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Shakeout Could Be on the Way for the PC Industry

Computers: A sharp decline in sales has the potential to trigger a Detroit-like thinning of the ranks of leading manufacturers.


The annals of auto manufacturing are filled with legendary but long-departed names: Studebaker, Duesenberg, Packard and Rambler. As the personal computer industry endures one of its toughest periods, experts are beginning to wonder whether the PC graveyard might soon include such names as Gateway, Compaq or even IBM.

If PC sales to consumers and businesses continue to deteriorate as sharply as they have over the last several months, the industry might ship fewer desktop computers in 2001 than it did last year. That would mark the first time the industry has experienced negative growth year-to-year since PCs hit the marketplace two decades ago.

Such a slump would leave it with so much oversupply, analysts say, that a Detroit-like shakeout of laggard companies might be inevitable. "The music's stopped and it's time for someone to leave," said Andrew J. Neff, technology analyst for Bear, Stearns & Co.

It is unclear how a wave of PC mergers or withdrawals might unfold. "Everyone thinks it's the other ones that should go," Neff said.

Facing the greatest risk, in Neff's estimation, is Gateway Inc., which ranks fourth in the nation for PC sales with about 9% of the market, according to International Data Corp. The San Diego-based firm, which lost $502.9 million in the first quarter of 2001, is the most vulnerable of the leading PC makers to the downturn in consumer spending in general and to the U.S. economic slowdown. ("Our recommendation: Look for potential acquirers now," Neff wrote in January.)

"If the company's for sale, I'm not aware of it," responded Bart Brown, senior vice president for consumer sales at Gateway.

Neff also believes that IBM Corp. should exit the PC business, in which its 6% market share trails the other major manufacturers, and that at least one other merger in the industry should take place.

Though PC executives disagree with some points of Neff's analysis, many observers expect an old-fashioned shakeout in the industry.

The reason is the sharp slowdown in sales of personal computers that began in 2000 and is expected to continue through this year. Although analysts expect as many as 165 million desktop PCs, notebooks and workstations to be sold this year, that's a scant 3% more than the 160 million sold in 2000.

PC makers, accustomed to double-digit annual growth, are responding with a wave of retrenchments that include layoffs of thousands of workers. Since Jan. 1, Compaq Computer Corp., Dell Computer Corp. and Gateway, which have a combined 46% of the domestic PC market, have announced they will shed 9,700 workers here and abroad. Such once-familiar second- and third-tier brands as Packard Bell, EMachines and Micron either have abandoned the U.S. market or are fading fast.

"The PC industry is already shrinking," said Michael Dell, chairman and chief executive of Dell Computer, in a recent interview. "It's just not happening by merger and acquisition."

And the process may be just starting. Analysts believe that the PC industry is about to enter a period of ferocious price-cutting that will slash profits to the bone as the largest companies strive to expand their market share at the expense of their rivals. The goal is to be stronger, or at least still be standing, when consumer and corporate PC purchases pick up again.

"We're planning on taking share by pricing very aggressively and sacrificing our gross margins," said Gateway's Brown. "Dell has said they're going to fight the share game too. The bottom line is, it's a great time to buy a PC."

PC Market Resembles Detroit of Old

If Brown sounds like a car salesman anxious to seal a deal, that is not surprising. The state of the PC industry resembles the Detroit of more than half a century ago, before a wave of consolidations and bankruptcies pared it down to three major domestic manufacturers (one of which, Chrysler, is controlled from abroad) and a handful of foreign companies.

The PC market is highly fragmented, with five large companies--Compaq, Dell, Gateway, Hewlett-Packard Co. and IBM--accounting for roughly 65% of the U.S. market. Most of the rest of the market belongs to so-called white-box computers, which are unbranded, generic units made by small-scale manufacturers or assembled at home.

Just as the auto makers have had to struggle through times of overcapacity, the potential supply of PCs today exceeds demand. And the price-cutting certainly is a familiar phenomenon to the auto industry: In the 1970s, Japanese auto makers became famous for cutting profit margins to secure market share in the U.S.

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