Dell is sharply reducing prices on its computers.
The tactic is classic, straight out of the playbook that made the company the world's largest computer maker. As overall demand for personal computers slows, lower your prices. Profit margins will take a temporary hit, but the move would hurt competitors worse as you take market share and enjoy revenue growth for years to come.
Dell did it in 2000 and it worked beautifully. But after Dell rolled out the plan last month, knocking as much as US$700 off a US$1,200 Inspiron and US$500 off a US$1,079 Dimension desktop, many of the securities analysts who follow the company, based in Round Rock, Texas, said that this time around it could be folly.
"They had had a much better cost advantage over the competition when they tried this before," said Cindy Shaw, an analyst with Moors & Cabot Capital Markets.
What changed? Nearly everything, it seems, except Dell's closely studied, widely praised and frequently imitated business model of selling directly to the buyer. The growth market, for one, is no longer in the US, but in China, India and Eastern Europe, where it is harder to reach a mass market online. Retail sales of desktop PCs now outpace laptops, which consumers are more likely to want to test the heft of before buying.
More than anything else, Dell's competitors have changed. In particular, Hewlett-Packard is no longer the bloated, slow-moving company it was six years ago. Mark Hurd, Hewlett's chief executive hired early last year, has cut costs and focused his company on profitability while speeding its growth in printing and corporate data centers as well as personal computers, which in 2002 lost the company US$400 million. Last year, it made US$660 million selling PCs.
The most telling evidence of the new landscape for PCs was seen in statistics on worldwide shipments. While the industry grew 12.9 percent in the first three months of the year, according to IDC, Dell's shipments grew 10.2 percent. It was the first time since analysts began tracking Dell that its shipments had grown more slowly than the industry. Hewlett's shipments, meanwhile, grew 22.2 percent.
Neither company would allow interviews with top executives before fiscal first-quarter earnings are released. Dell announces its earnings for the quarter that ended last month tomorrow and Hewlett follows on Thursday.
Kevin Rollins, Dell's chief executive, is expected to say that the company has finished its eighth consecutive quarter of decelerating revenue growth.
Rollins, who succeeded Michael Dell in July 2004, has lowered Wall Street expectations of growth, but he also has had to announce earnings shortfalls three times, most recently last week, which sent the company's stock down 6.75 percent.
"The days of Dell growing at two to three times the rate of the market are gone forever," concluded Richard Gardner, a Citigroup Global Markets analyst.
The problem for Dell is that it is harder to maintain a strong cost advantage over rivals. Because it built computers to order, it kept inventories low, usually less than a few days while rivals typically had four weeks of supplies and another four to eight weeks of finished goods in its distribution channels.
Hewlett, as well as Lenovo and Acer, have taken a lesson from Dell and tightened their supply chains to about two weeks.
"We've got laptops that are going direct from factories in China to the customer supply chain," said Ted Clark, Hewlett's senior vice president and general manager for notebooks.
Hewlett boasts that a custom laptop can go door-to-door in three days.
With tight inventories, Dell could squeeze out more of a cost advantage as prices on components dropped. But it is harder to get price gains on a US$500 computer than when they cost US$1,500. Compounding that, the rate that PC components are dropping in price has slowed from 1 percent a week five years ago, to about a quarter of a percent a week.
Despite its changing circumstances, Dell is hardly down and out. It still holds an operating profit margin advantage over Hewlett of at least 5 percent, Gardner calculated, though that has shrunk from 20 percent at the beginning of the decade.
Other analysts, like A.M. Sacconaghi of Sanford C. Bernstein & Co, think Hewlett will not try to match Dell's price cuts because Hurd is not ready to sacrifice profit for revenue unless the company starts losing significant market share.
Inside Hewlett, however, there is a feeling that it can beat Dell without resorting to price wars. Todd Bradley, the chief of the computer division, said, "The PC is not a commodity."
The company has started an ambitious marketing campaign to make that point.
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