PC makers take steps to ensure supplies

Dell Computer epitomized that trend today, investing $200 million in Samsung. At the same time, Dell inked a contract to buy a supply of flat-panel displays from the South Korean conglomerate worth about $8.5 billion over the next five years. The move follows an investment in Samsung by Apple Computer earlier this year.

The investment, which is actually not the first for Dell, comes as the industry, and Dell in particular, is grappling with a display shortage that has hampered notebook sales for nearly the entire year and seems to only get worse. By investing in Samsung, still reeling from the Asian financial crisis, Dell is insuring itself against future problems.

The company is taking as much as six to eight weeks to deliver notebooks with 13.3-inch and 14.1-inch screens, according to customers, longer than it takes to receive most Dell products. The delays have lingered for several weeks. Calls to Dell's sales staff confirmed this, although one 15-inch Inspiron model is available in just four days. Demand is apparently less for the larger display.

Dell disputed the long lead estimates, saying the longest wait time is four weeks and that models with 13.3-inch displays are available in two weeks from day of order.

"There's like an A list of customers that are protected. In terms of judicious investments to back that, if nothing else, making a show investment to make a commitment to a supplier, that would make some kind of sense for Dell," said Roger Kay, analyst with International Data Corporation.

"This deal is different because it's an important component that, currently anyway, is in short supply. It's crucial to one of many fast-growing parts of our business," said Dell spokesperson T.R. Reid, who later added, "Dell has invested in suppliers before. The scale of this investment, however, is not typical."

Dell in the second quarter chalked up $1.34 billion in notebook sales. Dell's notebook business, which accounted for 24 percent of its computer sales, grew 49 percent during the second quarter.

But Dell could have made even more. The Round Rock, Texas-based PC maker told analysts during its second-quarter conference call it could have sold more notebooks if not for display shortages.

Analysts said Dell is following a growing trend of buying favoritism with suppliers, something that Dell doesn't directly dispute.

"There is the beginning of a trend here, but this mini-trend was started by the fact Samsung desperately needed funding in order to expand their operations and continue to be viable," said Joe Ferlazzo, analyst with Technology Business Research.

Apple Computer in July invested $100 million in Samsung to ensure a steady supply of displays for the iBook.

On a conceptually similar plane, Intel invested $100 million and $500 million, respectively, in Samsung and Micron Technology so that the two companies would invest in equipment for manufacturing next-generation Rambus memory. Microsoft has also subsidized training and certification for many of its service and consulting partners, which some have said helped wean these companies from Novell's NetWare to Windows NT.

Reid would not provide details on the other investments Dell has made with suppliers. If anything, Dell is a fairly secretive, almost insular, company when it comes to letting the outside world in on its financial dealings. The company made its first acquisition ever when it purchased storage specialist ConvergeNet last month for $340 million.

In April, the company bought a stake in then privately held Red Hat software, the first investment in a private firm ever for Dell. Indirectly, the company at the time of the Red Hat investment also owned up to the fact that it had recently, and with almost none of the typical fanfare, formed a venture capital fund, called Direct Invest. CEO Michael Dell has a separate venture firm.

Shortages can hurt Dell
Preference may prove to be key to Dell's "just in time" manufacturing style. The company keeps less inventory than most manufacturers. In turn, low inventories have greatly reduced Dell's operating costs. Dell doesn't get hit as hard by component price reductions or have to endure the expense of extending credit to dealers or distributors.

However, when shortages hit, Dell can get hit harder than others.

Reid said it would be some time before Dell sees a better supply of displays. "Don't expect that the short-term situation changes overnight, but this gives us a preferred status with one of the major suppliers over the long haul," he said.

Dell may reap other benefits from the arrangement, as Samsung is a major supplier of computer memory. DRAM prices are skyrocketing, and there signs of shortages, said analysts.

Analysts predicted other companies would watch Apple and Dell's investment in Samsung very closely. If the PC makers get better access to displays and other components, similar investments might follow.

"But I don't think any company wants to be a key investor in their component manufacturer unless they have to," said Ferlazzo.

Michael Kanellos contributed to this report.