January 12, 2001 4:14pm
PC industry poised for 'game of
chicken'
By Ken Popovich eWEEK
Executives at Gateway Inc., staggered by a $94 million
quarterly loss that will force over 3,000 layoffs, have
vowed to win back consumers by escalating an
"industry game of chicken" -- a price war.
But the tactic might make a bad situation worse for a
PC industry already struggling with a slowing global
economy, analysts said, by not only further
undermining earnings but by ultimately forcing some
computer makers to abandon the market alto-gether.
Gateway announced its pricing moves after reporting
fourth-quarter results Thursday well below what Wall
Street had expected. Reeling from a 15 percent drop in
PC sales, the computer maker detailed a number of
steps it would take to streamline operations and cut
costs, including laying off more than 3,000 workers, or
12.5 percent of its workforce.
But while San Diego-based Gateway will bear the brunt
of those cutbacks, the company's pledge to become
"much more aggressive" on pricing will likely have more
far-reaching implications.
"We'll be more competitive on price at every level and
across every segment of the consumer and business
market," said Jeffrey Weitzen, Gateway's chief
executive, in a conference call with analysts Thursday
evening.
To demonstrate Gateway's new resolve, Weitzen touted
a 933MHz Pentium III system with 17-inch monitor and
color printer that the company is now selling for $999, a
$300 markdown from a few days ago.
"That's indicative of how we plan on working ... to be
extremely competitive on price," he said.
'Bloodbath environment'
The move by the nation's fifth-largest PC maker could
accelerate what has already become a price war, said
market analyst Andrew Neff of Bear Stearns.
"The pricing has been real aggressive, real tough. It's an
industry game of chicken," Neff said.
While low-cost computers are welcomed by
consumers, a protracted price war could hurt
manufacturers and force some PC makers out of the
market, he said.
"This is an industry which needs consolidation, there's
over-capacity, somebody has to leave," Neff said. "I
think that two of the top 10 PC makers will exit the
market this year."
Despite the obvious risks, PC makers have little choice
buy to cut prices, said analyst Roger Kay of
International Data Corp. in Framingham, Mass.
"They really don't have any choice because it's
imperative that they get rid of inventory," Kay said,
adding that the PC industry will face mounting
difficulties in the next six months.
"I've been saying for a while that it look liked a
bloodbath environment, it's just only more so now," he
said.
A lousy holiday
Significant price reductions started occurring last month
amid what Weitzen called "possibly the worst
Christmas sales period in the history of our industry."
Prior to Thanksgiving, several PC makers, such as
Compaq Computer Corp. and Hewlett-Packard Co.,
stocked the channel and boosted their inventories in
preparation for an expected surge in holiday sales that
never materialized. As a result, PC makers and their
partners, faced with rising inventory costs, slashed
prices and offered rebates to rid warehouses of unsold
inventory.
The cost cuts quickly spread across the industry as PC
makers sought to remain competitive.
But despite those aggressive actions, Weitzen said,
there's still "a lot of inventory sitting out there that's
basically rotting on the shelves."
For now, the Gateway executive said he sees no hope
that prices will stabilize anytime soon.
"We're going to see an awfully aggressive pricing
environment in the first quarter, if not for the first couple
of quarters," agreed Rob Cihra, a market analyst with
ING Barings in New York.
But while he expects computer makers will face some
tough times, Cihra said he doubts any major U.S.
companies will abandon the PC market this year.
"I think the least competitive PC vendors are actually
IBM and HP," he said, "but they can probably afford to
stick it out longer than anybody."
The most likely competitors to be forced out in a
continuing price war would be some of the second- and
third-tier companies, Cihra said, including many
companies based in Asia.
Rebound in second half?
But it's already clear that the downturn in PC sales and
an escalating battle to offer lower prices is having an
effect on major computer makers, he said.
"Dell's hiring pace has certainly slowed or stopped,"
Cihra said, adding that "Compaq has already been
trying to reduce their headcount for a while now."
HP also warned Thursday that its earnings for the
current quarter were falling below expectation, blaming
a slumping demand for computers as well as other
high-tech equipment. It marks the second straight
quarter the giant computer company has missed Wall
Street's estimates.
Summarizing PC sales forecasts for the year, Cihra
said, "the next six weeks look pretty dismal, both in
terms of weak demand and aggressive pricing. But I
think you might see things pick up in the third and
fourth quarter."
However, he said, a worsening economy might
undermine predictions that the PC industry will rebound
in the second half of the year.
"The big question mark right now," Cihra said, "is if the
economy continues to slow and corporate IT spending
falls off a cliff -- then all bets are off." |
