Cyrix faces challenges with direct approach

Old-guard semiconductor manufacturer National Semiconductor is now selling its entire product line through its recently launched Web site. The site, which will feature the Cyrix family of microprocessors among other products, will essentially allow do-it-yourself consumers as well as computer dealers and manufacturers to buy chips directly from the company or from identified wholesale distributors.

But, as Compaq Computer learned the hard way, National faces challenges as it attempts to navigate the dangerous waters of placating chip dealers and distributors in the name of offering customers convenience.

National launched the site with the intent of making the lives of chip purchasing managers and design engineers easier, said Phil Gibson, director of interactive marketing for National. Among the benefits: emergency ordering and easier inventory control.

Despite the improvements, National's business partners approach the concept with some skepticism. Deals once made over business lunches and in bars can now take place online, a prospect that makes some distributors and customers uneasy, Gibson said.

"The image I have of a typical purchasing agent is a person with a phone growing out of his ear," said Nathan Brookwood, an industry analyst with Insight 64. "This is clearly a much more efficient way to do it...personal relationships will remain in place, but this will complement that."

National has taken steps to make sure that it doesn't fall into the same trap as Compaq, which upset resellers earlier this year when it announced that it was expanding its Internet-sales effort. Some Compaq computers could be found cheaper online, which did not sit well with the "brick-and-mortar" resellers. Compaq later halted sales of some of its computers through online retailers, as a way of soothing the established resellers.

National is making every effort to include distributors in its online efforts, Gibson said. For example, after typing in a part number, visitors are shown all distributors who currently have the part in stock, Gibson said, along with a link to buy directly from National. Every product is sold at the official retail price; the company offers no discounts for those who buy online. National currently offers links to seven distributors, who are "delighted" with the arrangement thus far, he said.

The rest of National's 50 distributors have shown signs of "consternation," he said, disputing the notion that the site competes with traditional chip distributors and dealers.

"Is it competing, or raising the bar?" Gibson said. Despite the steps that National has taken to keep distributors in the loop, some independent dealers are concerned. "At first they asked, 'How could you do this to me?' They don't like it, but they know it's inevitable."

Although the move online by big players like National may squeeze some distributors, observers believe that it's probably impossible to stop the progress. "There's room for incremental adoption of the technology, but if it proves to be popular, distributors who aren't online will get there quick," Brookwood said. "If National competitors start losing business, they'll get online. The concept will have a chance to prove itself."

Many chip dealers who purchase from distributors are concerned about National stealing their business. National may not undercut them on retail price, but what happens when increased efficiency cuts the retail price so low that it becomes difficult to make money?

Dealers feel the pinch
"It would be good for us to be able to buy that way, but if my customer has access to [the site] I would probably boycott National," said Dale Donnell, head of sales for Computix, a Southern Californian components dealer, who sees National's direct sales as potential competition.

"They're taking money out of my pocket, by taking commissions that I can't-- they're taking food out of the mouth of my kid," Donnell said, estimating that 60 percent of his profits come from commissions.

Donnell noted that with rapidly dwindling profit margins on components like memory and processors, independent dealers can't afford to compete with large manufacturers. "Products that I was selling for $125 three years ago, today I'm selling for $3. Margins are very tight, and any business I lose, hurts."

National has been booking fairly modest sales thus far--the largest order to date was around $3,000--selling to individual purchasing managers and engineers. Many analysts expect that widespread direct sales are inevitable in the semiconductor industry.

"It's a pretty forward-looking move," said Brookwood. "A lot of business in the future will be transacted that way."

Already, rival Intel has expanded handling chip transactions over the Internet. The company books approximately $1 billion per month of chip sales via the Internet and virtually all of the company's sales to Taiwan go via the Web, said Sean Maloney, corporate vice president and director of the sales and marketing group at Intel. Ninety percent of chip transactions will take place through the Web within two to three years, he said.

Gibson expects sales to pick up over the next few years, as other semiconductor companies move online, and buyers are able to build and order an entire system on the Web. Roughly 10-15 percent of all National sales will be conducted online by 2003, he predicted.