OS/400 Edition
Volume 12, Number 2 -- January 13, 2003

IBM Outsources xSeries Server Manufacturing

by Timothy Prickett Morgan

In a surprising but understandable move, IBM has outsourced the manufacturing of nearly its entire line of Intel-based servers to a contract manufacturer that it has long ties to, Sanmina-SCI, of San Jose, California. IBM wants to make more money on xSeries servers, and the company believes that outsourcing to Sanmina-SCI is better than trying to invent more cost-effective manufacturing processes on its own. Sanmina-SCI got a similar contract last year to make IBM's desktop PCs.

IBM has never been a low-cost producer of PCs and Intel-based servers, even though it was known primarily for its engineering and manufacturing genius in the middle 40 years of its history. Some of that has to do with the geographies and economies where IBM has historically built machines (it is far less expensive to build an electronics gadget in Taiwan or China than it is in the United States or Germany, for instance, just based on labor costs alone), and in a sense IBM has to be commended for holding out as long as it did, and not just throwing in the towel and letting one of these big contract manufacturers take its plants and people and do what it will with them to get cheap PCs and servers out the door. In some cases--and no one is talking about this now, for local political reasons--these factories will be shuttered and people eventually will be fired--by Sanmina-SCI, not IBM. That's another reason why people outsource: It alleviates the pain and guilt associated with trimming down facilities and people, and shifts the political and personal heat to another party. Moreover, the deal shifts the substantial financial burden of acquiring workstation and server components from IBM to Sanmina-SCI, and that company will in many cases be coping with custom configuration of xSeries machines, too.

Sanmina-SCI was created two years ago, after the merger of Sanmina Corporation, a manufacturer founded in 1980, and SCI Systems, which was founded in 1961 and is already a big producer of PCs for other manufacturers. The company has more than doubled its revenues, to $8.8 billion, in 2002 (thanks to the merger), but it also posted a $2.6 billion loss (due also in part to the merger).

Under the Sanmina-SCI deal, a three-year manufacturing and services contract worth $3.6 billion, the company will make all xSeries servers for IBM's customers except the top-end xSeries 440 machines and some BladeCenter servers, according to IBM sources familiar with the details of the deal. Sanmina-SCI will also make IBM's IntelliStation workstations. Sanmina-SCI will make these machines for customers in the Americas, Europe, Africa, and the Middle East. IBM already has a partner in China that makes PCs and servers for the Asia/Pacific region, and that is also responsible for the majority of its worldwide ThinkPad manufacturing. As part of the deal, Sanmina-SCI will take over a factory in Guadalajara, Mexico (with 400 employees) and a factory in Greenock, Scotland (with 650 employees); the employees will be offered jobs at Sanmina-SCI, but there is no guarantee that Sanmina-SCI will keep these facilities or people in the long run.

Contract manufacturer Solectron, a rival of Sanmina-SCI, was given a $120 million, three-year contract to operate a 250-person PC refurbishing operation at IBM's facilities in Research Triangle Park, North Carolina. Solectron already makes some xSeries machines for South American markets, and that relationship has not been affected by the Sanmina-SCI deal.

IBM was very clear that no other product line in the Big Blue catalog was affected by this announcement, but the company cut $5 billion out of supply chain and manufacturing costs in 2002, and it wants to do it again this year, which means it will do what it has to do. It won't be long before IBM starts pondering the outsourcing of some of its pSeries and iSeries machines, and it would not be surprising at all to see IBM outsource manufacturing of zSeries mainframes to Hitachi, which already makes some models in the zSeries line that IBM adds features to and rebrands. Hitachi and IBM have a vague (to us in the outside world, that is) deal on co-marketing and developing Power-based machines already, which it announced last year, and it has just completed the sale of its hard disk drive manufacturing business to the same Japanese electronics giant. For all we know, IBM is already planning on outsourcing its entire server manufacturing operations, and plans to engineer and build only the central electronics complexes for its machines. This announcement has got to be making the IBMers in Rochester, Minnesota, where pSeries and iSeries midrange machines are made, and in Poughkeepsie, New York, where zSeries mainframes and other server components are made, a little jumpy.

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But Wait, There's More. . .

Timothy Prickett Morgan

Managing Editor
Shannon Pastore

Contributing Editors:
Dan Burger
Joe Hertvik
Kevin Vandever
Shannon O'Donnell
Victor Rozek
Hesh Wiener
Alex Woodie

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Advertising Director:

Jenny Thomas

Advertising Sales Representative
Kim Reed

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