and CEO, tapping a table forcefully for emphasis.
This new product is among the latest changes for a company that cannot afford to stand still. There’s a familiar pattern in the company’s history: keep high-stakes R&D in Toronto; punt lower margin commodity business to sites where labour costs are lower (Celestica operates 20 facilities in 14 countries including Mexico, Taiwan and Malaysia).
Muhlhauser calls managing change “one of our competencies.” Good thing, too, because the bridges behind his company are burning. Celestica’s core business is making printed circuit boards that are embedded in other companies’ products, from telecom switching gear to mobile phones. But lower-cost, higher-volume Asian competitors are continually squeezing prices and margins. Under Muhlhauser—who joined the company in 2005 and became CEO the following year—Celestica is focused less on such “commoditized” products and instead establishing itself in new, higher-margin fields where major players currently do the majority of design, testing, manufacturing and quality control themselves. If Celestica pulls it off, it will be a rewarding and higher-margin business; if not, it’s back to the treadmill of perpetual restructuring.
Although it has more than 100 customers, a small handful have always accounted for most of Celestica’s revenue. That speaks to the trust the company can build with successful clients, but those relationships can become millstones when a customer runs into trouble. Smartphone maker BlackBerry once accounted for 20% of Celestica’s revenue (which was US$6.5 billion last year), but as BlackBerry lost market share in recent years and had to cut costs, it switched to cheaper Asian suppliers, and the two companies formally announced their split last summer; sure enough, Celestica’s first-quarter results showed a BlackBerry-sized hole in the balance sheet, with revenues down 19% from the year before.
Celestica has lost big customers before, but not this big. The past decade has left the company battle-hardened, though. Things were worse when Muhlhauser took over. “During the last 15 years, we tended to go out on an acquisition spree, buy a bunch of revenue, buy a bunch of infrastructure and sites, and not be able to retain the big customers,” he says. As a result, Celestica found itself stumbling from crisis to crisis. Its financial performance was widely regarded as disastrous, quality control suffered and customers were bailing. With the company on sounder footing today, Muhlhauser is now working to replace the lost RIM revenue. The company’s core will continue to be telecommunications gear, servers and high-end storage. But what really excites him is in sectors where outsourcing is still nascent.
That’s where Mike Andrade, executive vice-president of the company’s “diversified markets” segment, comes in. Five years ago Muhlhauser charged him with the task of repurposing the Toronto facility for higher-margin business. “What we began to see was that communications [technology] was getting more pervasive and prevalent,” says Andrade. Computing power and memory was also getting cheaper. Celestica had a hunch that these combined forces would revolutionize other sectors like aerospace, auto manufacturing and medical devices, just as they had in the sectors Celestica has traditionally served. “We’ve seen this happen in other industries,” Andrade says. “Maybe this time we can get ahead of it and bring these ideas to these marketplaces.”
The solar panels represent part of Celestica’s push into green energy. That might seem an odd choice, given the havoc wrought of late by a glut of cheap Chinese solar panels. But Andrade believes his competitors look at their products from the wrong perspective. Developers are the primary buyer of solar panels, he says, and they look at it much as they would a fixed income instrument. “They couldn’t care if it was squirrels in cages that generated the steady flow of energy that they had a contract for,” he says. “They just wanted a reliable flow of money from it.” For him, Celestica’s expertise in supply-chain management and quality control made it eminently qualified to produce panels whose reliability and predictability would imitate the interest generated by a high-quality bond. Among others, it now makes panels for Recurrent Energy, a division of the Japanese giant Sharp, and Andrade says it does so profitably. Andrade’s division is also drumming up business making avionics for clients like Boeing and Airbus, high-resolution camera systems, and an ingestible pill that transmits health data via an abdominal patch to a doctor’s smartphone.
Can the diversified division grow quickly enough? It accounts for more than a fifth of Celestica’s revenues today, and Muhlhauser wants to increase that to half in the long term. But it can take years to build the necessary relationships under which such projects can blossom. The company admits that it’s taking longer than expected to make inroads in the health-care sector, for example. “It takes longer, but in the long run we’ll be better off,” Muhlhauser insists.
Not everyone is that patient. According to analyst ratings compiled by Bloomberg, only four rate the stock a Buy, while 11 others offer negative perspectives. “Is it fast enough for the financial analysts? Probably not,” Muhlhauser concedes. But fiscal prudence in recent years has left the company with no long-term debt, $530 million in cash on its balance sheet and substantial cash flow. And the party who really matters is Gerry Schwartz, a director on Celestica’s board. His large buyout firm Onex Corp. controls all of Celestica’s multiple voting shares, granting him unassailable control even while owning a minority position. So long as Schwartz is content, Muhlhauser has time to effect his transformation. Asked how long it will take, Muhlhauser says he draws inspiration from IBM—from which Celestica was spun off in 1996 during a lengthy, ambitious restructuring that rescued the company from the scrap heap of history. “So let’s say 10 years,” he says.