Dell continues with Chinese expansion

The world's third-largest PC maker has been planning a new facility in western China for years.

By Zacks.com Jan 12, 2012 5:14PM
The world's No. 3 PC maker, Dell (DELL), plans to start production this year at its new factory in Chengdu, Western China.


Dell's Chinese expansion has taken a while. The plan was initiated in September 2010, but construction didn't start until a year later. Previously, Dell expected the unit to be operational by the end of fiscal 2011, creating 3,000 jobs.


Dell’s efforts complement the Chinese government’s strategy to develop new trade relations. China's "Go West" policy was aimed at developing economic cooperation with western neighbors and cementing trade ties with Central Asian countries. We believe that Dell’s expansion in China illustrates the country’s new approach to international trade.


Along with Chengdu, Dell plans to open an additional office with 500 employees in Xiamen, situated in southeastern China. Dell had its first operating unit in Xiamen.


According to Dell, the overall China expansion will cost more than $100 billion over the next decade for facilities, employment, research and development, as well as purchases from Chinese suppliers. We believe this massive capital expenditure reflects Dell’s confidence in the region, boosted by a string of successes seen there.


According to the industry analyst firm IDC, demand for computer systems in western China will grow at a 21% annual rate through 2014. With a talented workforce and well-planned execution, Dell will be able to capitalize on the emerging opportunities in China.


Today, PC makers are not happy with revenue trends or margin generation. Demand for PCs are low as consumers gravitate toward mobile computing gadgets such as laptop and tablets. Moreover, higher component pricing (higher prices for hard-disk drives due supply shortages post Thailand flood) is pulling margins downward.


In such a situation, we think that Dell’s second operating unit in China could do well. Our assumptions are based on IDC’s forecast and the economic benefit (cheap labor, favorable inter-country business relationship) that Dell can achieve in China.


Dell currently lags behind the topper Hewlett-Packard (HPQ) and Lenovo, but is still ahead of players like Acer and Apple (AAPL).


Currently, Dell has a Zacks No. 2 Rank, which equates to a short-term "buy" recommendation.


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