Doubting Dell

texasmonthly.com: Is this story a reaction to all the bad press Dell has been getting lately?

S. C. Gwynne: Dell has been getting nothing but bad press for the past year or so, most of which suggested that the company was losing its edge. Dell was embattled and obviously trying to figure out its own future. So it seemed to me and to editor Evan Smith like a good time to take a larger look at the company.

texasmonthly.com: You traveled to China for this story. What was that experience like?

SG: It really changed the way I looked at Dell, which these days is booming overseas in ways reminiscent of the U.S. market in the nineties. The big question about Dell is, Can the company keep expanding at a double-digit pace? In China you see a big part of the future of the computer industry and the answer, it seems to me, is yes. If you’re going to argue that Dell’s growth phase is over, you also have to argue that it does not have much of a future in China or India. In China it was obvious to me that Dell’s model does work—the 37 percent annual unit growth it is experiencing now is no fluke.

texasmonthly.com: What surprised you most during your reporting for this story?

SG: Dell’s ability to manufacture computers in the U.S. That may seem simple enough, but no one else can figure out how to do that. While Dell has chased all of its competitors’ plants offshore to China with its manufacturing efficiencies, Dell itself opened a brand new plant this year in Winston-Salem, North Carolina. In an era when manufacturing is fleeing this country, you would think that a company making low priced computers would be building them in China or Indonesia or somewhere.

texasmonthly.com: Do you think direct sales will be the dominant business model of the future?

SG: I have mixed feelings about it. You can already see how popular direct-selling is over the Internet. My daughter recently bought a pair of custom Nike sneakers on the Web. There was no middleman, no retailer. Just my daughter and Nike. Dell is by far the largest direct Internet seller in the world and has been for a long time—something like $40 million a day. But while the direct model is a great idea, it is very hard to execute. If it wasn’t, you’d have lots and lots of companies just like Dell, just like you’d have lots of companies like Wal-Mart. Most of the company’s success relies on precise execution of the model. It is very hard to imitate. I think you will see Dell’s competitors like HP and Lenovo do more and more direct selling, but I don’t see them embracing the direct model the way Dell does.

texasmonthly.com: You leave the future of Dell open-ended, but do you personally think Dell is in a better position than it was in the nineties?

SG: No, it is not in a better position. It has much, much stronger competitors now, and it no longer enjoys the phenomenal profit-margin advantages it had in the nineties. On the other hand, it has a lot fewer competitors too.

texasmonthly.com: What is Dell’s greatest weakness?

SG: Right now critics are focusing on laptop computers. Dell has stumbled in that area several times and has lost some ground to HP. Laptops are easier to buy in retail stores and there is evidence that growing percentages of people prefer to buy them there. Dell, of course, does not sell through retail stores. Dell also does not enjoy the same cost advantages with its laptops that it does with desktops and other products. Whether that is a long-term or short-term problem is hard to say.

There is also the question of management. The Wall Street Journal just wrote a story suggesting that Dell’s problem might be its CEO, Kevin Rollins. The company has certainly not done well since Rollins took over. As I wrote in my story, the company lost a lot of its best talent in the last five or six years because so many of them got rich and left. And lots of other managers were promoted for the wrong reasons during the go-go years of the nineties. The company has to work on that, and it is.

texasmonthly.com: Do Wall Street and the business media have it all wrong?

SG: No, not all wrong. But there is a clear pack mentality, and we have seen it before. Dell was not as good as the media said it was a year and a half ago ( Fortune’s cover story, for example), and it is nowhere near as bad as these stories are now suggesting that it is. Dell is a very good company. It has taken some hits. It has some very good, very revved-up competitors. We’ll see what happens.

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