By Justin Scheck, Wall Street Journal,
September 5, 2008
Dell Inc. is trying to sell its computer factories
around the world, a move to sharply overhaul a
production model that was long a hallmark of the
PC giant's strategy but is no longer competitive.
In recent months, according to people familiar
with the matter, Dell has approached contract
computer manufacturers with offers to sell the
plants. One person briefed on the plan said he
expects the company to sell most -- and possibly
all -- of its factories "within the next 18 months."
Other factories could close, this person said. Dell
would enter into agreements with the contract
manufacturers to produce its Pcs.
The plan is the latest sign of changes in the global
PC business, and the increasing pressure on Dell
to improve its profitability. The Round Rock,
Texas, company last week reported disappointing
quarterly profit that helped send shares down
more than 18%, and has been trying to reduce
expenses since early last year. Dell, which led the
industry in lean manufacturing approaches and
build-to-order PC manufacturing, now finds itself
lagging rivals in wringing the most savings by
outsourcing operations to production partners.
Any factory sales are contingent on Dell finding
buyers. The most likely candidates are big
contract manufacturers -- most of which are
based in Asia -- that may hope to get a bigger
piece of Dell's business. A company that
purchases a Dell factory would likely be
contracted to continue making computers there
for Dell, said one person with knowledge of the
talks.
Dell's factories were originally tailored for a PC
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. Dell has lagged
behind competitors in coming up with a
streamlined system to build portable Pcs.
A Dell spokesman asked to comment referred to a
company filing with the Securities and Exchange
Commission earlier this year that said Dell is
"continuing to expand our use of original design
manufacturing partnerships and manufacturing
outsourcing relationships."
Dell could face several obstacles to selling its
plants. Contract manufacturers may be hesitant to
buy factories in places with high labor costs, like
the U.S., said one person with knowledge of the
talks. And some facilities could be encumbered by
agreements with local governments. Dell's North
Carolina plant, for example, received several
million dollars of state and local tax incentives that
are contingent on the factory meeting certain
employment and local-investment goals by 2015.
Michael Dell, the company's founder, drove an
innovative strategy of selling computers directly to
customers, only building them after they were
ordered. After a customer places an order through
the Web or over the phone, the company's
factories assemble the needed components, load
PCs with software and ship them in a matter of
hours.
The system eliminated idle inventory and
maximized Dell's cash flow. The company owns
factories in Texas, Tennessee, North Carolina,
Florida, Ireland, India, China, Brazil, Malaysia and
Lodz, Poland, where it opened a plant early last
year.
Dell's plants are still regarded as efficient at
churning out desktop PCs. But within the industry,
company-owned factories aren't considered the
least expensive way to produce laptops, which
have been the main driver of growth lately and are
complex and labor-intensive to assemble. Rivals
such as Hewlett-Packard Co. years ago shifted to
contract manufacturers -- companies that provide
production services to others -- to build their
portable computers. H-P builds "less than half" of
its PCs in facilities it owns, wrote Tony Prophet, HP's
senior vice president for PC supply chain, in
an e-mail.
Contract manufacturers can generally produce
computers more cheaply because their entire
operations are narrowly focused on finding
efficiencies in manufacturing, as opposed to large
firms like Dell, which must also balance marketing
and other considerations.
For many Dell notebooks, a contract manufacturer
already partially builds each system in a plant in
Asia. The half-built computers are then shipped to
one of Dell's own plants where assembly is
completed. Because each computer goes to two
factories, Dell refers to the system as "two touch."
Dell began efforts to cut manufacturing costs last
year. It has farmed out an increasing number of
products to contract manufacturers such as
Taiwan's Foxconn Group to eliminate two-touch
production of some notebooks, and earlier this
year closed down one of its own plants in Texas.
Selling factories could be a culmination of a plan
Dell started last year to increase its reliance on
contract manufacturers, something competitors
did first. "A lot of companies are already on that
model," said Mike Cannon, Dell's production chief,
in an interview earlier this year. "We're playing
catch-up there."
H-P, for example, transferred a leased PC plant in
Australia to Foxconn in 2005. Apple Inc. has many
of its PCs shipped directly from Asian
manufacturers' plants to customers.
Series of Steps
Reducing costs for manufacturing and other
operations is one of a series of steps Dell hopes
will restore momentum after a slide that saw the
company lose its position as the world's biggest
PC maker by sales to H-P. Mr. Dell returned as
chief executive in January 2007, and said he
would revive the company through a combination
of investments and strategy changes -- including
the introduction of sales through retail stores --
and move to cost cuts.
Since then, Dell has unveiled a series of more
stylish products and laid off about 8,500 workers.
The company sold 53% more consumer PCs in its
fiscal quarter ended Aug. 1 than it did a year
earlier, sending its world-wide consumer market
share to 9.1%, up from 7.5% at the same time last
year, the company said.
But Dell reported a 17% drop in quarterly income
compared with last year. Profit margins fell, the
consumer business lost money, and the company
said costs remained too high to compensate for
the growing investment in new markets, which
included aggressive cuts to PC prices to help
drive sales, especially in Europe.
Part of Dell's problem is the long-term shift by
consumers to buy laptops, which many
consumers prefer to buy in retail stores. The
company has addressed that issue, offering
machines through channels such as Best Buy.
But its factories are geared toward building PCs
for direct-order customers. The two-touch system
was one result; Dell couldn't figure out how to
efficiently link its custom-order system to the
contractors' factories, said people familiar with the
matter. In the past, the extra shipping and
assembly costs associated with the two-touch
system weren't significant problems for Dell, since
the company maintained relatively high profit
margins by avoiding marketing and other costs
associated with selling through retail channels.
Manufacturing Costs
As Dell moved into retail stores last year -- and as
PC prices continued to drop and transport prices
went up -- manufacturing costs have become a
bigger issue. In its last quarter, Dell saw a 2%
annual decline in desktop sales and a 26% jump in
notebook revenue.
Due in part to the production system, Dell's
operating margin last quarter was 5%, said Lou
Miscioscia, an analyst at Cowen & Co., while HP's
margin in PCs was nearly 5.7%.
Dell, whose latest balance sheet values all its
property, plant and equipment at $2.6 billion, isn't
likely to reap a financial windfall from selling
factories, said Mr. Miscioscia. Instead, the benefits
of shedding factories would come over the long
term, through reduced spending.
Improving Dell's manufacturing processes is the
responsibility of Mr. Cannon, the production chief
who was hired by Mr. Dell after his return early last
year. Mr. Cannon was formerly CEO of contract
manufacturer Solectron, which is now owned by
Flextronics Inc.
Mr. Cannon initially delayed a plan early last year
that would have streamlined the manufacturing
system, said several current and former
executives. In the interview this year, Mr. Cannon
declined to comment on that plan, but said he has
been working since his arrival at Dell to outsource
more of its manufacturing. Asked if the company
might sell or close some plants, Mr. Cannon said,
"Everything's on the table." The Dell spokesman
said Thursday Mr. Cannon was unavailable for
comment.
This article has been reprinted under licensing with the Wall Street Journal. |
