Toshiba, Dell Ink $5b Supply Chain Pact

Deal ensures Dell a stable supply in coming shortage

September 16, 2000 -- Electronic News -- In an alliance of giants, Toshiba Corp. announced over the weekend a $5 billion strategic agreement with Dell Computer Corp. to supply the computer maker with LCDs, memory chips, disk drives and other components over a three-year period.

Coming as demand for components is squeezing the industry, the deal increases the likelihood that Dell, based in Round Rock, Texas, will have a stable supply of parts during a time of shortages.

However, the news comes after a week in which such semiconductor stalwarts as Intel Corp. and Micron Technologies Inc. experienced losses on the stock market partly as a result of reports predicting weaker than expected demand.

Toshiba of Japan, which usually is silent in regard to customer relationships, said the agreement is expected to create mutually beneficial opportunities for both companies' product lines. The two companies want to combine resources to develop more leading edge products for Dell's customers. In addition, they want to improve time-to-market cycles and time-tovolume benefits.

"High-growth companies need to have high confidence of supply continuity," said Stephen Marlow, senior vice president of demand generation fox Toshiba America Electronics Core. "Component suppliers need demand continuity."

The agreement helps Dell and Toshiba address some industry issues surrounding the tremendous risks involved in investing in new technology and bringing new products to market, Marlow said.

"The risks today are enormous both on the component side of the industry and on the system side of the industry," Marlow said. It can be enormously crippling to both sides if either misses out on a particular market window or if they bring new products to market and find no buyers for them.

"We need component suppliers who can provide not only stable delivery of products, but who also can deliver the most advanced capabilities for the next generation of enhanced computing systems," said Glen Neland, Dell vice president of worldwide procurement, in a statement. "Toshiba is well suited to meet these needs as a leading developer, manufacturer and supplier of technologically advanced, high-quality components."

Toshiba says it has improved its supply chain process for providing DRAM products and that has resulted in increased efficiency and flexibility and significant reductions in cycle time. Toshiba wants to move this model to other product lines partially because it results in the types of efficiencies Dell needs with its direct sales mndel.

"If Toshiba builds a leading-edge DRAM facility, it will spend $2 billion dollars before it receives its first dollar in return," Marlow said. "If you pick the wrong time or the wrong technology, the risk is enormous. It behooves us as an industry to define the system needs and to closely align ourselves with our customers to try and determine particular technologies and time frames."

The agreement does not spell out specific quantities of components, Marlow said. And the two companies have yet to discuss what particular component technologies will be needed for future generations of Dell computer products. However, the alliance provides the companies with a framework to meet on a semi-regular basis to discuss the need for certain commodities. "The market will determine the prices of certain commodities," Marlow said.

The agreement should not change Toshiba's pre-existing plans for investment for such aspects as fab capacity, Marlow added. But in addition to what new technologies are needed for Dell systems, the two companies will discuss quantitative aspects of the component supply chain.

"The agreement ensures time-to-market windows are meeting the needs of Dell's end-customers with technology-relevant products," Marlow said.

Although the agreement spells out an amount of $5 billion over three years, Marlow did not say if it required a minimum amount of investment from Dell. He did say that Dell was already a substantial customer for Toshiba.

Copyright Cahners Business Information, a division of Reed Elsevier, Inc. Sep 11, 2000