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COMPAQ FLEXES ITS PECS
If you thought the PC price wars of '93 were winding down, think again. Former champions Apple Computer and Dell are announcing losses in their latest quarters. Tandy Corp. has sold its personal-computer business to AST Research Inc., which has to absorb a big restructuring charge as a result. IBM claims its PC business turned a profit this quarter, but analysts don't think it made much. That leaves only one big player as a standout performer: Compaq Computer Corp., the once stumbling Texan that engineered a turnaround in one of the toughest business environments going.
In fact, Compaq is on a major roll. On July 21, the nation's No.3 PC maker (behind IBM and Apple) reported that its sales soared 97% vs. last year's second quarter, to $1.63 billion, while earnings more than tripled, to $102 million. Shipments in that time rose a stunning 150%, to around 700,000 units, vs. an average 25% growth rate for the industry. And Compaq is the only big PC maker whose margins are rapidly rising. Net margins hit 6.26% in the second quarter, up from 3.5% in the same period last year.
How is Compaq doing it? Sales are booming largely because of a decision by Chief Executive Eckhard Pfeiffer last June to overhaul its product line and ignite a fierce price war with a slew of low-cost models. But the company has also pulled off the difficult feat of lowering prices and raising margins simultaneously by squeezing fat from its once bloated infrastructure. It doubled production over the past year and now is running its three plants around the world seven days a week, 24 hours a day. That gives it efficiencies of scale over rivals such as Gateway 2000 and Dell Computer Corp. that only do final assembly of their PCs. Given its higher purchasing volume, Compaq also expects to save more than $400 million in materials costs this year, on top of $200 million in 1992.
BURNING FAT. Now, Pfeiffer plans to press these advantages for all they're worth. He says his main goal is to boost market share from the current 6.5%, displacing market leader IBM by the first quarter of 1996. To do that, he wants Compaq to offer a computer for everyone, everywhere. So he plans to continue the company's push into direct mail and mass-market retailers, bolster research and development with 200 new hires, and introduce new products such as a handheld personal digital assistant and a superlight portable PC. He also laid the groundwork for more growth overseas by adding three subsidiaries in Europe and one in China. Now, he's scouting out South America and India.
The big question: Can Pfeiffer pull all this off if demand slips? PC companies expect healthy growth in the U.S. this year, but some analysts believe that's wishful thinking. "Everything is pointing to demand flattening out," says senior analyst Randy Giusto of WorkGroup Technologies Inc. He just cut his estimate for second half U.S PC shipments by 20%, to 10.8 million.
Compaq, however, insists it can increase market share no matter what happens to demand, citing Europe as an example. Industry shipments there slowed in the second quarter from the first, but Compaq says its revenue grew 58% anyway. "People have been talking about saturation for eight years," says Chief Financial Officer Daryl J. White. "There's a never ending opportunity for new customers, new products, and repurchases. The treadmill continues."
Given that scenario, don't look for a truce in the price wars. David Goldstein, who runs industry watcher Channel Marketing in Dallas, expects prices to fall 25% for the year. That's a lot less than last year's 41% decline but enough to push out some of the 900 PC suppliers worldwide. Compaq says it won't be the one to start another price war. "There are better ways to leverage our position," says White. "We can do more damage in other ways." Price war or no, it sounds as if there's more skirmishing in PCs to come. Peter Burrows in Dallas, with bureau reports