Nortel will shift the last of its manufacturing operations to Flextronics next year under a deal announced yesterday.

The network giant, which five years ago built all of its own products at 26 locations, has outsourced those operations so it can get products to customers faster, as well as cut costs, said Chahram Bolouri, president of global operations.

Nortel's five-year outsourcing process reflects an industry-wide trend, according to Frank Dzubeck, president of Communications Network Architects. Rival Cisco has also offloaded much of its manufacturing over the last few years. Equipment makers want to focus their own resources on developing the next generation of hardware and software, Dzubeck said.

Under the deal [pdf], Flextronics will buy operations and some assets from Nortel. It will also acquire Nortel's global repair services, which it will manage with employees of Flextronics and third parties carrying out repairs, Bolouri said.

Plus, Flextronics will take over some design operations for existing Nortel optical products while Nortel focuses on developing the next generation of gear. In all, about 2,500 Nortel employees will transfer to Flextronics. The first part of the deal is expected to close at the end of this year, with the rest closing in the first half of next year.

Rather than maintain its own factories and manufacturing workforce, Nortel is turning to specialised companies such as Flextronics and Solectron to respond to changes in customer demand by shifting resources, Bolouri said. In addition, having manufacturing in different parts of the world lets Nortel get products out to customers in those areas faster, he said. For example, in China, Nortel already uses a joint venture operation and several Flextronics facilities to do manufacturing for local customers, he said.

In all, Flextronics would take charge of operations accounting for about $2.5 billion of Nortel's cost of sales. As part of the deal, Nortel will receive about $675 million to $725 million in cash.

Nortel should be able to maintain quality control so that customers have nothing to worry about, according to Dzubeck. "Nothing changes; it's just that they've caught up with everybody else," he said. "It's something that a company like Nortel was slowly but surely doing, but had to accelerate it due to its economic problems," Dzubeck said. The company was hit hard by the recent telecommunications slump and is now reviewing its financial results for 2000 through the first half of 2003. In April it fired CEO Frank Dunn and delayed reporting its results for the first quarter of 2004.