Navigating a PC sea change
By John G. Spooner
Staff Writer, CNET News.com
March 18, 2002, 12:55 PM PT
newsmakers Mike Winkler is Compaq Computer's chief product guru, and it will be his job to make good on claims the Hewlett-Packard merger will result in billions in savings--assuming shareholders say yes. But if they turn thumbs-down, he also has a plan.
As executive vice president for Compaq's global business units, Winkler runs the company's vast PC, server and storage operations. If the deal wins approval, he will also become one of the top five vice presidents at the newly constituted HP. In that new role, he would also run the supply chain and e-business efforts of the combined organizations. Among other assignments, Winkler will be called upon to make good on management's argument that a merger will result in some $2.5 billion in savings.
"I am looking forward to it," he says, dismissing any concern about soon being in the eye of the storm.
In the meantime, Winkler's been plugging away at fixing problems in Compaq's access business group--which includes its PC division--while overseeing the company's research and development charge to develop new devices that access the Internet.
CNET News.com recently chatted with Winkler to get an update on last-minute product planning and other happenings on the technology front at Compaq.
Q: In the past, Compaq has discussed aspects of the non-PC Internet access product. Can you provide an idea of what you have up your sleeve?
A: The real killer-applications on these new innovative Web access devices really are the wireless mobile devices, the smaller ultra-portable PCs and the handhelds. As we're now incorporating in our iPaqs voice capability and Web access capability combined with it in a single device over GSM (Global System for Mobile Communications) or GPRS (General Packet Radio Service) networks, it really does change the fundamental nature of these access devices.
We feel quite good about the business. We don't apologize for being in the PC business anymore.
So we see the mobility market and the wireless aspects of that to be the most significant growth areas. That's where you're going to see a lot of continued investment and innovation on our part.
You will see subsequent versions of the iPaq handheld. We now have in Europe the ability to incorporate voice in that. You will see tablet PCs from Compaq. There's a lot of discussion about how big that market will be. But we think the tablet market is going to surprise people and be more successful than people think.
Compaq took some hits in 2001 in terms of market share. Would you rather be profitable or would you rather gain back some share at this point?
We think it is not an "either-or" (case) anymore. We've reduced the cost base and increased the efficiencies of our supply chain and distribution to the point where we can both grow market share and make money. We do not intend to cede any more share by any means. Yet we have committed to make this business profitable and we will.
When do you think corporate PC sales will pick up?
I look at the backlog of people (looking) to migrate to Windows 2000 and Windows XP. Customers we talk to all are going to Windows 2000 and Windows XP. They've just kind of pushed it out to see how the economic situations at their companies are going to be. But they're all going to do it, so it's just a question of when the dam breaks. Our projection is the second half of the year will see a return to some significant growth.
We believe we've effectively neutralized (Dell's) advantage now.
There have been rumblings in the analyst community that Compaq has been stuffing the channel.
I think we're in terrific shape. We knocked a billion and a half out of inventory in the last year. Secondly, where we sell indirectly with our traditional channel partners, we've reduced inventory very significantly to less than two-and-a-half weeks in general. We used to run four to six weeks in the old days.
Still, they've been talking about channel stuffing and a lot of Compaq inventory being out there. Do you agree?
There's certainly not Compaq inventory out there. No one has verified any Compaq inventory out there. There were a couple of analysts looking at why Compaq--and even HP--could have such good quarters with all of this "merger turmoil" and yet have good sequential growth. Well, it must have been that they stuffed channels to make this revenue.
They didn't bother to actually do the homework and look out there and find out that there really was true demand. We tried to bolster that, as you've seen, with a lot of the press releases we've done on the $5 billion worth of multiyear business that we've won from major clients since the merger (was announced).
So no glut exists?
We feel quite good about the business. We don't apologize for being in the PC business anymore. We think this is going to be a healthy market, and I think that it will return to reasonably good growth. And I do believe there's money to be made in this and we can have a very healthy and profitable business doing it.
They didn't bother to actually do the homework and look out there and find out that there really was true demand.
Michael Capellas recently sent a memo to employees, outlining areas of focus for Compaq: the enterprise, a profitable PC business and new Internet access devices. Where is Compaq on all of these?
One of Michael's key initiatives has been to make Compaq a stronger player in the enterprise. That means the server business, not just the industry standard server business, but also continued presence and growth in the Linux and Unix (segments), high-performance technical computing and the very high end of the Tandem mission critical system--and then storage, of course, which is a really big and good growth business for us.
Is storage more profitable than other businesses?
It offers among the highest margins of the businesses we participate in.
How strategic is services going to become?
If you look at our largest enterprise accounts, we've probably got over 20 percent of our business in a services-wrapped environment now and growing significantly.
So services has become a way to help sell hardware?
It does. We call it services lead selling, where you're really looking at the total value proposition to the customer. Rather than trying to be a purveyor of boxes or the PC vendor du jour who wins the latest bid, it puts you in a different position within the account.
Compaq's been trying to make its access business profitable. How far along are you?
Let's go back a bit. In the year 2000, we were profitable in the access business--the PC business--and we were profitable for three out of the four quarters. It was really last year, when the market fell apart, that really led to our going back into a loss position. But in the fourth quarter, we significantly improved. We said to financial analysts at our analyst conference in January that we would be profitable again at midyear in the PC business, and we're comfortable that we will be.
What's your reason for confidence?
We have dramatically improved our supply chain--and all of that translates--into lower costs in terms of layering, inventory devaluation, et cetera. That's been the biggest advantage that Dell has had in the market. We believe we've effectively neutralized that advantage now. When you look at the enterprise area, Carly has said the product lines fit together like a zipper. When you get above the PC space, I think that's exactly true.
Indeed, Michael Dell doesn't say it's a low-price game anymore; he says it's a low-cost game.
I think if you want to make money, given that prices are going to be low, that he's right. I think that we have made dramatic reductions in our cost base. We've said we reduced our total supply chain cost by 30 percent in just the last six months. We think that we have as good a cost structure as anyone in the industry now.
Component prices are no longer coming down as quickly while RAM and flat panels are actually going up in price. Is that the new trend?
I don't think you're going to see as rapid price erosion in processors as Intel had last year, particularly as it went to the Pentium 4 from the Pentium III. Memory reached its all-time lows and a level that was unprofitable. That has turned around and memory prices have come up pretty significantly. Flat panels--both because of capacity constraints, in some cases, and tremendous demand as prices dropped--are in shorter supply.
What I believe will happen as the market growth comes back--and we all know it will, it's just a question of when it happens--there are going to be component shortages that we don't even forecast now. Last time we had those shortages, back a couple of years ago, it tended to be discrete components on boards, capacitors and things that you never would have thought would have been your bottleneck.
Are any of these real show-stoppers?
No. It may mean that prices firm up because your costs increase as they become scarcer. But you can find them at some price. The discrete components are often the ones that surprise you.
Assuming the HP deals win approval, what do you see as Compaq's role and your own role in the new company? What will the new product lines look like?
I've been announced as one of the five executive vice presidents that report to (Michael) Capellas as president. When you ask what role Compaq will play in the merger, I think it's both in terms of management people participation and our engineers and salespeople, obviously, where I think you'll see a significant mass of Compaq people represented in the new HP structure at all levels. I think Carly (Fiorina) wants to take some of the admired cultural aspects of Compaq, such as our speed, our can-do attitude, our decisiveness. I think she wants to bring that to augment the HP way.
You will see, once the merger closes, what the products are. We are not allowed to disclose those yet, until we have all the regulatory approvals. But you will see a broad presence of Compaq products innovation and development resources that are an important part of the new HP. Then, of course, the very strong customer base that we bring and a services organization that's actually larger than theirs. So you look at the merged company and there will be a very strong Compaq piece to that. I think this is very much more of a merger than an acquisition.
Are there any HP products that you covet?
I admire a lot of the HP products. When you look at the enterprise area, Carly has said the product lines fit together like a zipper. When you get above the PC space, I think that's exactly true. We are so strong in industry standard servers. They are so strong in the commercial Unix space. I admire their services organization...their Unix, their management software...and their strong success in the consumer market overall. There's a heck of a lot that we both admire about each other in terms of what we bring to the merged equation.
There's always the chance that this deal won't happen. Is there a plan in case it doesn't and what will Compaq look like?
We feel that we're on a pretty good track, either as a merged or a standalone company. Compaq is strong, it's profitable and it's well-positioned as the tech market comes back. Some people said this was a merger of survival. I think that is fallacious and we have clearly proven that in the fourth quarter--and you've got a very strong Compaq company, whether the merger goes through our not.
Do you see more consolidation with companies like Gateway pulling out of markets?
I think that is what's occurring. While people say that one of the deficiencies of the HP-Compaq merger is it increases exposure to PCs, in point of fact, it is leading the way to consolidation of the industry.
What do you think the terrain will look like, post-consolidation?
The fact is that there's only going to be two or three big players over the longer term, which is what happens when industries consolidate. Those two or three players are very profitable doing it. You look at the profit contribution a business this size can make to a new combined HP and we will look back at this a couple of years from now and say that one of the real benefits of this merger was in fact a large, profitable, growing PC business that came out of it. |
