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Technology Stocks : DELL Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: Bilow who wrote (1970)	9/27/1998 10:39:00 AM
From: Geoff Nunn	Read Replies (1) \| Respond to of 2578

Carl, Having seen a good number of your posts, I've reached the conclusion you are pathologically naive on matters of economics. Sorry to say this because I've enjoyed some of your posts. But you seem to make one statement after another which is at odds with known facts, unfounded, or just plain wrong-headed. Take for example IBM, which, according to you, is positioned to "survive the next computer revolution in good shape." ( Dell meanwhile is in big trouble). From reading your post, a reader would never know that IBM's pc division, which I assume is what this discussion is all about, is losing money. Anyone who thinks that IBM is in good shape, and Dell is in trouble, is someone divorced from facts. For you to say IBM's pc segment is in good shape is to mock reality. IBM's pc business is sick. It has been losing $$m. per yr. for years, is rapidly losing market share to Dell, and survives only because IBM cross subsidizes it with profits from other segments. Last yr, according to Business Week, IBM's pc business lost an estimated $300mil. Before we contemplate whether IBM can survive the next computer revolution, perhaps we ought to know whether it survives the present one. Here is another sample of your naivete: But vertical integration does provide efficiency, as it is much easier to control the process of production. Sometimes those suppliers that a "virtually integrated" company uses just don't supply. They go out of business, start up competing businesses, go to court and sue, etc. The problem with this is that suppliers don't just disappear for no good reason. When firms are profitable they have a habit of remaining in business. When they go away, normally it's because their customer base deserted them. There can be any number of reasons why a firm may fail. What it usually boils down to is poor quality products or services - or prices, that are no longer competitive. When suppliers go away, normally it's because their customers want them to. The real problem here is the exact opposite of your formulation. It is the vertically integrated firm which runs the greatest risk of being forced to rely on a failed "supplier." How would you like to be the manager of IBM's pc segment, and be compelled to use IBM modems? IBM modems aren't sold in the general market, and there is no reason to think they meet world class standards. Even assuming they do, there is even less reason to believe they are manufactured efficiently. After all, when a manufacturing operation is sheltered from competition, it isn't subject to the discipline of the market place. This discipline can be harsh, forcing a firm to do things it would rather not do (such as reducing its costs). Of course, if the modems are sold to you at less than cost, then the problem is not yours but someone else's. In any event, vertically integrated firms can easily end up manufacturing components that don't meet the standards of quality and price set in the competitive market. This is precisely the problem with IBM, too many divisions which are laggards. (see Business Week,9-14-98) As for your comparisons between IBM and Dell, statements such as the following are meaningless: Right now, IBM has 6 times the sales of DELL. Profits are about the same as DELL, as a percentage of sales.. First of all, no investor cares about sales. Sales are irrelevant. Sales are for HWP's public relations folks to crow about when they explain to investors why HP lost money on PCs for the umpteenth qtr in a row. Second, profits as a percentage of sales are also irrelevant. Thirdly, comparing IBM's total profits to Dell's total profit, as you did in a previous post, is completely bogus. The only way to gauge the profitable a firm is to look at profits relative to invested capital. Example: whether a four billion $$ profit is large or not depends on the amount of invested capital. If the firm has a capital investment of $20bil. then the rate of return is quite good, 20%. But if the firm has a capital base of $100b., the firm is only earning only a measly 4% rate of return. In this case, investors in effect are losing money. They would have done better to put their money in a bank at the passbook savings rate! Last time I looked DELL was earning a 22% return on invested capital, which dwarfs anything at IBM. Geoff