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Top Stories: Driving Dell's Business Model
By Eric Moskowitz
Staff Reporter
10/14/98 1:46 PM ET
AUSTIN, Texas -- Smart leaders hire smart
managers. Perhaps that is what separates
Michael Dell from some of his peers.
While Dell weaves the vision for his
company, it is up to Kevin Rollins, one of two vice-chairmen, to make sure
the Dell (DELL:Nasdaq) machines hum without a murmur.
Rollins runs half of Dell's worldwide operations,
including the Americas region and the Pacific Rim,
while Mort Tofler, the other vice-chairman, runs the
rest. "Michael [Dell] really has hired Mort and
myself to run the business, so he can spend his
time thinking about customers, the company,
technology, and where it's going."
It's not easy being the leader in a market where
everyone is queuing up to take away market share
at the first sign of weakness. Rollins is concerned
about almost everything and everyone. "We really
believe [former Intel (INTC:Nasdaq) chief] Andy
Grove's 'Only the Paranoid Survive,'" he says. "We
eat, sleep and drink IBM (IBM:NYSE), Compaq (CPQ:NYSE), Fujitsu, NEC
(NIPNY:Nasdaq), Toshiba to try and find out what the heck they are doing."
It's no accident that Rollins, a former director at technology consultants
Bain & Co., named a host of Pacific Rim computer manufacturers. He is
spearheading the company's efforts in the dilapidated region, and
personally launched Dell's new manufacturing facility in Xiamen, China,
last year. Result? Dell had a 35% sales growth rate in China over the first
half of the year.
But China still plays a small part in Dell's overall plans. In fact, Rollins is
quick to point out that Dell's Pacific Rim operations will not impact Dell's
"top or bottom line" for at least two or three years. "We know there are
some economic and exchange rate risks over there, so our operations over
there will remain a very small piece of our total business," he explains.
What about the region's continuing economic woes? Surprisingly, Rollins
thinks a downturn in the economy might actually help Dell's business
going forward. "We believe our model is sustainable, and may even
strengthen a bit in the event of a downturn," he explains. "Look what
happened in the Pacific Rim during that region's downturn."
Over the first half of this year, Dell had a 35% year-over-year increase in
Pacific Rim revenues, while much of the rest of the PC industry was
struggling just to break even there. "I don't see any reason why we can't
continue to be profitable over there," says Rollins, who also is responsible
for Dell's worldwide sales and marketing.
Many of Dell's competitors, by entering the sub-$1,000 PC market, seem to
be sacrificing profit margins in the U.S. to maintain market share. But not
Dell. Rollins argues that the company -- which recently branched out into
selling servers -- will not play that game.
"When the Japanese began making economy-box cars, American auto
companies switched to minivans and trucks," he says "We are saying that
we will always be competitive on the low-end desktop level." That's a jibe
at IBM, Compaq and Hewlett-Packard (HWP:NYSE), who are struggling to
keep PC margins healthy. "IBM's PC business has not been formidable and
HP doesn't have as clean a product line," says Rollins, who adds
disparagingly that Compaq bought DEC for its services business, and not
for its notebook computers.
Yes, Rollins sounds arrogant but he can since Dell hasn't disappointed its
investors yet.
But it could happen, and some Dell investors are worried about the
company's reliance on Intel chips, especially after the chipmaker
announced another delay in its 64-bit Merced chip. Rollins says Dell isn't
lowering its forecasts to people because "there are plenty of legs left in the
Pentium 32-bit architecture." Sure the delay could give Sun's
(SUNW:Nasdaq) Unix servers a little bit longer period to run, but Rollins
doesn't see a long-term impact.
"The people we are talking to are still planning to go to [Windows] NT
5.0," says Rollins, who points to the company's growing server business as
evidence. "Our server business can still grow significantly in these new
markets whether or not Unix has another year of heyday or not." Dell
currently has 8% of the worldwide server market and 20% of the U.S.
market in terms of unit shipments, according to the latest figures from tech
researchers International Data.
Although Dell's PC competitors are busily switching to non-Intel makers
such as Advanced Micro Devices (AMD:NYSE), Rollins stresses that he
doesn't expect to lessen his reliance on Intel's chips.
Another development that could burst Dell's balloon is a slowdown in
information technology spending in 1999. Since the company has a large
base of large corporate customers, including the U.S. federal government,
analysts such as Steven Milunovich at Merrill Lynch argue that the first
thing chief information officers will cut back on next year is PC spending.
"You may very well see an IT downshift next year, but you also saw one in
1998," says Rollins. "This year, companies did shift some of this money to
Y2K problems, and next year I believe they will be able to look past this
and buy more hardware."
It's not hard to deflect these potential dilemmas now, especially since Dell
has been so adept in dealing with similar issues in the past. But in this
market, where even good earnings numbers are not enough for skittish
investors, any corporate spending slowdown could give Dell investors
sleepless nights.
Rollins insists, however, that investors shouldn't worry about its reliance on
corporate spending or Intel because Michael Dell has a few more visions
up his sleeve. "It's true, we have not implemented all of Michael's visions
yet, but they are out there," says Rollins.
Is there a limit to how high Dell can go? After applying its direct model to
PCs, laptops, servers, workstations and storage equipment, what else is
there for Dell to make? Anyone need a TV set?
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