Computers & Technology Tailored PCs Not Easy Fit For Makers
Investors Business Daily, Wednesday, March 11, 1998 at 11:55
It's a basic rule of business: Companies that want to deliver
products to customers faster and cheaper can just cut out the
middleman.
But in the personal computer industry, it's not that simple. As
some PC makers try to emulate the factory-direct sales models of Dell
Computer Corp. and Gateway 2000 Inc., they're finding it hard to
break ties with distributor and reseller partners, collectively known
as "the channel."
PC makers that grew up using distributors don't seem to want to
shake them off for fear of losing what they have. They also worry
that emulating the custom PC-building abilities of Dell and Gateway
may bring culture shock.
"(PC makers) are very good at building 1,000 computers of the same
kind," said Bill Nanney, vice president of quality integration
services at computer reseller MicroAge Inc. in Tempe, Ariz. "They're
still not very good at doing an order of 500 computers that are going
to 423 different locations with 15 different configurations and
customer-specific software."
PC makers aren't happy with the status quo, though. They are
moving aggressively to slash inventory and cut prices. They also
want to give customers more choices. Custom PCs are necessary to
keep the customer satisfied.
Two basic avenues are used for customizing - "build to order," in
which PCs are assembled by the manufacturer, and "channel assembly,"
in which distributors or resellers build and configure the machine.
This arrangement raises several questions. Is it better to
assemble custom PCs in the channel or in the makers' factories? And
should companies in the channel even need to worry about selling PCs?
After all, they make plenty of money hawking software, networking
gear and support services for users.
"The bottom line of all of this, for most PC resellers, is that
there's no profit to be made from simply shipping hardware anymore,"
said Charles Smulders, an analyst at Dataquest Inc. in San Jose,
Calif. "It's the add-on products and services that make it
worthwhile to be in the business."
Market leader Compaq Computer Corp. is an example of a company
torn between the two distribution models. Compaq last year pondered
selling PCs without including its channel partners in a build-to-
order process.
The company eventually backed off that approach and decided
instead on a multipronged strategy in which Compaq configures some
machines, and distributors help build other PCs on demand.
Now it appears Compaq won't cut ties with the distributors that
helped vault it to No. 1 in the U.S. and world markets.
"We have a good relationship with the channel," Mason said. "In
no case are we walking away from (that)."
It's unclear how much compensation channel partners are receiving
for configuring computer systems. But top PC makers, including
Compaq, HewlettPackard Co. and International Business Machines Corp.,
all have started some sort of channel assembly.
HP is tentative about custom-building machines, so it is focusing
more on channel assembly. IBM tried its own direct-sales effort
before but only alienated its distributors. Now IBM is focusing on
channel assembly.
All three companies say channel assembly will help bring costs
down.
But the more difficult parts of implementing such plans are yet to
come, says Steve Baker, an analyst at Reston, Va.-based PC Data Inc.
The dream of providing customized PCs is still six months away, he
says.
"What they've done so far is the easy stuff," Baker said. "The
hard stuff the integration of manufacturer systems with channel
systems and the configuration issues - all have to be worked on."
Indeed, companies in the channel have yet to feel the changes.
"The effect on us at this point in time has been nothing," said
MicroAge's Nanney. Nanney questions manufacturers' ability to
customize their PCs. The needs of PC users vary widely, he says.
Nanney argues that the channel-assembly model is far more
realistic. Even Dell computers, he says, require some tweaking by
systems integrators. Up to 15% of the PCs that MicroAge configures
come from Dell, Nanney says.
The point of customized PCs is to reduce inventory. HP doesn't
want its stock to hang around for more than two weeks. The Palo
Alto, Calif.-based company turns over its inventory every four to six
weeks, reports Mike Borg, manager of HP's PC business unit.
Compaq, meanwhile, had about 14 turns last year, says the
company's Mason. Compaq's goal is to hit 25 in '98 and 30 in '99.
But Dell had one inventory turn per week last quarter, more than
three times as fast as its rivals, and so it has more room to
maneuver. Last year, Round Rock, Texas-based Dell's PC prices were
15% below those of PC makers not using direct sales, analysts say.
Still, the efforts of nondirect-selling PC makers seem to be
working. Their prices have come down nearly to those of direct
sellers in recent weeks, says PC Data's Baker.
PC makers have become more demanding of channel partners. They
offer less price protection and are stricter about taking back
returns.
Analysts say the channel may have less of a role in handling basic
PC hardware in the future. Such a change would not necessarily be
bad, they add. If PC makers can manage inventory, configure their
machines and ship them, resellers can focus on other, more profitable
activities.
Besides, PC makers may have no choice, says Dataquest's Smulders.
The margins that resellers earn on PCs can be as low as 6%, he adds.
"Now if you consider that the reseller may have expenses of 10%,
you can see the problems they face," he said.
But the debate is far from over. Most of the build-to-order craze
has been confined to business PCs.
This year, Smulders says, the focus will shift to the consumer
market.
"That has a whole set of different challenges," he said.
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