TO ALL---- "WATCH OUT FOR THE FROG"----Dow Jones Newswires -- November 20, 1997
WSJE: Europe Computer Makers Wilt Under U.S. Onslaught
From Friday's Wall Street Journal Europe
By Kimberley A. Strassel and Matthew Rose
AMSTERDAM (AP-Dow Jones)--Tulip Computers NV has just cut the ribbon on a gleaming, state-of-the-art factory; relaunched its range of home personal computers; shelled out for a splashy new ad campaign; and opened five new offices in Asia. The signs of a fast-growing computer company?
Not quite.
In fact, Tulip is wilting. The company warned Thursday that it would post 'a substantial loss' for this year, perhaps the biggest in its history. It's a familiar story these days in Europe's ailing PC business, where losses are spreading as fast as a computer virus. Pounded by stronger American rivals such as Compaq Computer Corp. and Dell Computer Corp., Tulip reflects the huge problems buffeting Europe's PC titans.
Strapped by tightening margins, wedded to small home markets and stuck with warehouses full of old products that they can't quickly unload, Europe's computer champions are being driven into financial ruin by U.S. powerhouses that command huge research-and-development budgets and vast geographic reach. Once the source of national pride, European PC makers are today the source of national embarrassment a sad testament to 30 years of lavish government subsidies and state favoritism on contracts.
'There aren't many of us left,' acknowledges Roberto Schisano, group chief executive of Olivetti Computers Worldwide, the former PC arm of Italian conglomerate Olivetti SpA. 'How many more can go out of business?'
Personal-computer sales are hitting record levels across Europe, but local PC-makers are struggling: In 1994, four European PC-makers were among the 10 biggest manufacturers in Europe. Today, only two Siemens Nixdorf Informationssysteme AG and Vobis AG have that status.
Some famous names are only a fading memory today. Pioneers among them, Amstrad PLC, Cie. des Machines Bull and Thomson SA either sold off or scaled back their PC businesses early in the 1990s, when U.S. companies first started turning up the heat.
Others, such as Escom AG, fought on, only to end up by filing for bankruptcy in the face of mounting costs and thinning margins. Now, even the most stalwart of Europe's once-thriving PC makers are bleeding. Last year, Tulip racked up losses of 9.95 million guilders ($5.1 million) on flat revenues of 527.5 million guilders. Thursday's statement predicting 'extraordinarily disappointing' results for this year follows a loss of 6.8 million guilders in the first half.
The other casualties: Olivetti's computer division reported a staggering loss of 59 billion lire ($34.8 million) last year, after an estimated 200 billion lire loss in 1995. The company also slipped from its cherished No. 1 position in Italy this quarter, overtaken by Compaq.
British PC maker Acorn Group PLC has posted pretax losses for the past three years. And Vobis, one of the last PC makers with a significant presence in the cutthroat consumer market, has watched profits stagnate. Damon Francis, director of Atlanta Technology, a London-based computer supplier, says most of the small or medium-size businesses that buy from him have never even heard of Tulip computers. 'And we would never think of suggesting one,' says Francis.
One possible exception: Siemens Nixdorf Informationssysteme, the information-technology unit of Siemens AG. SNI doubled profits this year and is snatching European market share. But analysts are suspicious: The subsidiary doesn't break out its financial results, and some analysts think SNI might be buying market share by selling PCs at a loss.
Another exception are Europe's many small, niche players, who build inexpensive PCs that cater to cash-conscious consumers and small businesses. Buying lower-quality, cheaper components, their trusted services and low prices give them an edge over big U.S. and European rivals.
But, for the most part, Europe's elite club of computer makers continues to lose out to bigger brand names. The reasons are clear: U.S. computer makers have enjoyed easier access to cash, debuting on stock exchanges and tapping venture capital. Those deep pockets enabled them to spread quickly across the world, scooping up lucrative international contracts.
It also allowed these companies to adapt quickly to new technology through streamlined inventory systems. And their mere presence in Silicon Valley gave them better deal-making opportunities, a wider pool of talent, and discounts with suppliers.
Nobody knows this better than Tulip. Started in 1979, the small Dutch company is one of Europe's oldest PC makers and until recently, one of Europe's most financially stable technology companies. But U.S. invaders have drastically altered that picture. After Thursday's profit warning, investors drove the company's share price down 16%, or 2.30 guilders, to close at 11.80 guilders each in trading in Amsterdam.
'This is hugely disappointing for us,' conceded Franz Hetzenauer, Tulip's founder and chief executive. He blamed the company's predicament on the loss of unspecified big corporate accounts to competitors.
It's a big comedown for a company that got its start high on the ski slopes of the Alps. Swishing his way down a Tyrolean mountainside as a student, Hetzenauer had little inkling he would be scrambling to survive only 25 years later.
At the time, the young Austrian engineering student was hoping to find a job in the sleepy mountains he called home. But while working as a ski instructor to fund his university studies, a chance slalom with a vacationing Dutch woman elicited tales of Holland's many bright young technology companies.
Soon after, Hetzenauer moved to Amsterdam, where he went to work for a high-technology firm. When he struck out on his own five years later, the young Austrian felt sure that business PCs were the market to be in. European companies were then pouring money into new technology.
Hetzenauer and a partner raised a small loan totaling 50,000 guilders and set up shop. Shunting aside traditional 'techie' names, Hetzenauer decided to christen the company something quintessentially Dutch. 'That didn't really leave us with much choice,' Hetzenauer said in a recent interview. 'It was either Cheese, Clogs ... or Tulip.'
Tulip, like most of Europe's biggest computer companies, struck gold in the 1980s. Rapidly changing PC technology was forcing European corporations and government offices to reorganize their computer systems, and local PC makers faced little competition, especially for government contracts.
Companies such as Olivetti and Acorn were also able to dominate educational products in their domestic markets. With times so good at home, many players only tentatively ventured into other European countries. Tulip almost doubled its revenue in 1988 alone.
In an unusual move for a European PC maker, Tulip took the plunge early on and listed on the Amsterdam Stock Exchange in 1984. Like U.S. companies that had gone the same route, the listing forced Tulip to satisfy shareholders by focusing on its balance sheet and cutting costs. But while Tulip used its newfound cash to grow domestically, U.S. companies were using their money to fuel global expansion plans.
By 1990, the Americans were marching over the Dutch border, and Tulip had few defenses. The first signs of trouble came from Dutch companies, long supporters of local products and labor, but in need of computer companies that could outfit their offices in Honolulu as well as Amsterdam. Tulip lost a long string of customers, including, just recently, ING Barings NV, which switched from Tulip to Hewlett-Packard & Co.
From being No. 1 in 1993, the company soon slipped to around third place in the Dutch rankings. Meantime, Compaq was chalking up some of Europe's biggest corporate names: Norwegian oil company Statoil AS, telephone giant Swisscom, and BZW, the investment banking unit of Barclays PLC. 'Big multinational companies with their big, multinational projects, are going to come to big, multinational PC companies like ours for help,' says Andreas Barth, senior vice president and general manager of Compaq Europe.
Then, in the early 1990s, the Dutch government embarked on a new austerity program designed to restructure its economy. Large educational and public contracts went to those offering lowest prices and most services, rather than to local manufacturers. As many of Europe's other economies hit difficulties in the early 1990s, leading national manufacturers found out how difficult it was to be shackled to local economies.
The Netherlands still counts for about 30% of Tulip's sales. Italy accounts for a similar amount of Olivetti's sales, and Vobis tallies some 65% of its sales from Germany's consumer market. U.S. companies, meantime, were able to ride out slumps in some European countries through gains in other markets.
By the time Tulip started pushing into other European markets, U.S. brand names were already thoroughly entrenched. 'Say 'IBM' or 'Dell' and a customer lights up like a Christmas tree,' says Gregory Kent-Coward, the office manager of Spectrum Ltd., an authorized Tulip reseller. 'With Tulip, customers have to think about that one for awhile.'
European companies also quickly discovered the disadvantages of not having a Silicon Valley connection. U.S. tech firms had the reputation for talented people, cutting-edge technology and quality. 'There is a perception that IT leadership needs to come from the U.S., and people don't pay attention to what others have developed,' says Rudi Lamprecht, SNI's executive vice president in charge of Pcs.
Tulip discovered the danger of lagging behind its U.S. competitors in 1994, when it tried to plow into the consumer market, which was growing at some 40% annually in Europe. The company threw money into a new line of multimedia computers called Impression, designed to be cheaper than the company's business line.
The move was a disaster. 'Stores were already selling two, three, four brands, and there simply weren't enough eyeballs to take in Tulip, too,' says Ad van de Laar, an analyst at Bank LaBouchere in Amsterdam. Worse, the move down market started cannibalizing Tulip's own sales. Small and medium-sized businesses, more concerned with prices than with quality, jumped to buy the cheaper Impression line, says van de Laar.
Just one year later, the company retreated to its core business. Tulip won't disclose how much the failed venture cost. Still, Tulip emerged from the ordeal determined to increase its profile. Tulip billboards have popped up along highways across Europe. The company sponsors the much-watched weather report on the British Sky Broadcasting Group PLC satellite service. And, at a recent London awards ceremonies sponsored by Tulip, attendees walked out of a hotel to be greeted by a fleet of London black cabs, all sporting the Tulip logo.
'It's helping to solve the 'Tulip who?' problem we've had for a long time,' says Joep Maas, marketing director for Tulip. But he acknowledges that the increased exposure will do little more than get Tulip through a company's door. A full 65% of Tulip's revenues still come from big corporate clients.
There are glimmers of hope: On Thursday, for example, Tulip announced it had won a contract from the Hungarian Ministry of Education worth $2.3 million to install 1,400 computers in schools across the country. But while Tulip's strategy is to get executives face-to-face in the hope of winning them over, the company sometimes falls back on buy-European sentiment.
'Supporting them as a European company was important,' says David Skurczynski, computer services manager at the National Trust, a U.K. government agency that looks after major historic monuments, and which has 1,200 Tulip computers. Skurczynski says the National Trust was more concerned with Tulip's reputation for quality than its prices, which were only slightly lower than U.S. competitors.
Seeking to diversify its sales, Tulip is now giving the consumer market another shot. Earlier this year, the company bought the remnants of a bankrupt Dutch PC maker, Commodore BV, for an undisclosed sum. The company conducted a study showing that Commodore was still the third most recognized name among European buyers. It is pinning hopes on getting the new Commodores into major PC stores across Europe and says revenues of the combined company could top one billion guilders a year.
But analysts are far from convinced that Commodore can save Tulip. The company is pitching the machines as a mid-range product between the most expensive and most cut-rate models, a strategy that has proved difficult for other companies in recent years. Hetzenauer has conceded that in the past Tulip couldn't compete on price alone.
U.S. firms were building new factories that allowed them to build computers as they were ordered, drastically cutting back on inventory costs. As they were buying bulk, and able to commit to long-term contracts, they were also able to negotiate deep discounts with suppliers.
Tulip could only afford to cut its prices 10% below U.S. companies. In fact, Tulip ran into a brick wall when it sought to trim costs in 1990 by building a factory in Ireland, whose generous tax breaks, export laws and skilled labor force have drawn investments from other computer firms, including Dell.
The trouble: The Dutch government levies a 'knowledge transfer' tax on any Dutch company that manufactures a home-grown product in another country. The tax, roughly equal to Tulip's market capitalization about 102.5 million guilders, might have been manageable for a company such as the $25 billion Dell.
For Tulip, it was out of the question. Later efforts to build a new plant in the Netherlands ran into resistance from Dutch environmentalists, who said the site was the habitat of a rare frog. 'Every time we turned the corner, something more seemed to be slowing things down,' says Hetzenauer.
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