"...in the next couple of years, I believe Dell Computer (DELL:Nasdaq - news - boards) might start outsourcing manufacturing of its lower-margin desktop machines, to allow it to focus on its high-margin server business."
Hi Kemble, what do you think about this interesting read? :)Leigh
thestreet.com
From the Mailbag: Michael Dell Replies
By Jim Seymour
Special to TheStreet.com
5/5/00 2:21 PM ET
This has been an odd week for me, sitting -- usually alone -- in a hospital room in New Orleans, while my wife has been wheeled from test to test, and from operating room to operating room. (She's going to be fine and thank you, if I may anticipate the usual kind emails from TheStreet.com subscribers, which always encourage us both.)
Won't be home, probably, 'til next week, so in this extended, enforced solo time I've been doing a lot of thinking, a lot of research -- though the hospital has a new, all-digital phone system, it provides a fax machine in the "couples" rooms of the sort we're using, so I've been able to borrow the analog phone line from it for a Net connection -- and I've also gone back through several thousand emails from the past couple of months.
My original thought was to pull together a "from the mailbag" column, highlighting the best of those notes. But I decided one letter was sufficiently interesting for a column by itself: A response from Michael Dell to an April 14 column of mine in which I passed along my semi-outrageous notion that sometime in the next couple of years, I believe Dell Computer (DELL:Nasdaq - news - boards) might start outsourcing manufacturing of its lower-margin desktop machines, to allow it to focus on its high-margin server business.
I was surprised by neither the candor and articulateness of Michael's reply, nor the passion in it. I've known Dell since his early days in Austin, Texas, when there were no "Dell" PCs yet, nor even "PCs Ltd." PCs, but only gray-market IBMs (IBM:NYSE - news - boards) and Compaqs (CPQ:NYSE - news - boards) Michael built up with memory, hard drives and more, and sold from a tiny, grubby office -- itself, a big move up from his former places of business: the trunk of his car, then his student apartment.
Since then Dell has, of course, built a world-scale business which is now teaching everyone from Ford's (F:NYSE - news - boards) Jac Nasser to dozens of e-tailing wanna-bes. Throughout, I've been astonished at Michael's almost unerring instincts. He can walk the corporate walk and talk the corporate talk with anyone, but his greatest strengths by far are his amazingly quick and good business instincts, and his belief in the model he's built at Dell.
Michael doesn't buy my thesis that Dell is going to be outsourcing the manufacture of some of its lower-margin desktops anytime soon.
First, he points out that, "We make lots of profit on desktops too. While it may be a bad business for others, our cost model makes it a great business. Note our 300% ROIC [return on invested capital]."
Yeah, Michael, but not a 300% return on the capital devoted to building thin-margin low-end desktops under your own roof.
Second, he takes issue with my view that Dell gets more out of a dollar spent on marketing -- in the broadest sense -- than on manufacturing facilities, and that that's an issue in Dell's future growth: "Note that our entire physical assets (not just manufacturing) at Dell amount to only about 6 to 7 weeks of cash flow! In other words we are a highly efficient information-centric business and have partners for all capital-intensive processes. It's de-verticalization taken to an extreme.
"We have actually looked at partners for some of the processes, but we don't think we want to teach subcontractors the magic of custom configuration with hardware and software. Compaq has tried 10 times in the last 7 years to go direct and we don't want to help them learn.
"SCI Systems (SCI:NYSE - news - boards), Jabil (JBL:NYSE - news - boards), Solectron (SLR:NYSE - news - boards), etc. are great at building the same thing over and over again. This is not what we do!!"
Agreed that it's a risk, Michael. But I think some of that lower-level manufacturing could fairly easily be moved to contract manufacturers without giving away the customer-contact and customer-information edge, to say nothing of protecting Dell's proprietary built-to-order knowledge.
I wrote that Dell was already outsourcing some of the design, and much of the actual manufacturing of some of its notebook PCs, which sets what I think is a positive precedent, showing that using outside assemblers works. And doesn't turn customers away.
Michael roared back: "This would have been true 3 years ago, but now Dell designs and manufactures completely without any help from Asia suppliers about 75% of our notebooks! And we do it more profitably than we used to!"
He also understands very well the perils of growth, but also the use of capital and raw size.
"Two years ago we grew $6B in one year. Last year we grew $7B, this year about $8B. You are right, it is a challenge, and Nashville is a great new area of expansion for us.
"Having said all of this we have almost $8B in cash and investments and are not exactly stressed about the cost of new factories given all of the above. To make it even more fun, small form factor devices, especially the new generation of desktops, will allow for many more units from the same factories."
So, some points conceded, others I'm not so sure about.
I say that the idea of Dell Computer moving to more outside manufacturing sometime in the next two or three years is still an open one. Michael has turned on a dime on a new and initially heretical idea before in my experience -- and I call that a sign of a good businessman -- and I wouldn't be too surprised if it happened here.
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