Dell Inc. (DELL) has started construction of its second operating unit in China, which is in line with its expansion plan initiated in September 2010.
Per the plan, Dell will open a manufacturing and customer support center in Chengdu, Western China. Dell expects the unit to be operational by fiscal 2011, creating 3000 job openings.
Dell’s efforts in this expansion complement the Chinese government’s strategy to develop new trade relations. China’s ‘Go West’ policy was aimed at developing economic cooperation with its western neighbors and cementing trade ties with Central Asian countries. We believe that Dell’s expansion in China is an illustration of China’s new approach to international trade.
Along with Chengdu, Dell plans to open an additional office in Xiamen, situated in southeastern China. This proposed expansion will add 500 employees to the Dell family. Dell had its first operating unit in Xiamen.
According to Dell, the overall China expansion will cost more than $100 billion over the next 10 years on 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 there.
Dell China has recorded solid revenue growth of almost 11 times over the past decade. In the recently-reported fourth quarter, sales in China grew 21% year over year. 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, we believe that Dell will be able to capitalize on the emerging opportunities in China.
Dell has been investing in high growth countries such as Brazil, Russia, India, and China (BRIC), and recently announced its plan to expand in India. We remain confident about Dell’s expansion strategy.
Moreover, we are encouraged by Dell’s attempt to shift its focus from PC and server roots to becoming a data-center vendor with a wider scope. However, concerns include soft demand from the Consumer segment, a high debt level and stiff competition from technology majors, such as Hewlett-Packard Co. (HPQ), Apple Inc. (AAPL), International Business Machines Corp. (IBM) and Microsoft Corp. (MSFT). Currently, we have a short-term Hold rating on Dell shares, which equates to a Zacks #3 Rank.
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