Are PCs the Buggy Whips of the 21st Century?

Minyanville

Had a buggy whip manufacturer in 1910 rethought things and concluded that rather than being in the buggy whip business he was instead in the business of creating "transportation starting devices." he just might have been able to survive the challenge of the new economy and make the transition into a new era.

-- George Steiner

"Buggy whips" is a shorthand way of describing a manner of thinking more than referring to an actual product. There actually are lots of whips and crops being made today, including ones by some century-old producers. The same can't be said of iron-banded wheels or hand-shaved wooden spokes, which, to my knowledge, really did go extinct.

So, regarding the PC and PC manufacturers, is it their thinking or their product that's the problem? It depends.

Both Dell (DELL) and HP (HPQ) blamed falling sales of the former cash cow on the weakened economy. Many have challenged this assertion, noting that overall PC sales (desktop and laptop) are flat year-over-year according to IT research firm Garner.

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Who's gaining market share at the expense of the US-headquartered companies? Taiwan's Acer (2353.TW) and Asustek (2357.TW) along with Hong Kong's Lenovo (LNVGY).

The real issue is the operating margins the Asian companies find acceptable (ranging from 0.40% to 2%) are substantially lower than HP's at 4.7%. Dell CFO Brian Gladden specifically said that the company did not want to compete "in lower value products in emerging markets where there was aggressive pricing." Gladden's argument was that consumers prefer smartphones and tablets to PCs. He added that the company would continue "pruning" away less profitable segments.

A year ago, HP announced plans to spin off its PC business, citing some of the same factors, although the company's CEO Leo Apotheker said at the time, "HP's PC business will be in existence for many years to come."

So what's going on with the PC business, which is still the world's largest in terms of sales? Yes, it's challenged by smaller, mobile devices. According to Gartner, global smartphone sales are expected to grow nearly 60% this year and the sales of tablets should more than triple.

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But the crux of the issue is that PC sales are shifting from western Europe and the US to emerging markets such as China, Russia, and Brazil. These markets are perfect for the entry-level PCs made by Acer et al. HP and Dell, which want to stay out of low level sectors and concentrate on mid- to high-end units with higher margins, may not be able to make the transition fast enough and could be forced to rely on PC sales.

But PC margins have little hope of improving and the Asian tech groups are clearly making the game one of volume. In the previous quarter, Dell barely made any money on consumer PCs.

In a way, the industry is back to its low price/high volume/low margin roots. So it's up to HP and Dell to decide if they have a buggy whip in hand, or if they can still serve the carriage trade with traditional fare. Asian countries have embraced the PC market as it exists now and are building PCs as fast as Henry Ford built Model Ts.

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