Interesting article in today's WSJ on CPQ in Germany. Apparently 'white boxes' and price rule this market, not brand name. I liked the text near the end that states CPQ has inventory down to 3 days...
John
German Market Stifles Compaq,
Despite Its Seeming Advantages
By MATTHEW ROSE
Staff Reporter of THE WALL STREET JOURNAL
DRESDEN, Germany -- For Compaq Computer Corp., selling PCs in
Germany should be a snap.
Europe's biggest country is home to Compaq's European headquarters. It
is filled with technology-savvy consumers with money to spend. And
Compaq's chief executive, Eckhard Pfeiffer, is German, as is the head of
the company's European operations.
But while the company has an 8% share of the world-wide consumer
market for personal computers, its share in Germany is only 1.2%.
Compaq's unusual competition: a 30,000-strong army of mom-and-pop
computer assemblers who have captured 60% of Germany's consumer
market.
Last winter, when food retailer Aldi Einkauf
GmbH piled 100,000 locally made PCs next
to the sauerkraut, there were reports of fist
fights in the aisles. In one store, someone even
started waving a gun around.
"A no-name PC is just as good as one with a brand name," says Gerhard
Korn, an electrical engineer, as he breezes past the familiar red Compaq
logo in a superstore just minutes from Compaq's European headquarters in
Munich.
Compaq's dilemma is all the more surprising because Germany isn't known
for its bargains. Everything from compact disks to clothes costs more here
than in the U.S. But because of the popularity of no-name PCs, the
average price of a midrange PC, not including tax, is $1,059 in Germany,
compared with $1,272 in the U.S., according to Context, a
market-research company based in London. Even after adding in higher
European taxes, the computer in Germany still costs less.
Fighting Back
Now Compaq is trying to fight back. The company has turned its
manufacturing process upside down, ditched unpopular features and
slashed the sticker price on its new standard model for the German market
by 55%. Its German models now sell for 15% less than their U.S.
equivalents, though they do have fewer features.
Compaq has also formed an unlikely partnership with a series of local
players that are teaching it how to be a manufacturer on the fly. One,
Shaefer IT-Logistik GmbH, is the heir to communist-era electronics giant
Robotron, which made knock-off copies of U.S. computers in the 1970s.
The Dresden plant that now makes Compaq's PCs was built from plans
stolen from International Business Machines Corp., and it still has a
helicopter landing pad on the roof that was built to welcome Erich
Honnecker, the dictator who ruled what was then East Germany.
To understand why Compaq had to resort to such desperate measures,
just ask Ulrich Kuschel, an independent tax adviser. Browsing around a
computer store in Munich, Mr. Kuschel says price is more important than
brand names. According to Inteco Corp., a market-research company
based in Working, England, two-thirds of German consumers think the
same way. They just aren't willing to pay extra for the kinds of frills that
consumers in the U.S. consider standard, such as internal modems: "I don't
look at gadgets," sneers Mr. Kuschel.
There is also ruinous competition among retail outlets for customers'
attention. Every weekend, newspapers are crammed with the latest offers
from companies like manufacturer-retailer Vobis Microcomputer AG and
food retailers such as Aldi and Lidl & Schwarz Stiftung KG. Price
pressure recently pushed one firm, Schadt Computertechnik GmbH, to file
for bankruptcy protection. As a result, the average price of a new PC in
Germany has fallen almost every quarter for the past three years.
"Germany was a black hole," says Brian Woodham, head of IBM's
European consumer unit. "You poured money in and got nothing out."
It is no surprise, therefore, that Compaq's relatively expensive and bloated
product was left on the shelf. Even though the company recently retooled
its Scottish manufacturing facilities, it couldn't keep up with the Germans.
These companies, just like fast-growing Dell Computer Corp., keep
inventory very low by building PCs only when they receive orders. That
keeps costs low and allows companies to put new technology or cheaper
components into products as fast as they hit the market.
'You Lose Big'
Last year, Toon Bouten, head of Compaq's European consumer PC unit,
requested a breakdown of the company's competitive situation in
Germany. Compaq is a strong force in the business market. But it was
ranked 10th in consumer sales. Compaq was selling machines at prices
that on average were 65% higher than local brands. "As this is such a big
market, if you go in losing money, you lose big," he says.
Compaq's alliance -- dubbed Cyborg -- with Shaefer and Soest-based
component supplier Actebis International Distribution GmbH goes beyond
the company's other relationships with independent manufacturers.
Normally, Compaq designers would develop a single model to be sold
around the world without considering differences in local manufacturing
costs or local market conditions.
In Germany, Compaq managers pinpointed an appropriate German cost
and design and told local developers to design a PC to fit. Compaq
outsources its consumer production in the U.S. But in Germany, Shaefer
controls the entire manufacturing process and has input at the design level,
too. It is also Compaq's only partner dedicated to a specific country.
Compaq has also started to use more off-the-shelf components, dispensing
with expensive custom software and such design frills as Compaq
keyboards and Compaq mouses. That allowed its local manufacturer to
swap any component if it could be found cheaper elsewhere. In fact,
Compaq's other partner, Actebis, has 80 employees who do nothing but
work the phones to find the cheapest PC components.
Compaq, which has long-term relationships with a few component
manufacturers, occasionally delves into this "spot market" to cover
shortages but can't shop around like this on a regular basis.
The final configuration is fixed only 15 days before production, and that
design will sell for only three weeks before being changed again. A
standard Compaq model sells for three months. The speedy turnaround
allows Compaq to take better advantage of changes in price and
technology. It used to carry three weeks of stock in Germany. Now it
carries only two to three days, even less than Dell, and Compaq PCs
arrive in stores 12 hours after completion, down from 36 hours.
Compaq, in league with Shaefer, is doing everything it can to pare costs at
the manufacturing level, too. At the Dresden factory, Compaq computers
-- without their usual internal modems and speakers -- make their way
down a production line shared with six other PC makers: The computers
are taller and thinner than usual, making them easier to ship and cart
around the factory. And Compaq's instruction booklets are sealed in the
same plastic material used to transport components.
Compaq says it has already seen results since the first
Compaq-Shaefer-Actebis PC hit the stores in September. Mr. Bouten
says the company jumped to seventh from 10th in the third quarter this
year with 3.5% of the market.
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