January 8, 2002 2:30 PM PST

IBM to outsource desktop manufacturing

IBM is choosing its battles, and manufacturing desktop PCs isn't one of them.

The company said Tuesday that it will outsource production of its NetVista desktop PC line to Sanmina-SCI under a three-year, $5 billion agreement.

At the same time, Sanmina-SCI has agreed to acquire IBM's NetVista desktop manufacturing operations in the United States and Scotland, including some 980 employees, for an undisclosed sum.

The deal could be seen as a sign that IBM is giving up on the PC business after a tough year and a long string of unprofitable quarters. But that's not true, said Fran O'Sullivan, general manager of IBM's personal computing division.

"We are not doing that," she said. Instead, "this announcement is reaffirming our commitment to the desktop business."

The NetVista line, introduced in April 2000, was designed in part to help IBM reduce costs and bring its PC business back to profitability. The plan was working and IBM even projected the PC division would return to profitability in 2001. Then the bottom fell out of the PC market.

Now, IBM is looking to pare down costs again in its effort to seek profits.

"By announcing this deal, we are going to be able to lower our cost...and continue our core competencies, which are in adding value around the PC itself...things like the security subsystem," an IBM-developed bundle of hardware and software that protects sensitive data, O'Sullivan said.

IBM's decision reflects the big debate in the PC world: outsource or build to order? In the never-ending quest to cut costs, most major PC companies have either decided to offload the majority of manufacturing to U.S. or Asian subcontractors like Sanmina or Quanta, which assemble and even design PCs for the brand manufacturers, or develop hyper-efficient, low-inventory manufacturing centers like Dell Computer has.

One of the more interesting twists in the Hewlett-Packard/Compaq Computer merger is that HP has long been a proponent of outsourcing while Compaq has spent years putting together a build-to-order facility. Which path the merged company eventually takes is uncertain at this point.

Analysts reacted to IBM's announcement with little fervor, seeing the move as little more than IBM moving the product line to a lower-cost manufacturing scenario, as IBM will continue in-house product development, sales and marketing for NetVista.

The upside for IBM is it is "the same stuff but cheaper to make," said Roger Kay, an analyst with IDC.

Kay added that it is "quite likely" that this move could help IBM's PC division return to profitability. However, he said, "it's about more than just a lower cost of manufacturing. (IBM is) going to turn their attention to other things," such as services.

There are other battles IBM is also abandoning. IBM announced on Tuesday that it will license its Thin Client technology to Neoware Systems and phase out its own Thin Client product line. Later, IBM plans to resell the Neoware products and continue to support its existing IBM Thin Client customers.

"The (Thin Client) market never really materialized...and as part of our product simplification work...we viewed this as the best arrangement to meet our customers' Thin Client needs," O'Sullivan said.

IBM's most recent refresh of the NetVista series was in October, when it introduced the new X-Series all-in-one desktop with a display mounted on a swing arm, similar to the newest iMac from Apple Computer.

San Jose-Calif.-based Sanmina-SCI, IBM said, plans to use existing locations in Scotland and at Big Blue's Research Triangle Park complex in North Carolina to manufacture the desktop machines.

As of the end of the third quarter, IBM was ranked No. 3 in the PC business behind Dell and Compaq. The company will continue to manufacture its own ThinkPad notebook PCs.

 

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