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Dell Embraces Miracle of Outsourcing

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PC maker to farm out manufacturing.

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Dell (DELL) may sell most or all its manufacturing plants around the world in an effort to cut costs and remain competitive.

The sales could be completed within 18 months, the Wall Street Journal reports.

Dell now makes its own computers, but plans to join rival Hewlett-Packard (HPQ) in shifting to contract manufacturers. The Journal says H-P builds less than half of its PCs at company-owned plants.

Sale of the plants would allow Dell to concentrate on sales and marketing.

Dell's factories were designed to meet a personal computer market driven by corporate customers ordering large numbers of desktop PCs. But in the last three years, the market has shifted to laptops sold to individuals at retail stores. Competitors have out-paced Dell in designing streamlined laptops, further straining the company.

Dell, the world's second biggest maker of personal computers, must cut expenses and boost profitability. Last week's disappointing earnings report knocked the company's stock down about 18%.

The Wall Street Journal based its report on "people familiar with the matter." Asked to comment, a Dell spokesman directed reporters to the company's filing with the Securities and Exchange Commission. Earlier this year, Dell said it's "continuing to expand our use of original design manufacturing partnerships and manufacturing outsourcing relationships."

However, buyers may not be lining up to buy Dell's plants. Contract manufacturers may avoid plants in the United States with high labor costs. The sale of some plants may be hindered by agreements with local governments. In North Carolina, Dell received several million dollars in state and local tax incentives contingent upon meeting certain employment and local investment goals by 2015.

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Dell owns factories in Texas, Tennessee, North Carolina, Florida, Ireland, India, China, Brazil, Malaysia and Poland. The plants build desktop PCs efficiently, but company-owned factories aren't considered the least expensive way to make laptops.

Hon Hai Precision Industry, Compal Electronics and Quanta Computer are among the contract manufacturers that provide parts or make notebook computers for Dell.

In 2005, Dell transferred a leased PC plant in Australia to Foxconn. Apple (AAPL) has many of its PCs sipped directly customers from Asian manufacturers.

Company founder Michael Dell led the strategy of selling computers directly to customers and building them only after an order had been placed. This eliminated inventory and boosted the company's cash flow. The proposed sale of manufacturing plants is part of a continuing effort to keep the company competitive.

In August, Dell introduced new notebook computers with longer battery life pitched to business users. Dell also introduced a slimmer laptop weighing 2.2 pounds after Hewlett-Packard introduced a similar model in June.

In 2007, Dell stopped selling PCs only by phone and the Internet. Dell has signed agreements to sell computers through a number of major retailers. Dell also sells through Gome Electrical Appliance in China, Carrefour in Europe, Bic Camera in Japan and Croma in India.
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