Flextronics branches out from IT to ... Lego?

The company that produces Lego building blocks has decided to outsource production to electronics contract manufacturer Flextronics.

The company that produces the popular Lego building blocks has decided to outsource production to electronics contract manufacturer Flextronics International over the next three years.

But in a twist, the Lego Group intends to continue to make products "characterized by high technical requirements" at home, the Billund, Denmark company said Tuesday.

The Lego Group will avoid outsourcing highly technical work to Flextronics, despite it being one of the world's largest manufacturers of highly technical products. It produces a wide range of goods including Xbox 360 game consoles, PCs and mobile phones. Over half of its revenue comes from telecommunications products.

Making plastic building blocks appears to be a new line of work for Flextronics. A spokeswoman declined to comment on the deal, but said the company has long produced a range of plastic parts and mechanical enclosures, indicating that making Lego does not represent a sudden shift into non-IT products.

Flextronics, which is headquartered in Singapore, is in a pitched battle against Taiwanese rival Hon Hai Precision Industry Co. for the lead in the global contract electronics manufacturing business. Flextronics used to be number one, but Hon Hai took over the top spot a few years ago and has since extended its lead.

In this most recent deal, Flextronics will take over production of Lego products in North America and a portion of the Lego Group's Eastern Europe manufacturing.

The Lego Group plans to lay off 300 employees at its U.S. subsidiary in Enfield, Connecticut, as its North America production moves to a Flextronics plant in Mexico over the next three years. Up to 900 employees in Denmark could lose their jobs as some production in Billund moves to Flextronics factories in Eastern Europe.

By the time its three year outsourcing plan is finished, the Lego Group expects its head count to total 3,000 employees. The company's Web site indicates it currently employs 5,600 people worldwide.

Flextronics will also take over a Lego Group facility in Kladno, the Czech Republic, from Aug. 1.

The Lego Group intends to continue to manufacture more specialized products such as Lego Technic and Bionicle products on its own in Billund because they require more technical expertise, it said.

The company decided to outsource most of its production to reduce costs by as much as 1 billion Danish krone (US$169 million) and ensure its facilities were close to its major end markets, it said. The Lego Group, a family-owned business, has struggled financially over the past few years. In 2004, it lost 1.69 billion krone before taxes, while its pre-tax profit totaled 702 million krone last year.

"The traditional toy market is characterized by low or no growth, as a result of the severe pressure from electronic products, and intense competition at [the] retail level," the Lego Group said in a statement.

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Dan Nystedt

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