From MarketWatch :

[...] 

"There are definitely some cost deficiencies, but the more important thing from our perspective is the flexibility and control we have in creating a device from scratch and making it down to the last component what we want it to be," [...]

Reindorp said Microsoft will be working with a manufacturing partner at the new factory, though it is not naming the firm. But the factory is located in the same city as another plant operated by Flextronics International which produces Microsoft's Xbox video game console.

Microsoft is also not disclosing the costs and timetable associated with the new factory. The company expects to have devices from the facility available sometime in the fall, Reindorp said.

For the second version, however, Reindorp said the company wanted greater control 

Reindorp said the new manufacturing partner is "a partner we're very familiar with." Unlike the role Toshiba played, this partner will assemble only parts brought to it by Microsoft, and according to Microsoft's specifications, Reindorp said. 

[...]

The new Zune facility is also located in Doumen, Reindorp said. 

Doumen is located in Zhuhai on the southern coast of Guangdong province, west of Macau. Search Googleearth for: Flextronics.

EDIT 15 May 2007: ZuneInsider would like to clarify that Microsoft is building its own products, but its not building its own factory: This will allow us to apply our expertise producing our own hardware: Xbox, mice, keyboard to build the next generation from the ground up.

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