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Scope Of Flextronics Deal Fuels Concern Over Nortel

Flextronics Corp.'s massive deal to assume most of Nortel Networks Inc.'s equipment manufacturing doesn't end there: In a move that has raised eyebrows, Flextronics is also taking over most optical-product design from the financially troubled Canadian company.

Analysts last week suggested the latter move may have gone too far, noting that outsourcing of systems design activity could turn Nortel into a system-integration and software company by default.

"Nortel needs cash and seems to be making decisions on manufacturing and design without saying to itself and investors, 'What is the long-term strategy?' " said Ron Westfall, infrastructure analyst at Current Analysis Inc. "Perhaps a move to outsource so many steps in design could be managed successfully, but Nortel has not articulated that vision."

Analyst Frank Dzubeck, president of Communications Network Architects, conceded that "design assistance among vendors is common: Cisco, for example, paid a small fortune to IBM for their latest router project, particularly for help in ASIC design. But outsourcing a whole design division? I've never seen a company of this size abrogate intellectual-property responsibility."

Philippe Morin, general manager of the optical-networks business at Nortel (Brampton, Ontario), admitted the company took a radical step but said the move is a "re-creation of the vertical model of integrated design and manufacturing we had 10 years ago." Manufacturing of some steps had been outsourced piecemeal, separating design teams from manufacturing groups, he said. The Flextronics design work will be limited to "well-established platforms," while advanced optical-system design will remain within Nortel for photonic, physical-layer electronic, higher-layer protocol and software design steps.

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