Dell Freezes Over
The unthinkable has happened: the once impregnable computer behemoth has shown itself to be just another company—susceptible to the kinds of competitive pressures, stock-price plunges, and morale problems from which it was once immune. (To say nothing of laptops flambé.) Now what? Not surprisingly, a reboot is under way.
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Inside, it looks nearly identical to Dell’s manufacturing facilities in the U.S. Conveyors bear unassembled computers through a gantlet of blinking lights, industrial hoists, tracking screens, and stacks of inventory so small that it seems impossible that the plant can produce seven million units a year or that it can turn out a computer, from the arrival of materials to shipment on the dock, in less than three hours. But it doesn’t take long to realize what a vastly different market this is and to see the astonishing potential wealth that lies within. While analysts in the West were sounding alarms in the first quarter of 2006 largely because of weakness in U.S. consumer sales, Dell’s (mostly corporate) unit sales in China were jumping 40 percent, a growth rate reminiscent of U.S. and European markets in the nineties, at their most incandescent. Dell now controls some 10 percent of the market (behind Chinese companies Lenovo and Founder but ahead of Hewlett-Packard)—a share it reached faster than it did in any other foreign country, including the U.K. and Australia, in both of which Dell now ranks first. The stark truth is that if China’s computer market continues to grow at its present rate of 25 percent a year and Dell ends up with 20 percent of it—a reasonable assumption, since that’s its current share of the global market—Dell China in ten years could be nearly as big as Dell worldwide is today. (The U.S. market, by contrast, is growing at only 5 to 6 percent.)
All this vast potential was also on display in a meeting I attended in one of the plant’s conference rooms: It was both a corporate pep talk and palpable evidence of the cultural revolution that Dell and Rollins are driving deep into the far-flung ranks of the company. A slender 45-year-old named David Miller, the CEO of Dell in China, spoke to a crowd of some five hundred Chinese workers. He began with praise: Dell was growing like gangbusters in the Asia-Pacific area; Dell’s revenues were up 30 percent, a rate two times that of the competition; China revenues were up 30 percent; market share was up. Next he addressed the company’s recent problems, explaining that Dell had lost some of its cost advantages to competitors and had acknowledged its customer service woes, pledging, “We will never again sacrifice the customer experience for profitability.”
Then he turned to his most important subject, at least as measured by the time he spent on it: making Dell a better place to work. “We want to make sure you really want to come to work every day and that you want to stay … We want to be motivating, not intimidating… Employees can’t feel fear.” He talked about a more nurturing corporate culture in which there are such things as “individual development plans” and “career path management.” Then he said, somewhat surprisingly, “We feel shame that our turnover is as high as it is.” This is the real point of the Winning Culture initiative. As Dell said, they are not doing this to make people happy. (Ironically, Miller himself became part of the turnover in August, becoming one of five high-ranking Dell executives to join Lenovo in the past two years.)
China also illustrates some of the critical advantages Dell has over its competitors. The ability to maintain these advantages—and the willingness of investors to believe they can be maintained—is the key to Dell’s future. They start with what people in the industry refer to as the supply chain: the companies who make the components that go into Dell’s computers, many of which are located in China. The old model was vertical; one company made all of the parts and then assembled them. In the new, horizontal model, microprocessors, motherboards, hard drives, and LCD screens are made by an ecosystem of companies that work together. Managing your supply chain means getting suppliers to deliver exactly what you want (i.e., cheap, innovative, state of the art) exactly when you want it, at the lowest price. Dell has long been better than anyone at this and is notorious for its hardball tactics with its suppliers, often virtually dictating what it will pay.
But Dell’s biggest advantage lies in what happens to its products once they leave the factory. In Dell’s system, computers assembled at the factory are shipped directly to the customer, arriving in a few days. All other computer makers decide which products they would like to make, then make millions of them and send them out into what is known in the industry as the channel: the complex and highly interdependent network of distributors, resellers, and retailers who actually sell the computers. Because no one has ordered these computers, they must, in effect, sit on a shelf until someone buys them. This takes between 30 and 45 days. The problem is the very significant cost, peculiar to the computer business, associated with the lag time: These sorts of products devalue by as much as 1.5 percent per month.
In the nineties, Dell had a market-share edge over its competitors of as much as twenty percentage points, which allowed it to undercut them at will. But that gap has narrowed. Part of this is just the law of evolution: The fittest competitors (HP, Lenovo, Apple, Acer) have survived against one of the most aggressive companies in the world, and they have done so partly by copying Dell’s own practices. They have tightened their supply chains, squeezed costs out of the manufacturing process, and cut the amount of time that their products sit on shelves. HP, Dell’s principal competitor in computer systems, is the best example of this. “We have reduced our costs over the last five years,” says John Dayan, a marketing vice president in HP’s Personal Systems Group. “It has been done, honestly, with a lot of real hard work day in and day out. We have made significant improvement in days of material in inventory, and it now takes under three hours to manufacture a PC.”
Most industry analysts agree that Dell’s edge is shrinking, though they differ on just how much. “The lack of inventory is definitely an advantage that Dell retains,” says Roger Kay, the president of Endpoint Technologies Associates, a leading consultant to the computer industry, “and it retains some but not all of its manufacturing advantages. But in the supply chain area, rivals have caught up and equaled Dell and in some cases surpassed it. This is partly because everyone is using the same Asian manufacturing partners.” Kay also believes, as do many other analysts, that there has been a resurgence of good old-fashioned retail computer buying in the past few years, and that in countries like China, Dell’s direct model is not likely to work as well as it did in Europe and the U.S. Such buying habits favor a smaller brand like Apple, which, while holding only 2.5 percent of the global market (compared with Dell’s 19.3 percent), has shown that it is still possible to sell glamour in a commoditized business—something that Dell’s recent advertising campaign seems to understand.
I KNOW WHAT you’re thinking: Given how affordable it is at the moment, relatively speaking, should you buy Dell stock?
If the company’s supporters are right, Dell is going to start expanding again and will get quite a bit bigger than it is now. With a mere 10 percent annual growth—tortoiselike by its previous standards—Dell will reach $100 billion in revenues within five years, at which point its share price, now stuck in the low $20’s, will be a good deal higher than it is today. Emerging markets like China and India are the best arguments for this.
If the Wall Street skeptics are right, the company’s direct model will look increasingly dated, and Dell will settle into a period of respectable but unspectacular growth befitting a mature, middle-aged company with an unremarkable stock. The market today is full of such companies, who—compared with sexed-up sweethearts like Google—bore investors to death. It is not coincidental that Dell, Intel, and Microsoft, the big three of the computer business for the past twenty years, all languish in the same market doldrums. Between May 1999 and July 2006, Dell’s stock was off 53 percent, but Intel’s was off by the same percentage and Microsoft’s was down 45 percent.
Whatever your perspective, there are certain cold realities that the stock market sometimes seems to forget. Dell still holds a significant built-in cost advantage over its rivals. No one argues with that. Dell is still a lean, highly motivated, and dangerous foe. No one argues with that either. It is, measured in purely objective terms, one of the best companies in the world, as Fortune noted in March 2005 when it named Dell the “most admired company” in America. Its sales overseas, especially in Asia, are incontrovertible evidence that its model works in the world’s fastest-growing markets. Even as its customer service flagged in the U.S., its ratings among its corporate customers—which account for 85 percent of its business—never changed. In the first quarter of 2006, an influential survey of corporate chief information officers rated Dell number one in customer satisfaction in desktops and notebooks and number two in servers. And beware of a market that insists on seeing gloom and doom everywhere and targeting former highfliers with its ire. Buried in this summer’s news of plunging profits at Dell was another piece of information that media like the New York Times failed to note: Though Dell took a major earnings hit, its global PC market share (which includes desktops, laptops, and low-end servers) rose by a full point from the first quarter, from 18.2 percent to 19.3 percent, while HP’s global share fell from 16.5 percent to 16 percent. This important fact—possibly the single most important fact in Dell’s recent past when looking at the company’s long-term prospects—was unaccountably overlooked. There are two final things to bear in mind. First, Dell has always been at its best when it is under attack. This was true in 1989, 1993, and 2001. Second, over the past 22 years, everyone who has bet against Dell has lost, and lost big. The Cassandras have never won, except in the very short term, in spite of whole gangs of market soothsayers who have emerged during tough times to pronounce Dell’s run over. Retired admiral Bob Inman, a former Dell board member who is now a prominent Austin venture capitalist, recalls a day in 1991 when “people thought I was crazy to buy Dell stock. The stock had dropped, and I happened to have the resources and bought twenty-five thousand shares on the open market. The Wall Street Journal made fun of me for it.”
Inman had the last laugh then. Whether Dell has it now is the proverbial $64,000 question, except the answer is worth quite a bit more.
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