Dell outsourcing plan may be tough to execute

Dell outsourcing plan may be tough to execute

Dell wants to boost its profit margins to levels enjoyed by rivals such as HP

Franklin Paul and Jim Finkle

Saturday, September 06, 2008

NEW YORK/BOSTON, USA: Dell Inc plans to make fewer computers itself and rely on contract manufacturers to cut costs, but the company could find it hard to get rid of its North American factories at a good price.

The world's second-largest PC maker said in April it would outsource more manufacturing, and the Wall Street Journal reported on Friday that Dell was trying to sell most of its factories within the next 18 months.

Analysts said the most likely buyers of Dell's plants are big contract manufacturers, most of which are based in Asia because production costs are lower there.

They questioned how much cost savings Dell can get, since it would likely have to give the buyer of its plants an accompanying personal computer manufacturing deal.

"They will have to lock in a long-term production contract as well because no one will buy facilities unless there's business to go with it," Cross Research analyst Shannon Cross said. "I just don't know how much they get for them. They may also transfer the manufacturing assets to a partner."

Dell wants to boost its profit margins to levels enjoyed by rivals such as Hewlett-Packard Co and pour some savings into new product development, analysts said.

Some 58 percent of Dell's 5 million square feet (465,000 sq m) of manufacturing and distribution space is in the United States, according to regulatory filings. Twenty-two percent is in Asia and 20 percent is split between Ireland and Poland.

It has manufacturing plants in Brazil, Florida, North Carolina, Ohio, Tennessee and Texas.

"Competitors have done it over the years. They have migrated to outsourced manufacturing," Cross said, citing HP, the world's top PC maker. "It probably doesn't give them (Dell) an advantage because their competitors are already there."

The Journal, citing people familiar with the matter, said Dell had approached contract computer manufacturers with offers to sell the plants.

Dell declined to comment except to reiterate that the company has eyed more outside manufacturing help.

"We plan to expand our use of original design manufacturing (ODM) partnerships over time to deliver products faster and better serve customers in certain segments and geographical areas," Dell spokesman David Frink said.

NEW BUSINESS MODEL

Dell's factories were originally tailored for a market that was driven by corporate customers ordering large volumes of desktop PCs. But over the past three years, growth has shifted to laptops sold to consumers at retail stores.

The Round Rock, Texas-based company has lagged behind competitors in coming up with a streamlined system to build portable PCs. Contract manufacturers can generally produce PCs for less money because their entire operations are focused on finding production efficiencies, as opposed to large firms like Dell, which must balance marketing and other considerations.

Analysts said they believed Dell would gradually shift more production abroad.

"From a procurement perspective and from a design perspective, (Asian contract manufacturers) are just as good. North America is not exactly a low-cost area," said analyst Richard Kugele of Needham & Co. "They're starting to embrace the Asian ODMs a lot more."

The U.S. plants could be sold to companies outside of the PC industry and rebuilt to make other product types, he said.

Hon Hai Precision Industry unit Foxconn of Taiwan recently bought plants from Sanmina-SCI Corp, which sold assets of its PC business and associated logistics services located in Hungary, Mexico and the United States.

Spokesmen for contract manufacturers Flextronics International Ltd and Benchmark Electronics Inc were not immediately available for comment. A representative for Sanmina-SCI declined to comment.

Dell broke away from its exclusively direct-sales model last year to offer computers in retail outlets, after losing the title of top PC maker to HP.

It accelerated its cost-cutting drive this year, saying it would cut more jobs than the 8,800 it previously targeted as it seeks to trim annual expenses by at least $3 billion by 2011.

(Editing by Braden Reddall)

©Reuters