Commentary: PC vendors face choices

By Martin Reynolds and George Shiffler, Gartner Analysts

PC manufacturers are preparing for an intense battle for market share in 2001, as some PC vendors reduce profit margin gains to increase market penetration.

Gartner anticipates a price war in the United States in 2001, as direct vendors, such as Dell Computer and Gateway, endeavor to gain market share from Compaq Computer, Hewlett-Packard and IBM. The direct vendors will lower margins to do this, which will cause others to give serious thought about how they run their PC business. Because the ensuing price erosion will spur increased PC buying in other regions of the world, global vendors may also choose to shift their share from the United States to maintain profitability--an option not open to the U.S. national vendors.

Gartner Dataquest estimates that worldwide PC shipments (excluding PC servers) will total 144.5 million units in 2001, an increase of 10.7 percent over 2000 shipments.

While PC vendors must deal with a price war, they will also have the challenge of selling PCs as the U.S. economy slows. The PC industry suffered a nasty surprise in the fourth quarter of 2000 with the downturn in the U.S. economy. Economic circumstances in the United States still appear to be deteriorating, and the slowdown looks to be spreading to the rest of the world. If darker concerns about recessions in the United States and the world economies were to be realized, PC shipment growth could fall into the single digits for 2001.

The industry may be able to stimulate some added unit growth during 2001 in less-saturated markets such as Latin America through judicious price cutting and shrewd marketing campaigns, but poor economic circumstances could undercut those efforts.

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Gartner does not believe that market conditions will improve until 2002. Even then, the industry faces some significant challenges from market saturation. The U.S. PC market is nearly saturated, and Canada and Western Europe are not far behind. Unless the industry can stimulate faster replacement cycles, shipment growth will undoubtedly slow in these markets. Since these countries will continue to constitute 55 percent of the global PC market, this will put a significant damper on industry growth.

Despite the slowing economy and market growth, PC vendors have more options than the stark prospects of merely surviving or going out of business. In some cases, the weaker market even offers some opportunities. For example, low-end vendors such as Emachines can take advantage of the surplus of components to make and sell large batches of inexpensive PCs.

Nonbranded PC makers have a different set of expectations from their better-known peers. For these firms, short of maintaining profits, it will be enough merely to survive.

Big IT vendors, for which PCs do not represent the primary or sole focus, also have options. Falling profit margins will make it difficult for them to continue their capital-intensive PC operations as they are now constituted. Instead of shutting down their PC units altogether, however, these vendors can spin them off, sell them or find partners for them. Regardless of the approach, Gartner does not believe that the major brands themselves will disappear.

For consumers, all of this is good news. Anyone who needs a computer will find bargains.

(For related commentary on 10 ways to save money on hardware, see TechRepublic.com--free registration required.)

Entire contents, Copyright ? 2001 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.