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WSJ: Dell to sell off PC factories

Posted: 10 Sep 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Dell PC factory sale? outsourcing? consumer electronics?

The Wall Street Journal has reported that Dell Inc. is exploring the sale all of its PC manufacturing facilities to contractors in its bid to reduce operating costs and improve its ability to swiftly respond to market conditions.

A deal could be announced within months, the report said. According to the newspaper, the Dell has been holding discussions with EMS providers and possibly ODMs, many of which already serve as outsourced manufacturing partners to the PC, consumer electronics and other information technology equipment company.

Dell had led the market in the past with its vaunted direct-to-customer supply chain structure, a system that helped propel it to the top of its market, pushing revenue to more than $61 billion annually from approximately $12 billion only 10 years ago.

That supply chain structure has not been as effective in recent years as competitors such as Hewlett-Packard Co. revamped their own operations and boosted their competitive positions.

Cost cutting
A sale of Dell's manufacturing facilities would help reduce the company's overall costs while also giving it the chance to more closely match market demand with available capacity.

Although Dell's revenue rose 11 percent in its most recent quarter to $16.2 billion from $14.8 billion, gross profit margin dropped to 17.2 percent from 20 percent as the company continued to struggle with rising production costs.

Dell said it "absorbed $27 million of expense for the amortization of purchased intangibles and $25 million in business realignment costs," during the three months ended Aug. 1 and said it is aiming to lower costs by $3 billion by the end of fiscal 2011.

"We are making progress in improving productivity and reducing costs," said Brian Gladden, Dell's chief financial officer in a statement announcing the results. "Strategic actions to accelerate growth in certain areas of our business affected gross margins this quarter and there will be some non-linearity in the improvements in our operating income margins as we rebalance our portfolio, make cost improvements and drive growth."

The equity market has savaged Dell for the missteps. Its stock price has fallen by more than half in the last year to $8.27 as of the close of trading on Sept. 4 from the 52-week high of $17.24.

Analysts said they believe the IT market remains strong, however, and said Dell could make a quick comeback once it resolves the problems related to its manufacturing operation.

"From live one-on-one conversations with over 30 US-based chief information officers, we believe tech demand trends will hold up reasonably well going into the end of the year supporting our outperform ratings on Dell, HP and EMC," said Louis Miscioscia, an analyst at SG Cowens Securities Inc., in a report.

- Bolaji Ojo
EE Times

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