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Dell is mum about possible plant sale
DELL'S DEAL: CAN IT STAY IN COMPLIANCE WITH TERMS?
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Published: September 6, 2008
Winston-Salem and Forsyth County could get their incentive money back if Dell Inc. closes or sells its local plant in the next two years, officials said yesterday.
The Wall Street Journal reported yesterday that Dell may be considering selling some or all of its manufacturing plants -- including the one it opened here in October 2005 -- as part of its intensified effort to cut expenses.
Dell reported on Aug. 28 that it had a 17 percent decrease in net income, falling from $746 million to $616 million, in the second quarter, primarily because of lower prices and restructuring charges. Dell said at that time that it had cut 8,500 of the 8,900 jobs it had planned to eliminate as part of its consolidation effort.
The newspaper reported that Dell has talked with computer-makers in Asia who could either buy the plants and build computers for Dell or operate the plants 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."
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 plant and the employees, however, are on the wrong side of an industrywide trend toward slowing desktop sales and surging notebook sales as the price of notebooks continues to fall. Dell has said repeatedly that it has no plans to assemble notebooks at the Forsyth plant, citing much lower production costs overseas.
Analysts said that Dell faces several obstacles in selling its plant or outsourcing its production, particularly considering capacity is shrinking for desktop manufacturing worldwide.
Other obstacles include Dell's lucrative incentive deals with local and state governments in the United States, and the absorption of higher U.S. labor costs being a disincentive to Asian manufacturers.
Dell is eligible for up to $37 million in local incentives and up to $268 million in state incentives if it complies with its requirements between 2005 and 2020.
Dell received more than $6.5 million in city incentives for its first two years of local operations, and nearly $1.2 million in county incentives, according to city and county economic officials.
Derwick Paige, the deputy city manager, said that if Dell were to sell or close the plant before October 2010, it would trigger a claw-back clause in the incentive deal. Dell would have to pay back all of the upfront incentive monies and the monies it received since the plant opened.
If Dell were to sell or close the plant between October 2010 and October 2015, it would have to pay back half or less of the incentive monies on a prorated basis.
Dell has been touted as a prime example of the progress that the local and Triad economies have been making in transitioning from traditional manufacturing of apparel, furniture and tobacco to one based on health care, biotechnology, advanced manufacturing, services and transportation.
When Dell announced in December 2004 that it had selected Forsyth for its new plant, local officials beamed with pride over the economic shot-in-the-arm and the national spotlight they had just landed.
"A major reason for our aggressiveness on the Dell incentives is because we were getting Dell's name in Winston-Salem," Mayor Allen Joines said yesterday. "Dell's balance sheet at the time of the project was just stellar. It was one of the strongest companies in the country.
"But economic times change, and that's why we made the incentives performance-based," Joines said.
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 their PCs in other countries. Dell is 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. Dell would enter into agreements with the contract manufacturers to produce its PCs, likely using the former Dell plants.
When asked about Dell's restructuring plans, 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."
Deborah Barnes, a spokeswoman for the N.C. Department of Commerce, said that 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, or 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. It also has received more than $2 million from the N.C. Department of Revenue 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 went 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."
Paige said that the Winston-Salem City Council and Forsyth County Board of Commissioners would have to approve the transfer of local incentives.
"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.
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 be in compliance 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 compliance.
If Dell is not able to meet the state work-force requirement, it will receive a lower incentive payment.
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, 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.
Hood 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," he 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."
■ Richard Craver can be reached at 727-7376 or at
rcraver@wsjournal.com.
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