Celestica’s RIM loss seen as positive

In a sign of how wretched things have gotten for Research in Motion, Celestica's share price rose 3.7 per cent to close at $7.89 in Toronto on Monday after announcing its BlackBerry contract was ending.

Normally news that you're losing your biggest client, a company responsible for nearly 20 per cent of your revenue, is not the sort of thing investors like to hear, but market watchers agree that Celestica is better off without them.

Celestica announced it would be winding down the work over the next six months, taking a one-off $35 million charge as a result. The move is part of a massive restructuring exercise by the struggling BlackBerry maker, which is looking to cut costs by US$1-billion by the end of next year.

For Celestica, which had previously signaled to investors that it risked losing the RIM contract, the news is seen as an opportunity to move in newer, more lucrative directions; shifting away from low- to no-margin phones towards the far more lucrative fields of green tech, medical devices, aerospace and defense weaponry.

Such moves would represent a new, more diversified direction for the Toronto-based manufacturer, which has traditionally focused on being a hidden element in the tech sector's global supply chain.

Celestica has never formally disclosed what it makes for RIM, though it's believed to produce a number of BlackBerry models and to be RIM's primary repair provider.

Over the past decade, Celestica has been one of the largest producers of phones, computers and components, churning out products for Cisco, IBM, Motorola and Hewlett-Packard from its factories across Asia and North America.

The global supply business, however, is a brutal one, with increasingly larger rivals able to battle on scale, labour costs and government backing.

With competition intensifying, Celestica managed to squeeze out just 1.6 cents in profit for every dollar earned last year.

It was quickly becoming apparent that trying to squeak out a cheaper phone was a losing, low-margin battle, particularly when its biggest client, RIM, was seeing sales eroded on every side. With BlackBerrys soon to be off Celestica's assembly lines, the company needs to dig deeper in new markets.

According to its recent earnings report, its 'diversified unit' — which includes medical, defence and green technologies - drove 19 per cent of Celestica's US$1.7-billion quarterly revenue.

And most tantalizing, it did it with average margins between 5 per cent - 7 per cent offering a far more lucrative horizon that RIM could ever provide.