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Microsoft names second Xbox maker

Looking to save some money, the giant taps the contract manufacturing arm of Taiwan-based electronics conglomerate Acer to crank out its game console in China.

Microsoft announced this week that it has selected a second manufacturer for the Xbox as part of an overall move to trim manufacturing prices for the video game console.

Microsoft said in a statement that Wistron, the contract manufacturing arm of Taiwan-based electronics conglomerate Acer, will begin assembling Xboxes at a factory in Zhongshan, China, by the end of the year. Until now, Singapore-based contract manufacturer Flextronics International has been the sole supplier of finished Xbox units.

Microsoft announced last May, shortly after it cut the U.S. price of the Xbox from $299 to $199, that Flextronics was shutting its Xbox assembly plant in Hungary and moving operations to China. Xbox units for North America are still manufactured at a Flextronics plant in Guadalajara, Mexico.

The move was seen as a sorely needed cost-cutting measure, as the price cut pushed up the significant subsidy Microsoft pays to get each console on the market, a subsidy it tries to recoup with sales of its own games and licensing revenue from third-party software. Analysts estimated that shifting production to China, which has some of the lowest labor costs in the industrial world, could trim Xbox production costs by $10 to $15 per unit.

Louis Miscioscia, a Lehman Brothers analyst who tracks the contract-manufacturing sector, said the addition of Wistron was more of a strategic move for Microsoft than an indication of dissatisfaction with Flextronics.

"Microsoft has always said they want to have a second-source supplier for Xbox," Miscioscia said. "They don't want to have one of their most important products reliant on a single supplier...It's important just for continuity and backup."

Xbox demand has been minimal so far in Japan, where Microsoft has just barely sold out its initial shipment of 250,000 units, according to rankings compiled by Japanese research firm Dengeki. But Asian demand will increase as Microsoft introduces the Xbox to new markets such as Taiwan, Hong Kong, Singapore and South Korea, starting late this year.

And concentrating manufacturing in China still makes sense even if most of the units are shipped overseas, Miscioscia said, as most Xbox components come from the region.

"The supply chain for any consumer electronics item is shifting more and more to China," Miscioscia said.