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BlackBerry to outsource handset production to Foxconn

21 December 2013

BlackBerry yesterday said it was entering a handset production deal with Foxconn that lowered the risk it would have to take on massive writedowns on unsold smartphones.

Blackberry, in September, was forced to take  a markdown of about $934 million for unsold Z10 phones, a touchscreen model that the company had hoped would reverse its fading fortunes. (See: BlackBerry admits disappointing sales)

BlackBerry said it hoped to bring about an expansion of the fledgling relationship to its top-of-the-line smartphones.

The deal is being seen as unconventional in that BlackBerry would no longer pay upfront for components used in the devices made for it by Foxconn's Indonesian and Mexican factories.

Rather, Foxconn would take a share of profit on each device in return for taking on inventory management, which could result in writedowns if smartphones did not sell. Foxconn would also help with development, design and distribution of the handsets.

According to chief executive John Chen, who took charge at BlackBerry last month, he expected the Foxconn deal to help BlackBerry's handset business turn cash-flow positive, and for the company as a whole to post a profit for the fiscal year starting early 2015.

Thomson Reuters quoted Jefferies analyst Peter Misek as saying, it was almost like BlackBerry was disposing of its consumer handset business without actually disposing of it.

The move, which comes a month after BlackBerry said it was giving up on a plan to sell itself, helped to considerably soften the blow from the, $4.4 billion loss that it posted for the quarter ended 30 November, as smartphone sales shrunk.

The Waterloo, Ontario-based company had  pioneered the concept of on-the-go email, and though its pagers and phones had gained immense traction with political and business leaders in recent years it had lost its once-dominant market share to Apple Inc's iPhone and smartphones powered by Google Inc's Android operating system.

According to Chen, who is credited with turning around Sybase, a database and mobile software company, before it was sold to German software company SAP AG in 2010, the most immediate challenge for the company was how to transition the devices operations to a more profitable business model.

Chen had said he was banking on strong growth in BlackBerry's service business, which managed smartphone traffic on the internal networks of corporate and government clients.

Bloomberg reported Chen as saying yesterday that as part of the Foxconn deal, the manufacturer would help the company design phones and then produce lower-end models that would be sold in six to seven main market. The first phone, codenamed Jakarta, would be a 3G model that would come out around April, the report said.

According to Chen, over time Foxconn would take over the design of those lower-end phones, letting BlackBerry's staff in North America focus on pricier models for business customers, and if the joint venture worked out, Foxconn could eventually design and produce all BlackBerry phones.

The move would free up engineers for creating new services that do not need the BlackBerry platform.

The company had already developed the software, such as its messaging application, for iPhone and Android devices.

The company was also building an enterprise technology centre in Washington, DC, to work with government clients on new software security innovations, Chen added.

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