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Last Updated: Thursday, 21 August, 2003, 13:00 GMT 14:00 UK
Why PCs are still a hard sell

By James Arnold
BBC News Online business reporter

PC users
Shoppers are keen to play, reluctant to spend
At first glance, the computer market is showing unexpected signs of life.

According to research firm Gartner, global PC shipments during the second quarter were up 10% year on year.

But while unit sales are soaring, the overall dollar size of the market is more or less stagnant - an indication that consumers are only willing to stump up for cheaper and cheaper PCs.

For market leader Dell, which late on Wednesday unveiled further price cuts of up to 22%, this sort of trend is excellent news.

For the rest of the industry, the outlook is getting worse by the day.

Pair-shaped

The PC is looking increasingly like a two-horse race.

Carly Fiorina
Can Ms Fiorina win over her doubters?
Since Hewlett-Packard merged with Compaq, a deal that was completed last May, it has vied for global leadership with Dell.

At the last reckoning, Dell has 17.6% of the world PC market, against 16.1% for HP; the number-three maker, IBM, has less than 7%.

Dell, which five years ago was barely half the size of Compaq alone, has scrabbled up the rankings through an aggressive policy of price-cuts - discounts it fuels by selling directly to the public, and through innovatively nimble manufacturing techniques.

HP - a maker of rather upmarket computer equipment - acquired a powerful PC brand in Compaq, but has been forced to chase Dell down the price chain.

Over the past few quarter-years, market leadership has swung to and fro, with HP in the driving seat for much of last year.

Strategic struggles

But Wednesday's announcement from Dell looks like landing a decisive blow.

PC makers' shares
On Tuesday, HP admitted in its quarterly results that discounting was hurting its bottom line, keeping its PC division well in the red.

The company's shares dropped by 10%, and analysts have once again raised questions - thought to have been settled since the controversial merger went through - about the wisdom of chief executive Carly Fiorina's strategy.

Dell characterises its latest discount announcement as "serendipitous", but the firm is now nicely placed to clean up during the imminent back-to-school peak season.

Nimble nous

Cleaning up is relative, of course.

Dell is winning market share by selling PCs for $550 (345), not the sort of business that should have HP executives salivating.

The firm is able to cut and cut again because it has no expensive sales infrastructure: it deals through a website and call centres, and ships directly to the customer.

More importantly still, it manufactures only the PCs it needs, saving the crippling costs of tying capital up in stock.

HP has made great strides in squeezing cheaper prices out of suppliers, and has cut close to $3bn in costs since the merger, including some 17,000 job losses.

But it still has an expensive distribution network to carry, and is forced to spend far more on research and development than no-frills Dell.

Get smart

HP, analysts believe, cannot beat Dell in a cost-cutting contest.

It shouldn't even try, says one school of thought.

HP should let Dell have the increasingly unrewarding business of discounting for the masses, and focus on the sort of expensive corporate computers and high-margin equipment that built its reputation.

True, corporate technology is investment in the doldrums, and has been for three years now.

But most forecasts expect it to pick up before the end of this year.

Beige boxes

It's a seductive argument.

Certainly, HP's proud traditions - it was famously founded in a garage in Palo Alto, California - are scarcely being upheld by this drive downmarket.

Dell plant in Limerick
Another in a long line of plastic boxes
And Apple Computer has carved a highly profitable, if modest-sized, business by charging premium prices for premium technology.

But the corporate market is no goldmine.

Over the past couple of years IBM, which nearly lost its shirt in the 1990s by misreading corporate demand, has been doing for companies pretty much what Dell has done for consumers.

As a result, even a recovery in overall corporate spending may not be enough to bring back the days of fat margins.

And some doomsayers reckon that technological innovation is now the preserve of chipmakers like Intel and software firms like Microsoft, while consumers will increasingly turn to phones and other gizmos for computer-style functionality.

PC makers, meanwhile, are condemned to churning out endless identical - and, probably, increasingly cheap - plastic boxes.


SEE ALSO:
Dell makes grab for market share
21 Aug 03  |  Business
Hewlett Packard still struggling
19 Aug 03  |  Business
Dell Computer sees profits jump
13 Feb 03  |  Business
Hewlett Packard disappoints
27 Aug 02  |  Business
Profits rise at IBM
14 Apr 03  |  Business


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