Venkat Rao

GEOG 123
Section AP

The Globalization of Dell and the Direct Model

Introduction

The year is 2001, and the tech bubble had officially been burst. The stock market

was plummeting and the computer industry was facing a downturn of a magnitude never

seen before. Out of this collapse and destruction, one company seemed to survive and

flourish. Dell Inc. seemed indestructible in face of adversity and became the world’s

largest producer of personal computers. While others saw their cash flows dwindle and

their inventory rise tremendously, Dell prospered by implementing a revolutionary

business model.

Unlike most computer manufacturers, Dell sells directly to the end-user.

Customers can customize their machines to exact specifications. This direct relationship

draws in many potential consumers by giving them full control of the final product. The

Dell Model also creates a single point of accountability. With today’s technology being

so complex, customers need fast and streamlined support, which Dell provides very

effectively. In bypassing the reseller channel, Dell cuts costs in transportation and mark-

up and passes the saving onto the customer.

In selling directly to the customer, Dell operates in a buyer-driven commodity

chain. Aspects of production and products are determined by the end users who purchase

the product. Customers select exactly how they want their product to be built and have a

certain level of input into design. Dell design centers rely on customer feedback and

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opinions to figure out how to evolve and change their products to better fit the users. The

buyer-driven chain ensures a high level of satisfaction with Dell products.

What made Dell most effective was the implementation of a no-inventory model.

Parts would only be ordered once a customer order was placed. Instead of a traditional

vertically-integrated production process, the company relied on 3rd party vendors for their

parts. Several companies supplied Dell with materials and they all made frequent

deliveries during the day, as no inventory was held in Dell’s factories. In an average day

Dell sold 140,000 to 150,000 computers (Friedman, 2006). They got a signal based on

every component in the machine ordered, so the supplier knew just what they had to

deliver. Then every 2 hours, the Dell factory sent an email to various suppliers nearby,

telling each one what parts and what quantities of those parts it wanted delivered within

the next ninety minutes. This process repeated itself all day, every two hours. This

process eliminated inventory costs and allowed the company to operate more efficiently.

It also allowed Dell to provide its customers with the latest technology. Most

manufacturers were sitting on mounting inventory and had large gaps between the release

of new products and technology. Dell, on the other hand, did not have the chains of

inventory holding them back and was able to constantly evolve and change their

products.

The effectiveness of their business model domestically encouraged Dell to seek

out a more global approach. By implementing the model in different markets, the

company has gained increased revenue and a larger share of the worldwide PC market.

Globalizing has also made Dell even more efficient than they once were. The company

has shown the world a blueprint of how to effectively globalize a company. Combining

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resources from scholarly journals, news reports, and financial data, this paper will trace

Dell’s globalization from 1984 to 2005 and analyze the motivations behind it, as well as

how it was effectively executed.

When and Where

Dell was founded in 1984 by Michael Dell and introduced its first system, the

Turbo, in 1985. These initial machines were all produced in the Round Rock, Texas plant

and served the US domestic market. As their direct sales model started to take off, Dell

became public in 1988, initially offering 3.5 million shares of company stock at $8.50

each. This gave the company added funds to start their international expansion (Dell,

2007).

Dell now operates in 34 countries around the world with 90,000 employees and

$30 billion in sales. Operations are centered around four world regions: the Americas,

Europe/Middle East/Africa, and Asia-Pacific. When globalizing the company, Dell

established manufacturing facilities by region to serve its major markets. Each of the

regions also has its own regional headquarters and supply network. Dell’s vast global

transformation started with their first international manufacturing plant. In 1990, the

company established its presence in Europe by creating a manufacturing plant in

Limerick, Ireland. Then Dell made its first appearance in the Asia-Pacific region by

establishing subsidiaries in Australia and Japan in 1993. This was followed in 1996 by

the establishment of a manufacturing facility in Penang, Malaysia. This facility was

designed to serve the Asia-Pacific region and allow Dell to gain a larger market share. As

the company saw its sales grow in this region, it realized it needed to direct more

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specialized attention to the fast-growing Chinese PC market. In 1998, Dell’s first

manufacturing facility in China was created in Xiamen, China. After establishing their

presence in three distinct regions around the world, Dell went back to its starting place

and began to expand operations in North America. In 1999, the company opened its

second major U.S. factory in Nashville, Tennessee. This same year, Dell also opened a

manufacturing facility in Eldorado du Sol, Brazil to serve the Latin American market.

The North American expansion continued with the most recent addition of a

manufacturing plant in Winston-Salem, North Carolina (Dell, 2007).

During Dell’s globalization effort, the US economy saw one of its worst

downturns in history. The tech crash of 2000 was due to a combination of rapidly

increasing stock prices, individual speculation in stocks, and widely available venture

capital which created an exuberant environment in which many of these businesses

dismissed standard business models, focusing on increasing market share at the expense

of the bottom line. The bursting of the tech bubble marked the beginning of a recession in

the developed world. While Dell came into the tech crash as a phenomenon, it came out

as a superpower in the PC Industry. While most companies struggled through the tech

crash, Dell prospered as it honed and refined its business model. The company nearly

doubled its revenue from 1999 to 2003 to an estimated $35 billion, while at the same time

gaining large chunks of market share (Maney 2003). Dell’s stock price also stayed

relatively steady while others in the industry saw their prices tumble significantly. The

company’s direct business model is what kept them strong in hard times. While other PC

companies saw their inventory and costs soar along with diminishing sales, Dell was able

to have efficient turnarounds and offer customers prices below competitors’. This was

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due to Dell’s effective inventory management. Looking at data from Dell and Compaq,

one of its top competitors, this is very evident.

(Runkle, 2000) (Runkle, 2000)

As shown in the graphs, Dell’s steady growth and expansion in times where its

competitors were stumbling was fueled by effective inventory management practices.

Because Dell holds no inventory, it was not holding massive amounts of parts and

products during the tech crash. This allowed for high turnaround and low costs that were

passed on to the customer. The low prices on Dell PCs drove slumping computer

companies further into the hole and allowed Dell to gain large amounts of global market

share. The company’s gains in this period forced two of its biggest competitors, Hewlett-

Packard and Compaq, to engage in the tech industry's biggest merger ever to more

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effectively battle Dell. The two are now jostling for the top spot in the PC industry

(Maney 2003).

The evolution of the internet was another global development that greatly affected

Dell. The internet provided Dell with another outlet to directly reach its customers. The

company was able to create a virtual infrastructure and provide a fast and effective global

network for its products. Like many companies during this time, Dell took advantage of

the rapid development of the internet marketplace (Stapleton, Gentles, Ross, & Shubert,

2001).

II. Why

Dell’s globalization was fueled by a myriad of reasons. One of the main factors

was outsourcing for cheaper costs and sourcing efficiency. By allowing 3rd party

companies to produce their parts, Dell was able to cut costs related to inventory,

including transportation and storage. Dell also globalized in order to penetrate worldwide

markets. Data shows a strong correlation between percentage of overall Dell employment

in a country and percentage of Dell aggregate sales from that same region. The Americas

account for 72% of Dell’s revenues and 68% of employment; EMEA has 20% of sales

and 22% of employment; Asia-Pacific equals 8% of sales and 10% of employment (Dell,

2007). This shows that Dell globalizing its operations around the world leads to

significant gains in market share.

Dell’s decisions about where to locate are driven by the need to minimize costs while

extending the build-to-order, direct sales model around the world. Given the need to have

production and support capabilities in the major markets, Dell selects specific locations

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based on a combination of factors including labor costs, transportation and information

infrastructure, market access, proximity to markets and government incentives. Dell sets

up its operations in areas that are central to their target markets. This allows for more

efficient market access, support, and delivery. The company also locates in areas with

lower cost labor that have high quality and skilled workers. In areas where Dell has

located, such as Ireland, the labor is cheaper in comparison to other countries in the area,

and the workers are highly skilled and educated. Logistics is a bigger cost than

manufacturing labor according to Michael Dell, so transport infrastructure is very

important. The Tennessee locations, for instance, are in close proximity to major

highways and to a major Federal Express distribution center. Telecommunications

bandwidth, cost, and quality are also factors, especially for call centers and data centers.

Government incentives and tax breaks are also a major factor is Dell’s location decisions.

In most of its locations, Dell has received some sort of government grant for establishing

their company in that area. The company generally avoids existing industry clusters,

preferring to locate production where labor markets are not as tight. Most of Dell’s

operations do not rely on access to research universities and high concentrations of

specialized engineering talent, so it can avoid the higher costs associated with such

locations. It also does not need to be very close to suppliers’ manufacturing facilities;

rather it requires that suppliers simply ship to supply hubs close to Dell’s assembly

plants. The role of all of these factors in Dell’s decisions is even more evident when

looking at each location in detail.

Americas

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 Dell’s original headquarters was in Austin, Texas, where Michael Dell founded

the company in 1984. In 1994, Dell was offered a package of incentives from the

neighboring city of Round Rock that Austin did not even try to meet. After collecting

the usual 2% tax on Dell sales, the city rebates 31% of those tax collections to Dell

for 60 years; property tax abatement of 100% for 5 years; 75% for 5 years; 50% for

50 years (Lawton & Michaels, 2001). Dell moved its headquarters to Round Rock,

built other facilities there, and eventually had over 12,000 workers in the former

bedroom community. Dell maintains manufacturing facilities in Austin, including its

high-volume Metric 12 plant that assembles an estimated 4 million PCs per year.

Overall, Dell has about half of its 36,000 employees in central Texas, owing to

incentives, a relatively low-cost workforce (compared to other U.S. locations), and a

tendency to expand existing capacity rather than look elsewhere as the company

grew.

Dell opened its first North American manufacturing facility outside of Texas in

1999, in Nashville, Tennessee. Nashville was chosen for very generous state and local

tax incentives, good transport infrastructure, good labor supply and location central to

East Coast markets. Tax and other incentives from the state of Tennessee included

also lured Dell in. The state offered infrastructure assistance and road improvements

to service the facility totaling to about $12 million. The local Nashville government

offered even more lucrative incentives, including 100 acres of airport-area property

valued at $6.5 million, and the leasing of another 600 acres for 40 years at fair market

level. Nashville also gave Dell abatement of all property taxes on the facilities for 40

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years and $8 million in infrastructure improvements, beyond the state's $12 million,

and $1.5 million toward demolition of old buildings on the site (Locker, 1999).

In 1999, Dell began manufacturing at a facility in Eldorado do Sul, Brazil. The

decision was motivated by the need for production to supply the South American

market. Locating in Brazil enabled Dell to avoid tariffs that can nearly double the

price of an imported $1,000 PC, according to Dell. Brazil is by far the largest market

in South America, and it would be impossible to compete there with such a price

disadvantage. Also, PCs produced in Brazil can be exported without tariff to other

Mercosur countries, which include Argentina, Uruguay and Paraguay. The specific

choice of Rio Grande do Sul state was somewhat surprising, as most of Brazil’s

computer industry and supplier base is located near Sao Paulo. However, there were

financial concessions offered by the state government, and the southern state is

centrally located to supply the other Mercosur countries. Michael Dell said in a

statement that the region is a "phenomenal opportunity" for Dell. "Rio Grande do Sul

is an excellent base of operations because of its sophisticated labor force, its

economic incentives to attract technology manufacturing companies to the region and

its strategic location as an export hub to other South American countries," (Mahoney,

1999).

Europe/Middle East/Africa (EMEA)

Dell’s EMEA headquarters are in Bracknell, United Kingdom. It also operates a

sales and support call center there for consumer and small business customers in

Europe. Dell opened an assembly plant in Limerick, Ireland in 1990 to serve the

European market, and subsequently opened a second plant and administrative center

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there as well. It also operates a sales and customer support center in Bray, Ireland to

support larger corporate and other institutional customers. Dell located in Limerick

initially because of the low cost and high quality of labor. Today labor costs are much

higher, but the work force is still highly skilled and non-unionized. Dell has received

good cooperation from technical schools and universities in the area to develop the

skills Dell needs. Now, 50% of the people working for Dell in Limerick have at least

a bachelor’s degree. Another advantage of Ireland is its low corporate tax rates. In

addition, Ireland is part of the European Community, so products made in Ireland can

be shipped to Europe without paying the value-added tax. Also, because Ireland is

now adopting the Euro, Ireland will have currency stability with the rest of Europe,

eliminating the exchange rate risk within Europe. This is a major factor in Dell’s

decisions to expand production in Limerick. Another factor was the tax incentives

and other support offered by the Irish Development Agency. The agency helped Dell

find land, set up its facilities, and assisted with job training. More recently support

has been provided in the form of per capita grants for each Dell employee. Finally,

Ireland is attractive due to the presence of suppliers such as Intel and Microsoft, the

presence of contract manufacturers such as SCI, and the quality of its freight and

transportation infrastructure (Davies, 2005).

Asia-Pacific

Dell opened its first manufacturing center in the Asia-Pacific region in 1996 in

Penang Malaysia. Malaysia was chosen for its central location in the region,

proximity to suppliers, reasonable wage rates and attractive incentives. When Dell

built its factory in Penang, it received a five-year tax holiday. High-tech companies

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 investing in Malaysia are entitled to five years without having to pay the country's

30% corporate income tax (Arnold, 1997). In 1998, Dell opened a new manufacturing

facility in Xiamen, China. The plant is directly across the straits from Taiwan, and is

home to a number of Taiwanese computer and components makers. This provided

Dell with a base of suppliers and other support services. Having a plant in China was

necessary to sell in the main land China market. With China’s tariffs and taxes,

importing is not a viable strategy, and if Dell hopes to sell to government agencies

and state enterprises, it needs to have production in China (Elder, 2004). In 2001, Dell

announced it would begin producing desktop PCs for the Japanese market in Xiamen,

shifting production from Penang.

III. How

Dell has globalized itself based around inputs needed for their direct model

approach. Foreign Direct Investment is a major part of the company’s expansion. Dell

used Greenfield Investments into factories around the world to supply their target markets

globally. The company also set up subsidiaries in the different regions, in order to

oversee logistics. Dell did not, however, make use of mergers or acquisitions to globalize.

Sub-contracting is essential to the Dell business model and is another way the

company has globalized. Unlike other PC makers, Dell has avoided outsourcing final

assembly of its products. It outsources subassemblies, such as motherboards and bare-

bones PCs, and outsources nearly complete assembly of notebook PCs, doing only

limited final configuration in its own assembly plants. Dell prefers to keep control over

the key final assembly and configuration processes for the bulk of its products. One

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reason is a concern that by outsourcing its manufacturing completely, Dell might be

creating its own competitors. Also, unlike some of its major competitors (IBM, HP,

Compaq), Dell’s main business is PCs, and it feels it cannot afford to give up its

capabilities in PC production. A network of suppliers and contract manufacturers

supports each production facility. Sourcing decisions are made by worldwide product

development in Austin with input from the regions. Most sourcing is global, which means

that Dell sources major components for all locations from their headquarters. This allows

Dell to consolidate its buying power and get better terms from suppliers. While sourcing

of major components and systems for PCs is done centrally from headquarters, sourcing

of consumables, such as shipping material, printing of keyboards, printing of manuals,

etc., is done locally. The majority of sourcing is from low cost suppliers in Asia, but

some sourcing is from local producers. For major components, Dell looks for suppliers

with global capabilities such as Intel, SCI, IBM, Samsung, Toshiba, Sony and Seagate.

For each major component, it usually works with only a few suppliers. Local suppliers in

each region provide other parts. Suppliers are required to maintain inventory near or in

Dell plants to support Dell’s build-to-order production. They can produce elsewhere and

ship to supply hubs, or they can set up production nearby. Suppliers are required to

maintain ownership of inventory until it is actually pulled off the truck and onto the

assembly line. This, in turn, limits Dell’s liability and costs associated with inventory.

By creating this network of suppliers and outsourced production, Dell fits into a

modular commodity chain. The company does not have many exclusive suppliers, but

instead Dell has a plethora of open suppliers. Dell sets standards for the production of its

components which are then subcontracted out to these suppliers. Since the suppliers are

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not exclusive, there is a risk of technological and design replication. Dell resolves this by

only outsourcing modular components and having final assembly exclusively in Dell

plants. Another reason Dell uses multiple suppliers for the components of its products is

if one supplier breaks down or cannot meet a surge in demand, Dell will have other

options and will not be left in a vulnerable position.

Along with offshoring production, Dell also offshores some parts of the design

process. The company has design centers all around the world and each center serves in

giving Dell products a world-wide appeal. Dell’s expanding global presence gives the

company an edge over its competition in product development by brining in a widely

diverse range of ideas and employee skills, as well as offering an extremely broad

understanding of global customer needs. While its design headquarters still remain in

Austin, Texas, Dell has established innovation facilities throughout the world, each with

its own areas of specialization. The company’s original design center, the Austin facility,

handles notebook, desktop, server and storage system development, as well as software

development and documentation. Established in 2005, the Singapore center is home to

two of Dell’s global lines of business, Dell Displays and Dell Imaging. These lines

encompass Dell’s entire portfolio of displays, projectors and TVs, along with Dell

printers and associated software. The design center in Bangalore, India focuses on

software development, enterprise solutions, server development, international product

support, test engineering and documentation. The Indian workforce provides Dell with

highly skilled technical minds and an eye into the booming Indian economy. The China

center in Shanghai focuses on desktop system development, client system testing and

desktop services. This center serves as one of Dell’s main hubs for PC testing and

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development. While Shanghai focuses more on desktop design, the Taiwan design center

in Taipei focuses on notebook and server development and data center solutions (Dell,

2007). The combined resources of these design centers result in products that are targeted

to a global market and more viable in an increasingly interconnected world.

Dell’s steady performance and excellence is seen not only in its global design and

production process, but also in its financial data.

Tracking the price of Dell stock over the years shows how the company’s business model

and global philosophy translates into profits and strong financial performance. The price

of Dell stock rose rapidly from 1995-2000 when the company’s globalization strategies

were in full swing. After the tech crash, Dell’s stock price remained strong and stayed

steady in the years after. The fact that ten thousand dollars invested in Dell stock in

January 1991 is worth more than two million dollars today (Bhat, 2004) shows the

effectiveness of the company’s philosophies. Dell’s business model and globalization

principles kept the company strong and the stock price steady.

IV. Global Impact of Dell Model

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 The effectiveness of Dell’s globalization principles and business model has lead

to other companies trying to replicate it. These companies, and Dell itself, all contribute

to a global phenomenon relating to conflict prevention and globalization. As Dell and

other companies outsource labor, production, and design into other areas of the world, a

reduction of conflict between countries occurs. Once these countries receive the

economic and social benefits of a global marketplace, they are not willing to revert back

to their previous introverted model. Any sort of war or conflict in these countries would

reduce investment and all progress made there. Therefore, governments look to avoid

conflict and progress towards resolutions. This is evident in the evolving relationship

between China and Taiwan. Both countries are deeply embedded in Dell’s supply chain,

as well as other companies’ supply chains. If China were to invade or attack Taiwan, or

vice versa, investment in these countries would drop significantly. Since global

production and outsourcing have become an integral part of each country’s economic

viability, the tense relationship between China and Taiwan has progressed towards a

more peaceful one (Friedman, 2006).

V. Conclusion

For more than 20 years, Dell has revolutionized the industry to make computing

accessible to customers around the globe, including businesses, institutional

organizations and individual consumers. Because of Dell's direct model—and the

industry's response to it—information technology is more powerful, easier to use and

more affordable, giving customers the opportunity to take advantage of powerful new

tools to improve their businesses and personal lives. Dell has used globalizing techniques

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to achieve this by both accessing new foreign markets and creating better sourcing

efficiency. This global reach indicates the direct approach is relevant across product lines,

regions and customer segments.

Dell’s direct model is truly revolutionary and has allowed the company to control

costs and rise to the top of the PC industry. Implementing this model all around the world

has given Dell products global appeal and further increased the effectiveness of

production strategy. Dell has, in doing this, provided a globalization model that several

other companies have followed to success.

Along with becoming one of the most profitable companies in the world, Dell also

has used its business model to positively change the world. By globalizing its production,

Dell has directly provided jobs to hundreds of thousands of workers all around the world.

Dell’s impact on employment can also be seen in the rising number of jobs for its

suppliers and subsidiaries. Dell’s globalization, along with that of other companies, has

helped to reduce conflict and tension around the world. In countries such as China,

Taiwan, and India, the global supply chain has reduced traditional regional tensions.

Dell’s globalization techniques have made the company more profitable and

allowed the company to have a broader social impact. By integrating its business model

into a global landscape, Dell has risen to the top of the PC industry and will not fall from

this spot anytime soon.

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