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Why Flex is going beyond its manufacturing roots

A Flex supplychain monitoring system in action.A Flex supplychain monitoring system in action.
A Flex supplychain monitoring system in action.Rick English—Flex

Reinvention is that most elusive of challenges for an established corporation. Consider all the big U.S.-based companies that never reinvented themselves: Just 57 of the original Fortune 500, published 60 years ago, remain on the list today.

Flex, a $26 billion contract manufacturer known until recently as Flextronics International, is hell-bent on remaking itself—and not merely by clipping letters off its name. The company made its bones as an outsourced-manufacturing arm of gadget and IT hardware makers like Apple (AAPL) and Cisco (CSCO), receiving and flawlessly executing customer designs. That’s a big business, but it sports puny margins and includes low-cost competitors like Foxconn in China. So Flex has moved upmarket, refashioning itself as a “sketch-to-scale” engineering design shop.

Flex’s 2,500 designers develop intellectual property both for Flex and on behalf of companies whose products it makes. At an innovation lab near its San Jose headquarters, for example, it shows clients designs for products like sensors embedded in fabric for “wearable” applications. Customers can send their own design engineers to the lab to noodle on how their ideas might mesh with Flex’s wares, and Flex provides ultra-secure work areas where customers can pursue top-secret projects.

A Flex-designed jacket embedded with wearable biosensors.Jack Sinclair—Flex

Flex’s reinvention also involves its Lab IX accelerator arm, which makes venture capital type investments in startups that might become big buyers of Flex’s manufacturing services. Examples include NextInput, a sensor company; Atheer Labs, a “3-D augmented reality platform”; and Muse, which makes a headband that monitors brain activity during meditation.

Flex has moved to spin out products that don’t fit comfortably within a giant corporation. One promising example is the software Flex developed to organize real-time information from the company’s vast supply chain. Flex uses it to follow goods flowing across multiple vendors, tracking where products are in transit and their expected arrival times. The software proved valuable to customers who use multiple manufacturers—including Flex competitors. So in 2012, Flex, along with VC investors, created a new company called Elementum to sell the software.

The startup, majority-owned by Flex, aims to fill a void Flex thinks Oracle (ORCL) and SAP (SAP), the top supply-chain software vendors, have left in the market. “The capabilities we created weren’t unique to Flex,” says Flex CEO Mike McNamara. “They were unique to supply chains.”

Elementum CEO Nader Mikhail says the startup’s customer base has expanded beyond the accounts it inherited from Flex, though revenues are modest. Flex’s margins, meanwhile, have inched up to the 2% range, from around 1%, reflecting that the lion’s share of revenues still comes from its existing business model. Reinvention is urgent, but it isn’t necessarily speedy.

For more on the future of manufacturing, watch this Fortune video:

A version of this article appears in the October 1, 2015 issue of Fortune magazine with the headline “A manufacturer gets inventive.”