Report: Dell looking to sell off manufacturing plants

Analysts say move could help PC maker become more 'agile' in battle with competitors

If speculation that Dell Inc. is trying to sell off its computer manufacturing plants is true, then the company could wind up being a more agile competitor in the PC market, according to multiple industry analysts.

The Wall Street Journal reported today that sources say Dell is trying to sell computer factories around the world. The newspaper added that the company could be selling most, if not all, of its plants within the next 18 months.

Venancio Figueroa, a Dell spokesman, said the company will not comment on such speculation.

However, he did note that Dell has publicly stated its intent to “enhance its relationship with original design manufacturers.” Figueroa pointed to SEC filings in March and to a statement made in the company’s second quarter earnings report that note the company's plans to optimize its own global manufacturing network and to expand use of third party manufacturers over time.

Charles King, an analyst at Pund-IT Inc. in Hayward, Calif., said he hasn't heard about the rumored sale from any of his own sources but noted that the PC maker has been on what he calls a "cost-cutting spree."

"If the company does it, it would be safe to say it would be a dramatic move," said King. "It's dramatic because Dell built its early reputation and achieved a degree of its initial success on being able to very cleverly and very effectively manage its manufacturing process. Dell came up with a strategy of leveraging the manufacturing process to allow customers much greater choice than the options they had elsewhere."

King added that if Dell does sell its factories, it shouldn't inhibit the company from continuing to offer customizable machines. He noted that although Dell has its own manufacturing plants, it already contracts with stand-alone builders in Asia.

On Aug. 28, Dell announced that revenue was up 11% to $16.4 billion in the second quarter of this year. Although Dell continues to grow its business, the company did miss analysts' expectations, which caused its stock price to take a hit.

Rob Enderle, an analyst at the Enderle Group, noted that the company's margins shrank despite revenue growth. "Competitively, they've done fine, but they're not doing as well on margins and profitability so they have to shed cost. That would be why they could be moving this way."

Nonetheless, he was quick to note that it's just a rumor so far that Dell is selling off the plants.

And while the company's profits are strong now, executives may be looking to find a way to make sure they stay that way, according to Enderle. "There's the goal to remove an awful lot of cost from the balance sheet, and allow the company to perform in a way that financial analysts like. They don't like to see a large plant, or capital item, on the balance sheet. They tend to favor companies that are very, very lean," he said.

Enderle also said that strategies have changed since the time PC companies wanted to build their own machines to keep tight control of costs and quality. "A lot of PC makers use outside manufacturers right now and that makes them a bit more agile," he added. "As we move into this decade, it appears to be clear that [original design manufacturers] can provide adequate quality. Apple uses an ODM. There are ways to assure the quality of third-party manufacturers. The reality is that this is how most things are built today."

Dan Olds, an analyst at the Gabriel Consulting Group, noted that Dell could be looking to outsource manufacturing to stay competitive with key rival Hewlett-Packard and up-and-comers like Acer and Asus.

"You wonder, if this is true, is it that they might be seeing more pressure coming down the road and this is something they have to do to remain competitive," said Olds. "Another thing to consider is if this does happen, what will be the economic impact to Texas, where Dell does manufacturing and has warehouses and suppliers."

Copyright © 2008 IDG Communications, Inc.

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