H-P adds to worldwide PC lead: Gartner - MarketWatch

Gartner said that H-P (HPQ - Annual Report) had worldwide first-quarter PC shipments of 11 million units for 17.6% of the market. H-P’s shipments rose by almost 29% from the same period a year ago. By contrast, Dell (DELL) saw its shipments fall almost 8% from a year ago, to 8.7 million units. Dell’s results gave it a 13.9% market share.The worldwide top five was filled out by Acer, with a 6.8% market share, Lenovo Group (LNVGY.PK), with a 6.3% stake, and Toshiba, which claimed 4.1% of the market. All three companies saw their shipments increase during the same period in 2006.
Gartner said that total worldwide shipments rose 8.9% to 62.7 million units during the quarter.

For years Dell was the leader and gained share every year. Things have clearly reversed for the company. We still question whether their business model remains relevant in the era of ultra-cheap PCs.

Just yesterday we reiterated our concern that the prices for PCs have gotten so low that DELL’s world-famous direct selling model is no longer the most efficient (with shipping making up a larger portion of the total cost, shipping in bulk to retailers could result in a lower price than direct sales shipped to end users.) IT Week summarizes the recent share loss studies, and find various explanations from other analysts, all of which essentially say the same thing.

Dell pays for strategy change - 18 Jan 2007 - IT Week

Analysts suggested, however, that Dell’s market share is dropping simply because it has stopped pursuing a large share of the market.”They might not want to play in a low end price area,” suggested Mikako Kitagawa, principal analyst for Gartner Dataquest’s Client Computing Markets Group.

“Vendors really have to lower the price to gain the market, so it is highly possible that they didn’t want to play in that area,” Kitagawa told vnunet.com.

David Daoud, manager of the Personal Computing and PC Tracker Programs at IDC, explained that Dell may be considering shifting its focus away from entry-level machines to its business computers and more customizable, high-end PCs, such as its Alienware gaming machines.

Whether it is a strategic decision not to sell low-end products or that low prices have simply made DELL’s business model less attractive, the end result is the same.

In May, 2006 we noted that things were tough in the PC industry, with the HP/DELL/Lenovo troika competing heavily for market share at the expense of profitability.

DELL has cut its earnings estimates for the first quarter, saying the shortfall “was driven primarily by pricing decisions in the second half of the quarter.” With prices falling at a faster rate than unit sales are growing, it is tough to show any gains on the top line.

Over the course of the year, that thesis played out in large scale.

Global PC shipments grow, but revenue remains flat | CNET News.com

Shipments of desktops, notebooks and servers with processors from Intel and Advanced Micro Devices grew by about 10 percent worldwide in 2006, according to figures released Wednesday from research firm Gartner. During the calendar year, 239.4 million PCs left factories.For the year, revenue generated from worldwide PC sales across the industry, however, remained flat at $201.1 billion, according to the firm’s early estimate. It doesn’t appear that 2007 will bring much change. PC shipments will go up by 9.9 percent, Gartner predicts, but revenue will only climb to $201.3 billion.

“It is going to be a tough year,” said Charles Smulders, an analyst for Gartner.

The crazy thing is, though, that 2006 wasn’t especially brutal for PC pricing. While price drops were generally in the low double digits, looking back through history it was one of the slowest paces of price declines on record.

Now the question boils down to several competing factors to see whether the price environment will continue to be merely bad, or whether it will actually get worse. First and foremost among these is whether Windows Vista will truly result in a massive hardware upgrade cycle, and whether it will begin as quickly as customer pre-orders are indicating.

Secondly is whether selling prices are already so low that demand has become completely inelastic (insensitive to price cuts.) With systems now retailing for well under $1,000 this may be the case. Furthermore, it may be the catalyst behind the power shift from DELL to Hewlett Packard. As we discussed in August 2006:

It may not be that people care less about customization but rather that the now super-low prices of PCs has turned the industry on its head in terms of efficiency. In the past, DELL’s model was more efficient because declining prices meant that having a low inventory and no retail markup carried a large enough advantage to offset the cost of shipping the PC. Now, with the PC selling for $500 rather than $1,500 the shipping costs per unit are much higher and may actually make bulk shipments to retailers more cost effective than individual shipments to buyers.

What is clear, though, is that PCs are no longer a growth industry, and if the competition continues to revolve around price it may soon be a business in permanent decline from a revenue perspective. No wonder Apple (AAPL) took the “computer” out of its name.

With indications of a consumer spending slowdown building, hopes for real GDP growing at 2.5% must anticipate a fairly significant contribution from business spending (since the consumer accounts for roughly two thirds of the economy.) However, the latest poll of Chief Information Officers (CIOs) by CIO Magazine does not paint a particularly rosy picture. In fact, the only thread on which the bulls can cling is that CIO sentiment is frequently more of a lagging than a leading indicator of tech spending. As evidence, consider this quote from the poll findings:

In the December Poll, panelists project IT budgets will grow by 5.8% over the next 12 months, down from 6.5% in the September poll. In addition, CIOs report that IT budgets increased by an average of 5.8% over the last 12 months, up from 5.0% last quarter.

Hmm… the estimate for the next twelve months happens to be exactly what happened over the last 12 months? Definitely has the ring of a lagging indicator. But regardless, the results offer something of a glimpse into CIO plans.

Findings from the quarterly CIO Magazine Tech Poll(TM - Annual Report) show IT spending projections decreased in October-December with CIOs predicting IT spending increases of 5.8% over the next 12 months, down from 6.5% in the previous quarter. Poll results also show the majority of CIOs (63.6%) have no plans to invest in Office 2007 or Vista 2007 next year. Key focus categories of growth are Computer Hardware, Storage and Security.

So mixed news for Microsoft (MSFT - Annual Report) and a glimmer of hope for DELL. Since storage and security have recently been key spending areas anyway, it is hard to say whether calling them a focus area means improvement or not. As evidence, consider this quote from the poll findings:

In the December Poll, panelists project IT budgets will grow by 5.8% over the next 12 months, down from 6.5% in the September poll. In addition, CIOs report that IT budgets increased by an average of 5.8% over the last 12 months, up from 5.0% last quarter.

Hmm… the estimate for the next twelve months happens to be exactly what happened over the last 12 months? Definitely has the ring of a lagging indicator.

The CIO Magazine Tech Poll results are used to construct the CIO Magazine Tech Future Growth Index (TFGI), which projects IT activity over the next 12 months1. In December the TFGI is 2.3, down from 2.5 in September.

The problem is, even if considered as a contrary indicator, the stock market hasn’t priced much calamity into tech stocks of late.

William Trent currently has a short position in put options related to Office Depot (ODP).

The headline for the durable goods report was not very bright this morning - Durable goods orders slid 8.3 percent in Oct - Yahoo! News

New orders for U.S.-made durable goods tumbled much more than anticipated in October on a big drop in civilian aircraft but were also down unexpectedly when transportation was stripped from the total, a government report suggesting economic weakness showed on Tuesday.
Durables goods — big-ticket items expected to last three years or longer — fell 8.3 percent, the biggest drop since July 2000. The decline was propelled by a 21.7 percent fall in transportation orders, the
Commerce Department said.

But even excluding transportation orders, durables declined 1.7 percent as manufacturing, fabricated metal, and computers and electronics orders all slid.

As is our custom, however, we like to dig a little deeper into the data to determine whether there are any bright spots. Instead, what we saw for the most part was rising inventories and falling orders and shipments. All charts below are based on information provided by the U.S. Census Department and collected by Stock Market Beat.

Although last month we said it looked like it was time to play defense, even that sector is giving back much of its strength.

Also consider computers and related products. Both shipments adn orders are falling through the floor. The potential bullish case is that customers are holding off on equipment upgrades in anticipation of Microsoft (MSFT) Windows Vista. However, given the strong recent performance at Dell and Hewlett Packard (HPQ - Annual Report) this bullish case may be priced in already. That could leave investors holding a heavy bag if the Vista orders don’t come in as expected.

Communications equipment, which had formerly been bucking the trend in technology, has also seen a sharp reduction in order growth.

Semiconductors may be the bright spot, but at this point it seems too early to tell given that the one strong data point is balancing several weak ones. At the least, the strength could support the argument that slowing computer sales and orders are Vista related, and that the semiconductors will be needed to build computers in a few months.

Electrical equipment and appliances also look strong, which is probably due at least in part to strong holiday sales of flat-panel televisions.

There seem to be few places to hide.

Sometimes what seemed like a good idea yesterday seems like a bad one today. And sometimes people simply forget why they did something in the first place and make efforts to undo what has been done. For better or worse, some are suggesting that may soon happen in the form of a buyout of printer manufacturer Lexmark (LXK) by computer manufacturer Lenovo (LNVGY.PK)

Analysts hint at Lenovo buying Lexmark - Finance - www.itnews.com.au

Printer sales in China are growing so strongly that local firms may attempt to buy control of a major foreign printer maker to ensure a stake in the domestic market and a slice of international sales.Sales of laser printers in China are expanding particularly fast, driven by business users, according to recent data from Lyra Research.
Total laser revenue, including hardware, cartridges and media, is expected to surpass US$5 billion by 2010.

Analysts suggest that a Chinese firm might attempt buy a foreign printer manufacturer to jump-start local printer manufacturing.

US printer maker Lexmark is the most commonly named target for such an acquisition attempt.

Giant Chinese PC vendor Lenovo is seen as the most likely buyer, perhaps as leader of a consortium, and almost certainly with government support.

Lenovo made headlines by buying IBM’s PC division, a deal that was completed 18 months ago. By buying a printer maker, Lenovo could match Hewlett Packard (HPQ - Annual Report) across all product lines. Since printers are generally more profitable than PCs, many consider the printer business to be one of HP’s key competitive advantages.

But the funny thing is, such a deal would simply bring Lexmark back to its roots (albeit under new management). According to Lexmark’s website:

Since our inception in 1991 as a spin-off of IBM, Lexmark has become a leading developer, manufacturer and supplier of printing and imaging solutions for offices and homes. Lexmark’s products include laser printers, inkjet printers, multifunction devices and associated supplies, services and solutions.

So Lenovo may end up reuniting Lexmark with its former parent. Whether having a child move back in after 15 years of independence will make for a pleasant family reunion will remain to be seen.

Given the release of the producer price index this week, it’s time for our monthly review of which industries have greater or less pricing power than normal. All charts are taken from the Bureau of Labor Statistics and display the year/year change in producer prices.

Sawmill pricing is weaker than normal and in a declining trend. This is probably a side effect of the housing slowdown.

Pricing for corrugated boxes is strong, confirming the strong report from UPS.

Inorganic chemical pricing is strong. In conjunction with falling oil prices this could signal improving margins for chemical manufacturers.

Pricing for paint and coatings remains strong, which is somewhat puzzling given the weak housing and auto markets. Either more people are fixing up their old cars/houses instead of buying new ones, or the pricing power of paint is likely to peel.

Iron and steel mills have got their mojo back.

As does aluminum.

The lower oil prices haven’t hurt pricing power for new oil and gas machinery.

As bad as things seem right now, it doesn’t get much better for computer manufacturers.

And wireline telecom pricing power is the best it has been in years.

Tune in next month for more exciting behind-the-scenes reporting on the PPI.

Despite the boardroom spy scandal, Hewlett Packard (HPQ - Annual Report) has had an easy time of late both in the PC market and the stock market. The troubles at DELL (DELL) have been widely reported. But the third big player in the market has largely gone unnoticed since IBM sold its PC division to China’s Lenovo Group.

Any large merger can be expected to have its rough patches. However, when the byproduct of the merger is to remove what is perhaps the best-known brand in the business there can be further issues:

Lenovo Earns a Mixed Report Card from VARs

Despite some recent strides to engage the channel, Lenovo is still receiving mixed reviews from VARs as the PC vendor prepares to battle titans Dell and Hewlett-Packard.The Raleigh, N.C.- based company has earned some points with the channel, especially on price, but many resellers remain troubled by the vendors lack of name recognition among end-users, especially in the Small and Medium Business, where it had hoped its low-cost 3000 series would play well against Dell and HP.

Most believe it will take some time for Lenovo to establish itself as a world-class solution within the channel and separate itself from IBM. Still, several VARs said the wanted to company to keep the IBM name since it still resonates with SMB and enterprises customers.

“You still get a sense that they are stumbling through the woods,” Brain G. Deeley, the manger of Graymar Business Solutions in Timonium, Md., told Channel Insider.

With competition like this it sort of makes you wonder how DELL is doing so poorly.