How Dell stays on top - CEO speaks
October 1998 MONEY magazine
Michael Dell sounds off on Compaq, the iMac and the joys of market share.
You've got to hand it to Michael Dell---your money, that is. The 33-year-old CEO and chairman of Dell Computer has given shareholders an average return north of 100% a year since 1990. To see what lies ahead for the computer maker that pioneered direct PC sales, staff writer Malcolm Fitch talked to Dell.
Q. How have you been able to keep your gross margins in the 20%--plus range in a PC market with falling prices?
A. Let's contrast two companies. Dell reported its quarterly results the day before Hewlett-Packard [which reported on Aug. 19]. H-P had 81 days of inventory, and Dell had eight. But H-P's number doesn't include the inventory in its distribution channel, which is about 40 days' worth. So H-P really has 81 plus 40, or 121 days of inventory, 113 days more than Dell. So the question is, what were they thinking? The price of that material falls 1% every week, and 113 days is about 16 weeks, so that means that Dell has a 16 percentage-point margin advantage over H-P there. Plus the reseller who sells an H-P computer to the customer charges a 6% to 7% markup, so we have a 22- to 23-point advantage over H-P. Direct selling is just a smarter way to sell PCs.
Q But what about Gateway and Compaq? Both are switching to your way of selling PCs.
A. That thinking ignores that [Compaq's] build-to-order means to dealer order. We're not manufacturing a system until it's been sold to the end user. As for Gateway, they have always employed a direct business model, but one that we thinks is significantly less refined than ours. Our businesses are very different in other ways: The majority of our sales are to large corporate and institutional customers, not to home-PC users.
Q. What's the biggest risk facing Dell?
A. Building the infrastructure to keep pace with our growth and our competitors. We've been doing it for 14 years, but the difference is that the absolute numbers are a lot larger.
Q. Does the fact that you've gotten so big mean your rapid growth will slow?
A. Not really. We have only an 8% market share of worldwide PC sales. That can go a lot higher. In some markets, like Ireland and the U.S. federal government, we have a 30% share; but in others, like China and Korea, we have less than 1%. In the U.S. we have a 14% market share, and that growing 80% a year. There's a long way for us to go.
Q. Is Apple's iMac a threat?
A. Well, it is in the k-12 [education market], or really the K-6 market. That's 5% to 6% of our revenues, but Apple is not really a threat in the business market.
Q. A lot of people on Wall Street had been saying that your stock had gotten too expensive, especially before the market's late-August melt-down. Does Dell's valuation ever make you nervous?
A. I get uncomfortable when I don't understand why investors are buying the stock. When people don't understand our business and they invest anyway, that's scary.
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October 1998 MONEY magazine
(from printed copy)
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