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Dell to Start Second China Inning

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The world’s third largest PC maker Dell Inc. is all set to open its second innings in China. Dell plans to start production in its newly constructed operating unit in Chengdu, Western China by coming February or late 2012.

This Chinese expansion is taking a long time to take off. The plan was initiated in September 2010, while the construction of the unit was started in September 2011. Previously, Dell expected the unit to be operational by the end of fiscal 2011, creating 3000 IT jobs.

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 illustrates the country’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 is reflective of Dell’s confidence in the region, boosted by a string of successes seen there.

According to the industry analyst firm IDC, demand for computer systems in western China will grow at a 21% annual rate through 2014. We believe that with a talented workforce and well-planned execution, Dell will be able to capitalize on the emerging opportunities in China.

Today, PC makers are not happy with the revenue figure or the extent of margin generation. Demands for PCs are low due to high consumer affinity toward mobile computing gadgets like laptop and tablets. Moreover, higher component pricing (higher prices for hard disk drives due supply shortages post Thailand flood) is pulling margins downward.

In such a situation, we think that Dell’s second operating unit in China could do well. Our assumptions are based on IDC’s forecast and the economic benefit (cheap labor, favorable inter-country business relationship) that Dell can achieve in China.

Dell currently lags behind the topper Hewlett-Packard Co. (HPQ - Free Report) and Lenovo, but is still ahead of players like Acer and Apple Inc. (AAPL - Free Report) .

Currently, Dell has a Zacks #2 Rank, which equates to a short-term Buy recommendation.

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