Dell's New Blood: Cannon, Now Garriques

Michael Dell welcomes another senior exec, tabbing Motorola's Ron Garriques to lead consumer electronics one day after adding Solectron's Michael Cannon

Continuing what appears to be an aggressive pace of shakeups among senior management, computer maker Dell (DELL) tapped the head of Motorola's (MOT) handset division to run its consumer electronics unit.

Ron Garriques, a nine-year veteran of Motorola, had been in charge of its mobile devices group. This unit had been the star of the company before recently hitting snags amid declining prices for handsets.

Word of Garriques' departure from Motorola for Dell comes only a day after Michael Dell, less than three weeks into his second stint as the company's chief executive officer, tapped Solectron CEO Michael Cannon to head up Dell's global manufacturing and procurement operations, a new position.

The new hires are only the latest in a series of management changes that have hit Dell in the last few months. On Dec. 19, the company replaced Chief Financial Officer James Schneider with Donald Carty, the former head of AMR (AMR) and a Dell director.

Cannon, who starts on Feb. 26, is known best for his two stints helming Solectron (SLR), the contract electronics manufacturer, and prior to that, Maxtor, a hard-drive manufacturer that was acquired by Seagate (STX) in late 2005. In both cases he fought to turn around two large and troubled technology companies; with Dell, he's poised to try it a third time (see, 2/1/07, "Is Dell Too Big for Michael Dell?").

Cannon, 55, is an old hand at running operations with thin profit margins, squeezing them to improve efficiency and cost structures. But having held the top job at two large companies, why take a step down in seniority, especially when Michael Dell, 41, has made it clear that he's not going to relinquish the CEO title any time soon? Cannon didn't reply to an e-mail seeking comment, and Dell declined to make him available for an interview. But it's pretty clear what the benefits might be for Cannon, if he's able to turn Dell around. Still trading at pretty close to a five-year low, an improvement in Dell's stock—which would likely make up the bulk of Cannon's compensation package—has nowhere to go but up.

But as Cannon takes control of Dell's global operations—essentially becoming Dell's de facto chief operations officer—it is revealing to look closely at his track record. At Maxtor, he helped resuscitate the drive-maker and establish some consumer products that paved the way for its purchase by Seagate in late 2005.

Streamlining Solectron

When Cannon assumed the lead at Solectron, he had wandered into a bloated mess. The Milpitas (Calif.) company, founded in 1977, had defined the concept of contract manufacturing, essentially making products for companies that couldn't afford the expense of owning and operating their own plants. Revenues grew quickly, from $300 million in 1989 to $8.4 billion in 1999. Ironically, the sector probably benefited from Dell and its pioneering just-in-time-manufacturing process that put the squeeze on dozens of computer makers. To match Dell, rivals started to turn to contract manufacturers like Solectron, as well as overseas rivals such as Compal and Quanta Computer, both of Taiwan.

When Cannon took over in 2003, Solectron was suffering from a massive case of indigestion, having gone on an ill-advised acquisition binge of 32 companies. By 2002, as the telecommunications wipeout was well underway, Solectron's two biggest customers were Cisco Systems (CSCO) and Nortel Networks (NT). By the close of the 2002 fiscal year, Solectron's long-term debt had swollen to $3.2 billion, while sales fell from $18.7 billion in 2001 to $12.3 billion.

"Mike came in and reorganized Solectron in such a way that it was easier to do business with," says Alexander Blanton, who follows Solectron for Ingalls & Snyder, a brokerage firm in New York. "Before Mike, if you wanted to do business with Solectron you had to talk to six or seven plants around the world to get your products built. There were too many doors to walk through to get the job done. Mike changed that."

Safe but Stalled

Solectron also suffered under the weight of too much inventory. In 2000, prior to Cannon's tenure, Cisco, afraid of a component shortage, had pressured Solectron into taking on a huge inventory of components just before the bottom fell out of the telecom and networking equipment business in 2001. With demand for Cisco's routers and other telecom gear crashing, Solectron and some other contract manufacturers were left with warehouses full of components meant for equipment that wasn't getting built. Cannon oversaw the liquidation of that leftover inventory, diluting shareholder value in the process. But some insiders say he may have saved the company from bankruptcy. Today Blanton says, Solectron has one of the best balance sheets in its industry.

"It was a long hard slog, but he did it." says Pamela Gordon, president of Technology Forecasters, a consultancy that tracks the electronics manufacturing services industry. "The fact that Solectron is still a going concern and hasn't been acquired by someone else is itself a pretty good feat."

But Cannon is leaving with the battle not completely won, says Kevin Kessel of Bear Stearns (BSC): "He got off to a fast start, but then he stalled out." Contract manufacturers have had a hard time growing as Asian upstart competitors—notably Taiwan's Hon Hai Precision Industry, aka Foxconn—have been growing at mind-boggling rates by dominating the rising demand for consumer PCs and other gizmos, such as the Apple (AAPL) iPod. Meanwhile, Solectron and Flextronics have seen their growth stall, as they focus on making more complex, lower-volume products. Solectron's management says it expects sales to hit $11.5 billion for the year, which would be an improvement over the previous year's sales of $10.5 billion but about flat with the $11.6 billion in sales from 2004. "They're just now getting back the level they were at when Cannon joined," says Ingalls & Snyder's Blanton.

Expertise with Contractors

So what does Dell want with Cannon? That rare executive who can teach Dell a little something about efficiency. Accustomed to living in a world of minuscule margins, he'll be able to look at Dell and see some fat to trim. For the 12 months ended Nov. 30, 2006, Dell had gross margins of 17.5% and net margin of 5.1%. At Solectron, Cannon had to contend with gross margins of 5.1% and net margins of 1.2%. Cannon will go from dancing on the edge of a razor to waltzing on a narrow stage.

Investors seem encouraged by Cannon's appointment to the new post. Dell's stock closed at $24.38 on Feb. 15, up 48¢, or more than 2%. But that's still within sight of Dell's 52-week and five-year low of $18.95, far off the headier days of 2005 when it traded north of $40.

And as Dell pointed out in its own press release on Cannon's hiring, they're going to need his expertise. The company expects to manufacture closer to its customers in emerging markets. Dell says it has assembly plants in five countries including the U.S., and that it will be adding plants in places like Poland, India, and Brazil to feed a growing hunger for PCs in Eastern Europe, Asia, and the Americas. Cannon, as the first executive to have full control of Dell's global network of plants, may well look for ways to create products that are tailored to local tastes—say, PCs with high-end videoconferencing for broadband-rich Korea, or models with cheaper screens for less affluent locales.

Having hired an executive who has overseen operations at both Solectron and Maxtor, Dell is clearly out for a manager who knows the insides of the contract electronics manufacturing business. Today, Dell's laptops are made by Asian contract manufacturers, just as those of its main PC rivals are. Cannon's four years at the helm of Solectron will give him a keen insight that will help when it comes time to renegotiate those contracts. Cannon has 25 years of deep industry knowledge that could only help Dell right its ailing corporate ship. "He knows how things are procured, and how they're manufactured, and how that whole process works like few others in the industry," says Bear Stearns' Kessel.

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