IBM Exits PC Manufacturing; Awards $5 Billion Outsourcing Contract

In an effort to cut costs, IBM is selling its PC manufacturing operations in the United States and will instead offer customers IBM branded desktops manufactured by a third-party contractor. In a deal revealed Tuesday, the computing and services company says it has awarded a $5 billion, three-year outsourcing contract to Sanmina-SCI in San Jose, Calif. As part of the agreement, Sanmina-SCI will acquire an IBM computer factory in Research Triangle Park, N.C., for an undisclosed sum. The factory currently builds IBM NetVista PCs for the U.S. and Canadian markets.

IBM already outsources PC manufacturing for Europe, the Middle East, and Africa to a contractor in Greenock, Scotland. Under Tuesday's deal, Sanmina-SCI will assume management of that contract and will also acquire equipment from the Scottish plant.

IBM says all 900 employees at the Research Triangle Park plant will be offered jobs with Sanmina-SCI at the same salary. Sanmina-SCI was formed through a December merger of Sanmina Corp. and SCI Systems Inc. IBM plans to continue with its own design and marketing operations for the NetVista line and will continue to manufacture its ThinkPad laptops in-house at a company plant in Mexico. Company officials declined to give an estimate of savings the deal may generate.

The move is further evidence that PC manufacturing is falling out of favor with large IT vendors because of scarce profits in what has become a commodified industry. Last year, IBM exited the cutthroat retail PC market in an effort to shore up profits. For the third-quarter 2001, the company reported that revenue from desktop sales declined 30% compared with the previous year. IBM's Personal and Printing Systems Group, which sells PCs, posted a year-over-year decline in pre-tax income of 179.5% for the period. Meanwhile, Compaq's dependence on its PC business for revenue is driving much of the opposition to its proposed merger with Hewlett-Packard among some key HP shareholders.

In spite of the market's troubles, IBM PC Products and Services general manager Fran O'Sullivan says the company will not exit the business altogether. O'Sullivan says the ability to supply large corporate customers with a full range of computing products--from desktops to mainframes--remains strategically important to IBM. "PCs represent an important part of our overall E-business infrastructure offerings," says O'Sullivan. Technology Business Research analyst Bob Sutherland says the strategy makes sense. "Many large customers prefer a single source for all their computing needs, and IBM needs to deliver that."