Some notes on the current PC environment and the impact of indirect sellers moving to reduce inventories. It focuses a lot on Dell, but this is very telling. This was taken from a Lehman Bros. report dated 3/9.
I find it interesting to see Dell's aggressive sales of P II processors vs the others. One can assume they are also selling higher end disk drives. The companies who supply Dell will be pleased.
Amazing how the impact of inventory management is getting so crucial. In another report, I read 64 M DRAM chips fell almost 7% in a week. If you have 10 weeks inventory, that hurts. And if you cover the losses of the channel and tey hold really old systems waiting for a buyer, then you've got some very expensive dead wood to burn.
Will buyers accept lesser machines from CPQ, HWP and IBM when they can pay a little more and get the best machine available from Dell and Gateway? My appreciation for Dell rises everyday, too bad I hadn't realized this last year.
They also note that Gateway has a similar, but less attractive, situation with their 2 week inventory levels.
Regards,
Mark
Impact on Other PC Companies
Industry pricing will suffer.
We expect that indirect PC vendors will increase pricing aggressiveness to clear through channel inventory. The bulk of the pricing pressure will be felt by indirect PC vendors which maintain higher levels of inventory and will likely elect to reduce prices to maintain share. And while Dell will also be impacted by the more aggressive price points, we maintain that Dell's competitive cost structure and richer product mix will allow the company to more effectively weather increased price competition.
We believe Dell has already been pricing aggressively - widening its price delta against the indirect PC vendors while maintaining margins by leveraging the benefit of rapidly falling component costs. Again, we believe the advantages of the direct model will cushion margins in a more aggressive pricing environment. Further, we believe that Dell's mix shift will also allow the company to offset desktop margin pressure.
We expect Dell will need to respond, however, to some of Compaq's pricing cuts. But while we estimate Dell derives approx. 40% of its revenues from medium and large US corporate, we believe Dell will be insulated from the majority of the pricing pressure given its richer product mix.
Specifically, Dell ships a richer mix of desktop product than its indirectpeers. For example, in the January quarter Dell shipped 90% of its corporate desktop line with P2 CPUs vs. 22% for the industry. Inventory sitting in the channel is older with most resellers noting P2 shipments in the mid-teens. As a result, price cuts on older product will not impact Dell as significantly.
Second, as indirect vendors reduce their build plans and slow sales into the channel, Dell will dominate the market with leading edge, technology-rich product sold at competitive prices. The company will continue to leverage its inventory turns advantage to competitively price fresh, leading-edge product.
Further, Dell's revenues in other geographies are accelerating. In our recent trip to Asia where we visited Dell's Penang operation we uncovered several reasons why Dell is gaining strong share and posting strong growth in this environment while others have noted continued weakness.
First, like its major PC counterparts, Dell engages in an active hedging program. And while Dell's competitors are hedged, most of the indirect PC vendors' resellers, distributors and retailer partners are not. As a result, as currency devalues, many channel players - which resell indirect PC vendors product are forced to raise prices to cover costs reducing their competitiveness vs. the Dell model. Dell has gained share in this environment by being able to hold prices firm even in a challenging economic/currency environment.
Second, the economic/currency crisis has caused many resellers to go out of business or experience significant financial hurdles. Indirect PC vendors are being forced to deal with the weakened state of their reseller partners by extending credit terms, taking inventory and bearing more of the financial risk.
We believe these factors are providing Dell with an advantage in the A/P marketplace and will likely lead to further share gain. Dell also continues to see strong demand in Europe. |
