The The latest front line in Dell’s relentless battle to bring down the cost of the personal computer is a fiddly little label stuck to the casing.

With PC assembly time down to less than four minutes, the 30 seconds it can take to apply the ose ubiquitous security holograms and logos for Microsoft and Intel have become a significant manufacturing bottleneck. Talks are under way to eliminate what Dell production managers grudgingly describe as “other people’s advertising”.

Whether or not those discussions succeed, they illustrate the lengths to which Dell will go to improve manufacturing efficiency, enabling the Texan computer-maker to earn enviable profits by selling industry standard equipment more cheaply than its rivals.

This relentless approach, stretching from the floors of its assembly plants to the organisation of its complex supply chain and its low-cost method of selling over the internet and telephone, is a one of the wonder of the modern business world. Like Wal-Mart in retailing, Dell has established a way of doing business that has given it a price edge no rival can easily match. While most others in the PC industry have been awash in red ink, the business that Michael Dell started in his dormitory room at the University of Texas has churned out steady profits.

“Dell is not a high-tech company,” says David Gibson, who studies a professor at the same university who studies innovation. “It probably has the most efficient business model in the world, but the key to that success is its sales model and logistics efficiency.”

The unstoppable Dell machine has already made an impression well beyond PCs: the same hyper-efficient model has been applied to computer servers and printers and is now being pushed into televisions and other consumer electronics. It is not too much to say that The prospect that their markets will be turned into the same ultra-competitive, low-margin wastelands that have come to characterize some corners of the computer business has sent a chill through electronics manufacturers everywhere.

Dell’s image of impregnability, however, has just taken a dent.

With its industry-leading IT systems, Dell has always been able to keep a close watch on demand almost minute by minute, enabling it to fine-tune its prices and product offers. In recent months, though, that well-oiled system has not worked as expected. The company shocked Wall Street two weeks ago by reporting sales that fell short of the company’s guidance because steep price cuts failed to stimulate additional demand in the way it had hoped.

The company blamed this on a momentary lapse, one that it can could quickly fix. “We got too aggressive and we passed the [price] elasticity mark,” says Kevin Rollins, Dell’s chief executive. “We drove it too hard.”

For any other company, such an event might seem of little significance. For Dell, though, whose much-envied business model and close attention to flawless execution are so widely admired, it has been enough to raise troubling questions.

Can the Dell approach no longer be relied on in the ultra-competitive conditions that are now emerging within corners of the PC business and beyond? With a new wave of low-cost Asian competitors rising up and buyers demanding ever-lower prices, must even Dell bow to the prospect of lower profit margins or accept lower growth?

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It is clearly far too soon to call an end to one of the world’s most remarkable business successes.

First, Dell is still a technology industry powerhouse by almost any standard. It has met or exceeded earnings estimates for 18 consecutive quarters and controls almost one-fifth of the worldwide PC market. While rivals such as Hewlett-Packard and Gateway have been slashing payrolls or, as at IBM, selling off PC businesses, Dell continues to add workers and expand facilities.

Yet its growth has slipped, raising questions about some of its ambitious long-term plans. Despite a booming PC market, its growth its year-on-year sales rise has just fallen below 15 per cent for the first time since the depths of the technology downturn in 2002 and the company has forecast a still relatively modest 13-16 per cent growth for the current quarter. Mr Rollins earlier this month insisted that Dell remained on track to hit $80bn (£44bn, €65bn) in sales within four years – a target that implies growth of 13-18 per cent a year.

Second, there have been doubts about Dell before and those have proved groundless. No one gave much hope to a tiny company touting the wacky idea of selling computers by phone. When Dell showed that was possible, naysayers said the company would never be able to challenge industry heavyweights. Dell proved them wrong on that count too. Doubters also wrongly predicted that Dell’s model would not work for servers, the more powerful computers designed for corporate use. In addition, critics claimed Dell’s direct-sales model was not suitable outside the US – while the company has stumbled in some international markets, it is still posting solid growth in most countries in which it competes.

None the less, investor concerns are real. Chuck Jones, analyst at Atlantic Trust Stein Roe, which owns Dell shares, says the PC maker remains a very strong operational outfit but has grown too large to buck market trends. Those trends in the cut-throat PC market, which still accounts for almost two-thirds of Dell’s revenues, are getting worse – prices are plunging, aggressive low-cost competitors are girding for a fight and unit sales growth is expected to cool going into 2006. “There are some red flags out there,” says Mr Jones.

Over the past six quarters, Dell’s sales growth has gradually slowed from 21 per cent in spite of strong global PC unit shipments that have far outstripped all but the most optimistic of forecasts. IDC, the market research company, estimates that PC shipments were up nearly 17 per cent in the three months to June. Yet this was accompanied by a rapid decline in PC prices, spurred by the falling cost of components and heightened competition among PC manufacturers.

Dell’s strategy has been to attract customers with low headline prices and then convince them to buy more expensive models better suited to their needs. However, consumers in the US and developing nations increasingly seem unwilling to spend more, a development that could make it increasingly difficult for Dell to increase revenues and earnings at the same time.

George Schiffler, an analyst at Gartner, the market research group, says price-driven growth is putting significant strain on the industry. This would be likely to intensify if unit growth slowed, forcing vendors to cut prices further.

“Dell went into the consumer market to increase sales, but it’s not a great place to be. There is very little joy in it,” says Roger Kay, analyst at Endpoint Technologies Associates. The higher-profit notebook PC market is also proving less of a refuge: average selling prices could reach parity with desktop machines by the end of the year, says Mr Kay.

Adding to the woes of Dell and other PC makers has been the arrival of new low-cost Asian competitors such as China’s Lenovo, which bought IBM’s PC business. Acer of Taiwan has been particularly aggressive – and successful – in taking market share in Europe. Formidable competitors on their home turf, in Asia, they will also keep the pressure on Dell as it tries to boost its presence in developing nations – where consumers are not only more price-sensitive but are also less accustomed to the direct-sales model.

Against this fiercely competitive backdrop, some of Dell’s traditional strengths are proving less decisive than they once were. It sources its notebook computers from the same small group of Taiwanese contract manufacturers used by rivals like such as HP, Toshiba and Gateway.

Another hitch, at least in the short term, is coming from a slowdown in price declines for computer components. Dell fares best when component prices fall rapidly because it can pass along savings to customers much faster than rivals. With more stable component prices in recent months, Dell’s cost advantage has been curtailed.

Laura Conigliaro, analyst at Goldman Sachs, also believes Dell’s size, international exposure and broadening product line have made it a much more complex company to manage.

“With developing countries contributing a substantially higher proportion of PC growth and the emergence of newer, aggressive competitors, Dell will undoubtedly find itself facing multiple pricing and demand shifts more often going forward, challenging its ability to manoeuvre through trouble,” she says in a recent note.

It has been a mark of Dell’s success until now – based on a business model adapted to survive in such challenging markets and its relentless attention to detail – that Wall Street has come to take its ability to handle such changing conditions for granted. That assumption has now been called into question.

To some extent, the company is a victim of its own success. No longer the low-cost interloper in a business dominated by bigger, slower-moving computer giants, it is starting to suffer from being the biggest player in a market where consumers – thanks in part to Dell’s success – now demand ever-lower prices.

“It was great when they could take market share, but now they ARE the market,” says Mr Schroeder.

That prompts a question that Dell during its successful adolescence of strong and profitable growth, has seldom had to face: before: should it focus on maintain ing its ambitious growth plans or look instead to boost its profits? Mr Kay, for one, says he expects to see slowing revenue growth and higher profitability – the from Dell, which he notes are signs of a mature business. He predicts that realisation on Wall Street will lead to further share price readjustment. “They’ve been a darling on Wall Street for so long that there is no place for them to go but down,” he says.

Others , however, are less convinced that the company’s recent stumble signals a fundamental shift in its prospects. Certainly, Dell’s wobble could yet prove to be the kind of problem that most companies only dream of. Yet the fundamental advantages of its low-cost direct-sales business model should still give it an edge as pricing in the PC market becomes more brutal. “If General Motors had a big cost advantage, its rivals would have been bled dry if they tried to follow its price cuts, but they don’t have that advantage,” says Joe Marengi, Dell’s head of North American operations. “We do.”

Moreover, while component costs have stabilised for the time being, supply chain research group iSuppli predicts prices for those parts will start falling more sharply in 2006, a dynamic that is sure to help Dell.

At the same time, the company is pushing into newer markets where profitability is far higher than in PCs. The company should be able to shift to higher-margin products fast enough to offset the deceleration in revenue growth, says Keith Bachman, analyst at Banc of American Securities.

Barry Jaruzelski, analyst at Booz Allen Hamilton, says: “The market structure, their operating model and the fact that they still haven’t fully exploited some other opportunities outside of PCs suggests they still have a lot of runway in front of them.”

New markets will contribute more than 80 per cent of future growth, according to Dell’s Mr Rollins. Yet that doesn’t change the fact that, for now, Dell is still a PC company, Being chained to one of the world’s toughest businesses According to the Dell CEO, this is nothing new. “We’re not changing our strategy,” Mr Rollins the chief ­executive told analysts this month. “We believe the market is still healthy and we don’t see a whole lot ­changing.”

That level of self-assurance, born from a business approach that has turned Dell into one of the most feared competitors in the technology and wider electronics manufacturing world, is about to be tested as never before.

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