Which PC Maker is Endangered?

UPDATED: Analysts debate Gartner's prediction that three of Top 10 PC vendors will exit the market by 2007.
Posted November 30, 2004

Michael Singer

UPDATED: Three of the Top 10 PC vendors won't be around to celebrate the holidays in 2007 because of reduced profits and growth, according to a report from IT Research firm Gartner .

In its research note "Predicts 2005: PC Technologies Due for Transition," Gartner said 2004 was a very good year for manufacturers, thanks to enterprise IT purchases that sparked double-digit shipment growth the past few years.

But with slower growth rates and reduced profit margins ahead, the PC industry will face vendor consolidation, with three of the top 10 PC manufacturers exiting the market by 2007, according to Gartner's report.

The firm said PC unit growth is forecast to average 5.7 percent annually from 2006 through 2008, half the 11.3 percent average of 2003 through 2005.

PC revenue growth will average 2 percent annually from 2006 through 2008, less than half the 4.7 percent average of 2003 through 2005. Emerging markets will account for more than 60 percent of PC market growth from 2006 through 2008.

The report said PC price competition will intensify as vendors struggle to maintain growth in a competitive market environment characterized by weak replacement activity and the increasing significance of emerging markets.

Out of the Top 10 worldwide PC vendors, Dell has consistently been profitable in the past several years and has recorded the largest shipment growth. HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba, Acer, NEC, Legend, Gateway and Apple round out the rest of the Top 10.

The report suggested the PC divisions of HP and IBM are vulnerable to being spun off if a squeeze on margins and profitability are deemed too great by their parent companies. Representatives with HP and IBM were not immediately available for comment.

Exiting the market may be the only logical choice for global vendors bleeding profits and struggling for share, said Leslie Fiering, research vice president with Gartner's client platforms group.

Gartner's rationale is that emerging markets, particularly in the Asia/Pacific region, could open opportunities for local vendors to undercut prices of the larger vendors. China's Lenovo, for example, has several opportunities to use its local-market standing and low-cost operating models to its advantage.

"Local PC vendors in emerging markets should consider acquiring local rivals as a means to consolidate home market position and develop the scale economies required to springboard into a global presence," Fiering said in a statement.

Some analysts, however, took issue with parts of Gartner's findings.

"The irony here is that there are well over 1.5 billion potentially new PC customers on the horizon that want what the PC can offer in way of communications, information and even personal productivity," said Tim Bajarin, president of IT consultancy group Creative Strategies.

"But to meet the needs of these types of users, the definition of PC must change and the pricing needs to come down dramatically," he told internetnews.com.

Bajarin pointed to AMD's Global Planetary initiative, with its PIC computer that costs $179, as a PC closer to the type of system needed for the larger worldwide market, where cost is a major factor.

"In some cases, it could be a bit higher priced but a full system can't be more the $500 tops," he said. "This means that either these big players adjust their thinking about what a PC is and what the broad market wants or they end up opting out unless they are big players with broad distribution and the ability to create products at low cost and still make a profit."

Rob Enderle, principal analyst and founder of IT research firm Enderle Group, also took issue with Gartner's consolidation forecast. He said both HP and IBM have been showing strong growth in the last quarter and both firms appear to be increasing their investment in this segment. Gateway has also returned to profitability.

"Given [that] 2006 is expected to be a record year for this segment and that HP, IBM, Dell and Gateway are all showing increased strength this year, I'm wondering if Gartner realizes it is 2004, not 2002, they are talking about," Enderle said. "I agree Toshiba is at significant risk, but they have a serious execution problem that I'm sure they still think they can fix. I think [Toshiba] would be vastly more powerful focusing on parts and maybe doing some systems work for others. For instance Dell has wanted Toshiba to build their laptops for some time."

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