Sept. 5 (Bloomberg) -- Dell Inc. plans to sell its computer factories to help shave $3 billion in costs and revive profit margins weighted down by competition with Hewlett-Packard Co.

Dell may sell the plants within 18 months and has approached contract computer manufacturers, the Wall Street Journal said today. The move would mark a shift from Dell's strategy of making its own products to one where outsiders build all its computers, the Journal said.

Founder Michael Dell has pledged to trim up to $3 billion in annual expenses in the next three years by eliminating jobs and using lower-cost manufacturers. Profit at Dell, the second- biggest maker of personal computers, is fading amid price cuts to take sales from leader Hewlett-Packard. Once known for its manufacturing prowess, Dell has fallen behind as Hewlett-Packard wrung savings from Asian contractors.

``Dell had been behind the curve in outsourcing to those companies because it falsely believed it was more efficient,'' said Brian Alexander, an analyst at Raymond James & Associates Inc. in St. Petersburg, Florida. He rates Dell ``outperform'' and doesn't own the shares.

Michael Dell has expanded a line of prepackaged PCs and limited how much buyers can dictate specifications. Since his return as CEO last year, he hired operations chief Mike Cannon from contractor Solectron Corp., abandoned a strategy of only selling to customers directly, and put the Round Rock, Texas- based company's computers in more than 13,000 retail outlets.

Cost Savings

Dell rose 5 cents to $20.41 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has lost 17 percent this year, compared with an 18 percent drop for the S&P 500 Information Technology Index.

Dell could cut production costs for each computer by 15 percent to 20 percent by shifting manufacturing from the U.S. to China, said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco.

``It's pretty dramatic -- you would see significant benefits,'' Whitmore said today in an interview.

Of the cost-cutting plan overall, $750 million could come from job reductions, leaving Dell with more than $2 billion to trim from design and manufacturing, Whitmore estimates.

T.R. Reid, a Singapore-based Dell spokesman, declined to comment on the report, citing company policy not to discuss speculation. U.S. spokesman David Frink declined to comment.

``We have said repeatedly there are opportunities to use third-party manufacturers to reduce costs and increase efficiency,'' Reid said.

Sale Negotiations

Any profitability gains from selling the plants may take ``a while'' to develop as Dell would need to hand over operations, Shannon Cross, an analyst with Cross Research in Livingston, New Jersey, wrote in a report today.

When printer-maker Xerox Corp. agreed to sell half its manufacturing plants to Flextronics International Ltd. for $220 million in 2001, it took more than a year to complete the transition, said Cross, who recommends selling Dell shares.

Dell owns manufacturing and distribution facilities in Tennessee, North Carolina, Florida, Ohio, Ireland, India, China, Brazil, Malaysia and Lodz, Poland, where it opened a plant last year, according to regulatory filings. In March, the company said it would close its factory in Austin, Texas.

Some of Dell's U.S. factories, such as the one in North Carolina, may be difficult to sell because the acquirer may need to renegotiate incentive programs local governments offered to attract the plants, said Bill Fearnley Jr., an analyst at FTN Midwest Securities Corp. in Boston.

Complicated Negotiations?

``Does that complicate the negotiations? It probably does,'' said Fearnley, who rates the shares ``neutral'' and doesn't own any.

Hon Hai Precision Industry Co., Compal Electronics Inc. and Quanta Computer Inc. are among the contract manufacturers that make parts or notebook computers for Dell.

Hon Hai hasn't had any discussions with Dell on buying the plants, said Edmund Ding, a spokesman for the Taipei-based company. Elton Yang and Carol Hsu, spokesmen for Taoyuan, Taiwan-based Quanta, the world's largest notebook maker, didn't answer calls. Gary Lu, chief financial officer of Taipei-based Compal, said he hadn't heard of any talks with the U.S. company.

Adrienne Vaughan, a spokeswoman for Toronto-based contractor Celestica Inc., declined to comment. Singapore-based Flextronics, through spokeswoman Renee Brotherton, also declined to comment.

Dell would ensure that any manufacturer that purchased a factory would agree to make products for the company, according to the Journal report.

Product Range

Selling factories to focus on sales and marketing may help Dell's effort to expand its product range. The company said last week that second-quarter earnings fell 17 percent, missing analysts' estimates, as profit margins shrank after price cuts.

``As the company moves away from its direct sales business model, it needs to offer a wider range of products and respond more quickly to market demand,'' said Wang Wanli, a technology analyst at HSBC Holdings Plc in Taipei. ``Outsourcing production to third-party manufacturers will help them become more flexible.''

To contact the reporters responsible for this story: Mark Lee in Hong Kong at wlee37@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

Last Updated: September 5, 2008 16:03 EDT