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Technology Stocks : Dell Technologies Inc.

DELL 133.35

+0.1%

Nov 28 9:30 AM EST

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To: kemble s. matter who wrote (158030)	6/19/2000 1:09:00 PM
From: rudedog	Read Replies (1) of 176387

Kemble - re: "at half the cost" - In 1998, when CPQ was selling completely through the channel, most estimates placed the differential in distribution costs between CPQ and DELL at 9 to 11 points, about 7 points of that providing the margin for the resellers, and the rest giving price protection to the channel. Elimination of the price protection and a reduction in margin allowances dropped that to about 5 points - this was the main driver of the reduction in losses for CPQ's commercial PC division. The transition to direct removes additional differential - with 40% or so of CPQ desktops going direct, the difference in distribution costs is probably closer to 3 points now. I'm not sure where "twice the cost" comes from - probably this refers to twice the manufacturing costs. One of the reasons CPQ was able to compete despite the higher cost of distribution prior to 1999 was that they had lower costs for both hardware and software, but DELL has achieved the volume to qualify for top tier pricing. My current rough assumption is that CPQ and DELL are at parity on component costs - assuming that CPQ does not still have an edge. So the DELL cost advantage would be in reduced inventory carrying costs - perhaps a point or so, and in reduced manufacturing costs. That might translate to a total of 3 or 4 points. Looking at DELL's net margins for the last few quarters (about 7 points) versus CPQ's (maybe negative 2 heading to zero) supports that analysis - 3 points in distribution and 4 in manufacturing. Still 7 points is a nice edge, and even if CPQ went 100% direct in their desktop business, that would leave DELL with maybe 4 points. A decent advantage but not a killer obstacle for CPQ, especially given that DELL still has 80% of their sales in that segment, while CPQ has less than 30% there.

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