Since industry trends favor Dell over Hewlett-Packard, analysts see more sales pitch than substance in its latest eye-catching discounts
Dell rarely misses an opportunity to remind chief rival Hewlett-Packard (HPQ ) which one is king of low-cost PCs. On Dec. 6, one day before HP's semiannual meeting with analysts and investors, Dell (DELL ) announced that it had cut prices on a number of computing products by as much as 20%. Last year, Dell made a similar move, trumpeting hefty cuts of as much as 22% just one day after HP announced a disappointing third-quarter.
It's a bit of hard-nosed public posturing, no doubt. But does the latest news portend another round of belt-tightening price wars for the computer giants? Probably not, say analysts, who don't think the Round Rock (Tex.)-based Dell will squeeze its own margins to get prices down.
SHIFTING COMMENTS. It doesn't really need to. Prices for PC components, from memory chips to flat-panel displays, continue to drop, which favors Dell. Because it carries less inventory than HP, it can take advantage of the lower prices as they occur.
HP doesn't have that luxury. During the year, it notched razor-thin operating margins of 0.9% for its PC business, vs. Dell's 8.8%. It's not likely that HP execs will be willing to shave any more off that margin.
HP's public comments on the PC market have shifted to deal with the reality of that business model. In the past, executives for the Palo Alto (Calif.)-based outfit proudly trumpeted HP's neck-and-neck race with Dell for market share. But now, they spend more time talking about "profitable growth" for their PC biz. "Our strategy in the PC business is not to go for bragging rights on No. 1 in volume, or No. 1 in share," CEO Carly Fiorina said during HP's Nov. 16 fourth-quarter earnings call. "Our strategy...is to have appropriate scope and scale, competitive growth, and steadily improving profitability."
WIDENING GAP. Coming on the heels of the news that IBM is offloading its PC business to China's Lenovo (see BW Online, 12/8/04, "IBM's Chinese Adventure"), Dell's move looks more like a reminder that it's still in the driver's seat. HP hasn't owned the market-share lead since 2002, and Dell continues to pull away. During 2004's second quarter, Dell was responsible for 18.3% of PC shipments, vs. 15.7% for HP, according to researcher IDC. In 2003, the gap was narrower, with Dell having 16.7% of the market, vs. HP's 16.2%.
The biggest near-term boost for Dell is the rapid decline in prices. Earlier in the year, when component costs were up sharply, HP was able to lean on that big inventory and keep its own costs down. Dell's build-to-order business meant it had no choice but to deal with the increases.
Now that components are dropping once again -- by around 0.5% per week, according to Goldman Sachs -- the trend plays right into Dell's low-inventory business model. Take the liquid crystal display panels that go into 17-inch flat-screen PC monitors. They've fallen to just $170 apiece, from $296 in June, according to market researcher iSuppli. "It has reached the point at which [manufacturers say], 'Is it worth it to produce anymore?'" says iSuppli analyst Sweta Dash, who notes that prices are also falling for notebook panels, disk drives, and memory chips.
Price war or not, such trends just add to HP's challenging task of competing with Dell.
