HP holds on to PC lead by a thread

Through its merger with Compaq Computer, Hewlett-Packard has become the world's largest PC manufacturer for the first time, but the distinction might be short-lived.

HP, which finalized its merger with Compaq on May 3, shipped more PCs than any other PC maker in a second quarter that was flat overall, but the company's margin over rival Dell Computer is razor thin, according to reports from research firms Gartner and IDC.

Palo Alto, Calif.-based HP held 15.5 percent of the worldwide market in the second quarter, while Dell held 14.9 percent, Gartner said. IDC put HP's worldwide market share at 15.1 percent and Dell's at 14.8 percent.

Meanwhile, Dell is growing while HP continues to contract. Dell grew shipments by 15.5 percent, compared with the same quarter a year ago, while HP's shipments declined by 16.2 percent, according to IDC. Both HP and Compaq have been losing market share, but the declines accelerated in this quarter.

"I think it's going to be a close call next quarter," said Charles Smulders, analyst with Gartner. "Much will depend on HP's ability to integrate its business quickly and move forward with new products. I think the third and fourth quarters will be a better representation of the merger."

Being the largest PC manufacturer comes with more than just bragging rights. Companies can tout that honor in their marketing pitches to corporate customers and resellers. Size matters, too, when it comes to buying components. Intel, Microsoft, Samsung and others regularly give volume discounts to their largest customers, and the larger purchasers typically qualify for the steepest discounts.

In the second quarter, the PC market was essentially stagnant. Worldwide shipments of desktops, notebooks and servers containing processors from Intel or Advanced Micro Devices declined by less than 1 percent compared to the same period a year earlier, according to Gartner and IDC. In total, 31.1 million PCs left factory doors in the quarter.

Like HP, IBM, Fujitsu-Siemens and NEC--the third-, fourth- and fifth-largest PC makers respectively--all saw their worldwide shipments decline.

Sequentially, PC shipments dropped 7.8 percent, according to IDC, and 8.5 percent according to Gartner. PC shipments typically decline from the first to the second quarter, but the drop was greater than usual or expected due to a slowdown in consumer buying and a better-than-expected first quarter. IDC, for instance, expected a drop of 6.2 percent.

In the United States, PC shipments increased 1.8 percent from the second quarter in 2001, according to IDC. Dell remained No. 1 in the country with the 26.8 percent of the market while HP came in at No. 2 with 17.7 percent. Dell grew by 19.3 percent, while HP shipments declined by 13.2 percent. Apple jumped into the top five U.S. makers as a result of HP and Compaq merging.

Although shipments in the second half should pick up, the increase will be moderate.

	HP leads by a hair Hewlett-Packard grabs the largest piece of the PC market worldwide for the second quarter. Yet Dell's not so far behind.
	Company				Market share (%)				Growth (%)
	HP				15.1				-16.2
	Dell				14.8				15.5
	IBM				6.3				-8.8
	Fujitsu-Siemens				3.8				-8.8
	NEC				3.2				-8.4
	All				100				-0.5
	Source: IDC

The second quarter's performance "casts greater doubts over the potential for a fourth-quarter recovery," Smulders said, adding that the PC makers must contend with "continued economic uncertainty and accounting scrutiny, which have unnerved investors and I think are driving large corporations toward greater fiscal conservatism."

Nonetheless, he added that "we see great potential for (PC) vendors to take advantage of DVD (drives) plus graphic chip technology to deliver some compelling systems...That may create some buzz around the PC."

"We're not out of the woods yet. Overall things are roughly in-line with what we expected," said Loren Loverde, an analyst with IDC, which predicts that shipments may increase by approximately 5 percent over the previous year. "But we've got to have some seasonal increases in the consumer space...and we want to see a little more commercial activity."

IDC's Roger Kay said that corporate spending has picked up a bit, but very moderately. In the United States, for instance, IBM saw shipments rise by 4.4 percent.

Recordable DVD drives could become a strong suit for HP. The company became one of the fastest-growing PC makers in 1999 and 2000 by being an early promoter of CD-RW drives for recording CDs. HP is one of the main forces behind the DVD+RW standard for recording DVD disks.

On the other hand, HP will face the particularly difficult proposition of differentiating the look, feel and capabilities of its consumer PC lines, the HP Pavilion and Compaq Presario. It will have to create different usage models for the machines, but make them as similar as possible inside to cut costs.

The merger also continues to take its toll, but the pressure should ease soon. In the past few quarters, HP and Compaq were shrinking by 7 percent to 8 percent in comparison to the overall market. In the second quarter, the relative rate of decline doubled.

"This was worse than prior performance," Loverde said. "I would expect that, of all the quarters for the merger, this (the second quarter) is going to be one of the toughest ones."

Until the merger with Compaq, HP was ranked third among PC makers. Dell overtook the top spot from Compaq in the first quarter of 2001. HP said that it would become the largest PC maker in the world by virtue of the merger. This is the first quarter HP has been allowed to count Compaq's shipments as it own.

News.com's Michael Kanellos contributed to this report.