January 09, 2002 03:28
IBM to Outsource Production of Desktop Computers to San Jose, Calif., Firm
By Christina Dyrness, The News & Observer, Raleigh, N.C.
Jan. 9--RALEIGH, N.C.--Just a year after celebrating the personal computer's 20th anniversary, IBM has assembled its last PC in Research Triangle Park.
Big Blue announced Tuesday it will turn over manufacturing of its desktop computer line, NetVista, to contract manufacturer Sanmina-SCI of San Jose, Calif., in a three-year, $5 billion agreement.
Sanmina-SCI will hire the 900 employees working in IBM's RTP manufacturing facility, the nearly 100 working in Scotland, and acquire IBM's factories in both locations for an undisclosed amount.
Officials at Sanmina-SCI said all employees would be offered their current jobs at their current salary, although the benefits package will change to those offered by the contract manufacturer.
Fran O'Sullivan, general manager of IBM's PC products and services division, said that the step was an emotional one given the history of the PC in RTP, but it was necessary and positive.
"We view our announcement as a reaffirmation that we are committed to the PC desktop business," O'Sullivan said. "Our announcement is really that we're leveraging the industry."
Big Blue lost its early leadership in the PC market during the `90s to upstarts Dell and Compaq. IBM's PC division lost a memorable $1 billion in 1998. Although the red ink slowed -- the division lost $148 million in 2000 and $136 million in the first nine months of 2001 -- profitability in a highly competitive market remained elusive. Layoffs and reorganizations led some watchers to wonder whether IBM might quit the desktop computer business altogether.
But analysts say the outsourcing of the manufacturing isn't tantamount to a PC pullout, but it isn't a PC lovefest, either.
"This is not a reaffirmation of their commitment to the PC, and it's not them dumping NetVista," said Tom Bittman, analyst with tech research group Gartner. "It's the fixing of a business model problem."
Bittman and other industry watchers say they have been expecting this cost-saving move by IBM for some time.
Because IBM needs to have desktop computers to offer to its corporate customers looking for one-stop shopping for everything from technology services to software to mainframes, getting out of the PC business, however unprofitable it might be, isn't an option.
"PC is not the business you want to grow in," Bittman said. "It's the supporting actor. Having the PC business isn't in and of itself valuable, but not having it is dangerous."
But Roger Kay, director of IDC's PC research division, pointed out that NetVista manufacturing is now out of Big Blue's hands.
"Initially it's moved across to Sanmina; what happens after that won't happen under [General Manager of IBM's PC Group] Bob Moffat's watch," Kay said. "IBM is specializing in areas where it has intellectual property. They can still turn out their world-class designs; they'll just be built elsewhere. It could be across the street or it could be in Guadalajara."
Randy Furr, president and chief operating officer of Sanmina-SCI --formed when Sanmina and SCI, two contract manufacturing firms, merged last year -- said he expects that operations will stay in the Triangle.
"The greater Raleigh-Durham area is one that houses many tech companies, companies that need and could benefit from the services we have," Furr said. Sanmina-SCI, which employs 46,000 people worldwide and has 100 manufacturing sites, already has 400 employees nearby in Morrisville and east of the Triangle in Clinton.
Gary Helmig, an analyst with investment banking firm Soundview Technology Group, said the outsourcing decision was good news for IBM shareholders. Helmig said the elimination of low-skill operations and edging away from a business prone to unionization were decisions that made financial sense.
"I'm not sure how they got themselves into doing that type of work in the first place," Helmig said.
Indeed, outsourcing is nothing new in the computer industry. Still, Rob Enderle, who tracks PCs for researcher Giga Information Group, says IBM might still face a challenge convincing its customers that the new NetVistas are just as reliable as the ones built in-house.
"Dell makes a big deal showing people around their factories," Enderle said.
But unlike Dell, which Enderle said outsources some of its laptop computer manufacturing, IBM is keeping full control of its popular ThinkPad notebook computer line.
"There is still innovation in the design of notebooks," said IBM's O'Sullivan. "There's more differentiation." Desktop PCs, though, have become commodities, she said.
IBM spokeswoman Kelli Gail said that in addition to the transition of employees to Sanmina-SCI, some employees were laid off from other departments of the PC division in a move to cut unneeded skills from the payroll. Gail declined to give a number of RTP-based jobs eliminated, except to say that it was a "small number."
----- |
