Lenovo, Compal to build factory to keep up with PC demand

The companies will invest a total of $300 million in the new joint venture to manufacture Lenovo laptops and all-in-one desktop PCs

PC vendor Lenovo has formed a joint venture with laptop contract manufacturer Compal Electronics to build and operate a new factory in China, as part of a move to keep up with product sales, Lenovo announced Tuesday.

Lenovo and Compal are investing a total of $300 million over the next 18 months to start the new company and construct the factory. Lenovo will hold a 51 percent stake in the joint venture, while Compal will hold the remaining 49 percent.

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The new factory will be built in Hefei, China and is slated to start full-scale manufacturing by the end of next year. The factory will manufacture various Lenovo laptops and all-in-one desktop PCs, for sale around the world.

Lenovo said the joint venture is meant to add production capacity needed to sustain its growth: it is currently the fastest-growing of the world's top five PC vendors.

In the second quarter, the Chinese company rose to become the world's third largest PC vendor with a 12.2 percent share, according to research firm IDC. The company's PC sales for that quarter had increased 22.9 percent compared to a year earlier.

Lenovo's growth has been so fast, the company expects to surpass Dell by the end of this year. Dell had a 12.9 percent market share in the second quarter, and saw PC sales increase by only 2.8 percent year-on-year.

But Lenovo's joint venture with Taiwan's Compal Electronics may actually be an effort to improve profit margins on PC sales, said Tracy Tsai, an analyst with research firm Gartner.

Other PC vendors, including Acer, Dell and Hewlett-Packard, have all tapped Compal to develop and manufacture laptop computers. Forming a joint venture with Compal would help Lenovo streamline its manufacturing supply chain and lower transaction costs, Tsai said. This comes as profit margins for PC sales are declining due to increases in labor and material costs, she added.

"Lenovo definitely wants to consolidate and make its supply chain more cost effective," Tsai said.

The joint venture will operate as a stand-alone Lenovo product supplier. It will also rely on both companies' engineering and manufacturing expertise.

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