The annals of auto manufacturing are filled with legendary but long-departed names: Studebaker, Henry J, Nash and Hudson.
As the personal computer industry endures one of its toughest periods, experts are beginning to wonder whether the PC graveyard might soon include such names as Gateway, Compaq or even IBM.
If PC sales to consumers and businesses continue to deteriorate as sharply as they have so far this year, the industry might ship fewer desktop computers in 2001 than it did last year. That would mark the first time the industry has experienced negative growth year-to-year since PCs hit the marketplace two decades ago.
Such a slump would leave it with so much oversupply, analysts say, that a Detroit-like shakeout of laggard companies might be inevitable.
“The music’s stopped and it’s time for someone to leave,” said Andrew J. Neff, technology analyst for Bear, Stearns & Co.
Facing the greatest risk, in Neff’s estimation, is Gateway Inc., which ranks fourth in the nation for PC sales, with about 9 percent of the market, according to International Data Corp. The San Diego-based firm, which lost $502.9 million in the first quarter of 2001, is the most vulnerable of the leading PC-makers to the downturn in consumer spending in general and to the U.S. economic slowdown.
(Gateway denies that consolidation is imminent. “If the company’s for sale, I’m not aware of it,” responded Bart Brown, senior vice president for consumer sales at Gateway.)
Neff also believes that IBM Corp. should exit the PC business, in which its 6 percent market share trails the other major manufacturers, and that at least one other merger in the industry should take place.
The reason is the sharp slowdown in rate of increase of sales of personal computers that began in 2000 and is expected to continue through this year. While most analysts don’t expect an actual decline, the consensus is for sales of only 165 million desktop PCs, notebooks and workstations, a scant 3 percent more than the 160 million sold in 2000.
PC-makers, accustomed to double-digit annual growth, are responding with a wave of retrenchments that include layoffs of thousands of workers. Since Jan. 1, Compaq Computer Corp., Dell Computer Corp. and Gateway, which have a combined 46 percent of the domestic PC market, have announced they will get rid of 9,700 workers here and abroad.
Such once-familiar second- and third-tier brands as Packard Bell, EMachines and Micron either have abandoned the U.S. market or are fading fast.
“The PC industry is already shrinking,” said Michael Dell, chairman and chief executive of Dell Computer, in a recent interview. “It’s just not happening by merger and acquisition.”
Analysts believe that the PC industry is about to enter a period of ferocious price-cutting that will slash profits as the largest companies strive to expand market share at the expense of rivals. The goal is to be stronger, or at least still be standing, when consumer and corporate PC purchases pick up again.
“We’re planning on taking share by pricing very aggressively and sacrificing our gross margins,” said Gateway’s Brown. “Dell has said they’re going to fight the share game, too. The bottom line is, it’s a great time to buy a PC.”
If Brown sounds like a car salesman anxious to seal a deal, that is not surprising. The state of the PC industry resembles the Detroit of the late 1940s, before a wave of consolidations and bankruptcies pared it down to three major domestic manufacturers (one of which, Chrysler, is controlled from abroad) and a handful of foreign companies.
The PC market is highly fragmented, with five large companies–Compaq, Dell, Gateway, Hewlett-Packard Co. and IBM–acounting for roughly 65 percent of the U.S. market. Most of the rest of the market belongs to so-called white-box computers, which are unbranded, generic units made by small-scale manufacturers or assembled at home.
Of course, there are major differences between the two industries. It is expensive to build an automobile factory, set up dealerships and advertise the product. By contrast, PCs can be assembled by unskilled workers overseas, in mom-and-pop storefronts in the United States and by reasonably handy hobbyists at home.
Automobile brands tend to be structurally and technologically distinct from each other, but most PCs are standardized, with one brand similar to another once the beige case is opened.
“The products are largely undifferentiated and the [profit] margins are slim,” said Dean McCarron, components analyst at Mercury Research.
Over the last three years, Dell, Gateway and Compaq averaged only 5 cents in profit for every $1 in sales. To keep production costs low, most major PC companies outsource their manufacturing to generic factories in Latin America, Asia or Eastern Europe and use standardized parts.
This may explain why there has been no major merger in the PC industry since 1998, when Compaq bought rival Digital Equipment for $9 billion. As it happens, Compaq found it harder than expected to extract gains from the merger of two disparate corporate cultures, discouraging similar deals. Its stock has fallen more than 35 percent since the acquisition.
Analysts say fragmentation of the PC market places a limit on the industry’s ability to raise prices and fatten profits. One problem is that the natural three- to four-year cycle of corporate computer replacement was reset by panic over the Y2K bug. Because companies spent heavily to ensure that their systems were Y2K-compliant, “surprise, surprise: In 2001 no one’s buying,” said Martin Reynolds, PC industry analyst at Gartner Group/Dataquest.
For consumers, meanwhile, the power of the newest computers finally exceeds what is needed for the most popular applications. PC owners who used to grouse that their new computers were made obsolete by the latest Intel Pentium chip almost before they got them unpacked are now finding that last year’s chip will remain up to snuff for years to come.
“For e-mail, Web browsing and homework, you don’t need a Pentium 4,” said Anne Bui, analyst at International Data Corp.
To handle popular Web applications such as downloading music or video from the Internet, the important factor is the speed of an Internet connection, not the speed of the computer, Bui noted.
In any event, the most profitable segment of the consumer market is largely saturated, with at least one PC in 53 percent of all American homes. Bringing the remaining households to PC ownership will be a much harder sell, analysts say.
“Our advice to clients is to get out the ladders, because the low-hanging fruit is gone,” said Roger Kay, PC analyst at IDC.
Because of these factors, U.S. sales of desktop and notebook PCs and low-end servers–the computers used by businesses–are expected at best to rise by a meager 2.2 percent this year compared with 2000. That’s in contrast to market growth last year of 23.8 percent from 1999, according to IDC.
The year-to-year statistics may mask a darker trend. One survey of consumer electronics sales during the last holiday season showed desktop PC sales dropping 6.4 percent from the same period in 1999. Instead, consumers spent their gadget budgets on newer toys such as personal video recorders (up 300 percent in unit sales during the holidays, according to NPD Intelect) and Palm-type personal digital assistants (up more than 200 percent).
This changing market presents almost all the major PC companies with strategic quandaries. The exception may be Dell, which has a hoard of $7.9 billion in cash, more than Hewlett-Packard, Gateway and Compaq combined.
Dell, which sells computers mainly by direct marketing over the Internet and by phone, can afford to pursue its strategy of relentless price-cutting, which allowed it to expand its domestic market share to 22.3 percent last year from 16.9 percent in 1999, lengthening its lead over Compaq in the U.S.
Dell’s rivals say they offer unique strategies that will enable them to weather the slowdown.
