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Report: Dell is considering sale of plants, including Forsyth
AP file photo
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Published: September 5, 2008
Updated: 09/05/2008 01:50 pm
Dell Inc. may consider selling some or all of its manufacturing plants, including the one it opened in October 2005 in Forsyth County, as part of its intensified effort to cut expenses, the Wall Street Journal reported today.
Dell reported on Aug. 28 that it had a 17 percent decrease in net income to $616 million in the second quarter, primarily due to lower prices and restructuring charges. Dell also said at that time it had cut 8,500 of the 8,900 jobs it had planned to eliminate as part of its consolidation effort.
Dell has about 1,150 employees at its $115 million Forsyth plant where it assembles desktop computers for business and individual customers. That work force that has been relatively stable for close to 1½ years.
The Dell plant has been cited as a prime example of the progress that local and Triad economies have been making in the transition from traditional manufacturing -- apparel, furniture and tobacco -- to economies based on health care, biotechnology, advanced manufacturing, services and transportation.
The Wall Street Journal reported that Dell has talked with computer manufacturers in Asia that could either buy the plants or operate them for Dell on a contract basis.
David Frink, a spokesman for Dell, said that "the report in the Wall Street Journal that we are selling plants is speculation on their part and we don't comment on rumor and speculation." Frink referred to a Dell regulatory filing from earlier this year in which it said it is "continuing to expand our use of original design manufacturing partnerships and manufacturing outsourcing relationships."
The Wall Street Journal reported that Dell is considering radically altering its quick-ship, made-to-order strategy because it is considered no longer as competitive with rivals who assemble all of their PCs offshore. Dell announced in March that it was closing a desktop computer plant in Austin, Texas, cutting 900 jobs.
"One person briefed on the plan said he expects the company to sell most — and possibly all — of its factories 'within the next 18 months,' " according to the Wall Street Journal article.
"Other factories could close, this person said. Dell would enter into agreements with the contract manufacturers to produce its PCs. A company that purchases a Dell factory would likely be contracted to continue making computers there for Dell, said one person with knowledge of the talks"
Analysts have said that Dell could face several obstacles to selling or outsourcing its plants, including incentive deals with local and state governments in the United States. Absorbing higher U.S. labor costs also could be a disincentive to Asian manufacturers.
It is not clear how the sale or outsourcing of Dell's Forsyth plant would affect the $37 million in local incentives and up to $268 million in state incentives that it is eligible to receive.
Deborah Barnes, a spokeswoman for the N.C. Department of Commerce, said it is possible that the state incentives for Dell could be transferred to the new owner or operator of the Forsyth plant.
Those incentives, which come from the state Job Development Investment Grant (JDIG) program, are paid to the company that employs the workers, Barnes said. Dell has received about $1.5 million from that program to date. Dell also has received more than $2 million from the N.C. Revenue Department and more than $80,000 from the William S. Lee Act.
She said that a new company would have to meet the same incentive standards as Dell — minimum levels of full-time employees, and salary and benefit requirements.
Starting pay for local Dell assembly-line workers has been between $9.50 and $14 an hour.
Barnes said that of the 82 companies that have been made eligible for the JDIG program since 2003, only eight no longer participate. Most of those have either voluntarily withdrawn from the program because they could not comply with the incentive requirements or have gone out of business, such as the case with Skybus Airlines Inc. in April.
"We have had companies bought or spun off, and still received the incentives," Barnes said. "We have not had this potential kind of ownership change occur."
Derwick Paige, the deputy city manager, said that the Winston-Salem City Council and Forsyth County Board of Commissioners would have to approve the transfer of local incentives to another company.
"The new company would have to prove its ability to satisfy the same requirements as Dell for the incentives," Paige said. The local work-force requirement is 1,500 after five years of operation.
"If they were not able to meet those requirements, there is a claw-back clause that would reduce their incentive payment," Paige said.
Another claw-back clause requires Dell, or a new owner of the plant, to pay back 100 percent of the incentive monies if they cease operations at the plant by October 2010. If they close the plant between October 2010 and October 2015, they would have to pay back a percentage of their incentives.
According to city officials, Dell received more than $6.5 million in city incentives for its first two years of local operations. The incentive monies by the county was not immediately available.
Dell met its full local and state incentive requirements for employment and capital investment in 2006 and 2007.
However, it is likely that Dell will not comply in 2008 with state requirements unless it hires about 310 full-time employees by the end of the year. The state requires that Dell have a minimum of 1,463 full-time employees by Dec. 31 to be in full compliance.
If Dell is not able to meet the state work force requirement, it will receive a lower incentive payment via the agreement.
If Dell, or any company, is out of compliance for two consecutive years, a five-person state panel — the Economic Investment Committee — can vote to terminate the JDIG incentive deal, Barnes said.
Members of the committee are the secretaries of commerce and revenue, the state budget director and a citizen appointed by the House and a citizen appointed by the Senate.
John Hood, the president of the John Locke Foundation in Raleigh, has been a vocal opponent of corporate incentives, particularly involving Dell.
He said that the latest production possibilities for Dell "underlines why it is unwise for governments to base their fiscal policies around the predicted futures of single companies.
"In competitive markets, things change, sometimes rapidly and unpredictably," Hood said. "Rather than negotiate big incentive deals with particular firms, policymakers should focus on improving the business climate and infrastructure that affect all businesses, large and small."
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