January 7, 2003 8:53 AM PST

IBM signs major outsourcing deal

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IBM has inked a multibillion-dollar deal to outsource a portion of its server manufacturing, the company said Tuesday.

Just a year after outsourcing the manufacturing of its NetVista desktop PCs, Big Blue will do the same for some of its xSeries servers and IntelliStation workstations sold in North America and Europe.

San Jose, Calif.-based Sanmina-SCI--which last year took over the manufacturing of IBM's NetVista desktops and purchased IBM facilities in the United States and Scotland--will take over the manufacturing of xSeries 200 and xSeries 300 models from IBM, the company said. The servers use Intel processors and run Windows or Linux operating systems.

As reported earlier by CNET News.com, the deal will be worth $3.6 billion over three years. Another new outsourcing agreement with Solectron will be valued at $120 million over three years, IBM said.

The manufacturing agreement underscores a series of broader moves by IBM, which has been working to reduce the costs associated with its supply chain, a vast organization that includes everything from procuring parts to manufacturing servers to buying paper clips for IBM offices. Last year, IBM cut $5 billion from its supply chain and this year expects to do the same, company executives have said.

IBM thinks the deal will make its PC and server businesses more efficient by speeding manufacturing and lowering its overall costs. The move will also simplify its component supply chain by shifting the procurement of some parts to Sanmina-SCI.

The agreement is designed to help IBM lower its costs to better compete with companies such as Dell Computer on price in the cutthroat market for Intel-based servers. Meanwhile, IBM will be able to focus more intently on product design and customer service, the company said. Sanmina-SCI will also handle custom configuration of some of the servers.

Roger Kay, an analyst with IDC, said the deal could give IBM a needed lift.

"A deal such as this would help IBM aggressively lower costs and let the company better use its bulk, which it hasn't been able to do effectively in the past," Kay said.

Cutting costs is by far the biggest benefit IBM will derive from the server agreement, said Bob Sutherland, an analyst at Technology Business Research. But it also serves the company in other ways, such as freeing up product teams to focus on adding new technologies and improving designs of servers and workstations.

"This is all about IBM offloading a lot of its costs of manufacturing," Sutherland said. However, at the same time, the company "has been trying to focus a lot of its efforts of late on design development," he said.

Despite outsourcing desktops and some servers, IBM plans to keep its ThinkPad notebook line in-house. But the company will also streamline manufacturing there. The company said most of its ThinkPad manufacturing has been consolidated in a single facility in Shenzhen, China. Sanmina-SCI will begin handling some assembly of certain custom-configured ThinkPad models, however.

The manufacture of servers that are sold in the Asia-Pacific region and South America are not affected by the Sanmina-SCI deal. However, the deal could eventually include other IBM computers.

Despite its effect on about 1,300 IBM employees, Big Blue said the new outsourcing agreement won't result in major job losses.

Sanmina-SCI, which will acquire IBM assets including inventory and some facilities, is offering those employees affected by the deal similar jobs to the ones they have now.

Meanwhile, IBM said under its other new contract, Solectron will handle a small portion of IBM's Global Asset Recovery Services, an operation that takes in and redistributes leased equipment.

 

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