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HP cuts costs as sales growth lags

"Some of our competitors didn't think we had the stomach to take out some of the costs that we've done over the last year."

Jeff Clarke, Hewlett-Packard's executive vice president in charge of supplies

Hewlett-Packard Co chief executive Carly Fiorina is demanding discounts from suppliers to reduce costs and bolster profit as analysts project average sales growth of no more than 7 percent in each of the next five quarters.

The effort was expected to help Hewlett-Packard report yesterday that profit, minus some costs, nearly doubled to US$800.3 million in the third quarter ended July 30, up from US$420 million a year earlier.

Fiorina, who engineered the purchase of Compaq Computer Corp a year ago, has accelerated cost cuts to make up for slower sales growth. Revenue is forecast to grow 5.6 percent in the quarter.

"You need revenue growth to get some bottom-line growth," said Chuck Jones, an analyst at Stein Roe Investment Counsel, which manages US$8 billion and owns 1.26 million shares of California-based Hewlett-Packard.

"You can only cut so much," he said.

By reducing distribution centers by 40 percent, squeezing discounts from suppliers and firing 16,600 workers, Fiorina helped make up for slack growth. Third-quarter sales rose to US$17.5 billion, from US$16.5 billion a year earlier, according to an average estimate in a Thomson Financial survey of analysts.

Fiorina has cut supply costs twice as fast as she initially forecast when announcing the plan to take over Compaq in September 2001. The company says that as of June it had reduced the cost to buy supplies such as hard-disk drives and circuit boards.

Fiorina saved US$3.5 billion in annual expenses, of which US$1.55 billion is from supplies. Now, she is targeting an additional billion dollars of cuts in procurement.

"Some of our competitors didn't think we had the stomach to take out some of the costs that we've done over the last year," Jeff Clarke, Hewlett-Packard's executive vice president in charge of supplies, told analysts in June.

Hewlett-Packard is using fewer suppliers and promising higher volume to persuade the survivors to reduce prices. Some of those remaining are feeling the pain.

Taiwan's Inventec Co (英業達), which builds notebook computers for Hewlett-Packard, gave price breaks so big that second-quarter profit fell about 25 percent.

Inventec had Hewlett-Packard as its only customer for notebook PCs until winning work from Toshiba Corp to recoup.

"Toshiba is more reasonable than our other customer," Alexander Hsu (徐信群), Inventec's vice president of finance, said in a May interview.

In Taiwan alone, Hewlett-Packard spent about US$15 billion last year, representing roughly 11 percent of the country's exports.

Hewlett-Packard this fiscal year will have sales of US$72.4 billion, Thomson Financial says. The computer maker spends US$50 billion a year on procurement, almost equal to Peru's GDP.

"The ability to take the entire US$70-plus-billion dollars of revenue and business and optimize it across the supply chain is a huge advantage," Clarke said.

Saving US$1 billion dollars on supplies "will certainly show up in our gross margins," he said.

Investors say other companies such as Dell Inc and IBM also have cut costs successfully because sales have fallen industrywide and suppliers had fewer options. Cutting another US$1 billion in supply costs will be difficult, investors said.

"As business picks up, there are other places for suppliers to go," said Marc Klee, co-manager of the John Hancock Technology Fund, which owned 402,912 Hewlett-Packard shares as of March.

"If you're a supplier, at some point you walk away," he said.

Hewlett-Packard was the world's biggest PC maker last year by units shipped. Dell has moved ahead. In the second calendar quarter, Dell's market share rose to 17.8 percent from 14.9 percent last year; Hewlett-Packard rose to 16.1 percent from 15.8 percent, market researcher Dataquest Inc said.
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