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May 8, 2006 1:36 pm

Dell to increase procurement in Taiwan by 20%

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Dell, the world’s biggest personal computer maker, is to increase the number of its contract manufacturing suppliers in Taiwan as it attempts to counter downward pressure on profit margins.

The move is aimed at strengthening the US group’s pricing power and comes amid investor concerns its growth is slowing compared with its main competitors.

Kevin Rollins, chief executive, said the company expected to increase procurement in Taiwan by more than 20 per cent to US$12.5bn this year. In 2005, the company spent US$10bn on procurement in Taiwan, up from US$8bn in 2004.

Mr Rollins said Dell would expand its existing manufacturing arrangements, saying its main requirement of its partners was that they deliver the “newest, greatest technology”.

“Cost is always very important but at the moment top technology is even more important. Therefore it’s more the overall value that matters,” he said. He added that “new partnerships could also evolve”.

Analysts said Dell was considering adding Asustek, the world’s largest motherboard maker and Taiwan’s fifth-largest notebook manufacturer, and Inventec, another downstream electronics contract manufacturer, to its suppliers list.

Mr Rollins was due to hold talks with executives at Taiwanese suppliers on Monday but remained tight-lipped about any further details regarding Dell’s supplier relationships.

Most Dell machines and their components are produced by Taiwanese contract manufacturers, such as Honhai, the world’s largest electronics manufacturing services group, and Quanta Computer, the world’s largest notebook maker.

Dell also has a design centre in Taiwan where more than half of its notebooks are developed and 100 per cent of its single-socket servers are engineered.

Dell is feared among contract manufacturers as one of the toughest brandname customers on pricing. Contract manufacturers have been suffering from tightening profit margins as their customers, engaged in fierce battles for market share, push prices down.

In notebook contract manufacturing, gross margins often drop close to 5 per cent. This has led Taiwan’s top notebook makers, which command a global market share of more than 60 per cent, to resist pressure for any further price cuts.

Dell’s share price has slid more than 30 per cent since the company’s revenues and profit margins disappointed investor expectations in two consecutive quarters last year. The company also gave highly conservative guidance for the current quarter, forecasting only 6-9 per cent growth.

Mr Rollins has insisted the company’s basic strategy, including its direct sales model, is not in trouble and that the weakness is related to one-off execution problems.

Analysts said Mr Rollins, in spite of his relatively mild comments on Dell’s relationship with its manufacturing partners, was likely to try everything to further squeeze prices.

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