Michael Dell is still struggling to reclaim his company’s former glory, and the latest cutbacks show he still has a long way to go.
Dell (DELL) said Monday that it will close an Austin, Texas plant that makes desktop PCs. It’s just the latest step in a plan management laid out nearly a year ago, in which the company plans to shed 8,300 workers and save $3 billion in costs. The remarkable thing about Dell’s announcement isn’t the simple shuttering of a U.S. manufacturing facility – that sort of thing is happening across the country every day. It’s how precipitously Dell has fallen.
Rewind seven years, and Dell’s fortunes looked markedly different. Hewlett-Packard (HPQ) was looking to bail out its money-losing PC business by buying rival Compaq. Apple (AAPL) was a niche player casting about for ways to gain market share, and preparing to open some risky retail stores. Dell, meanwhile, was riding high. Its ultra-efficient system for manufacturing desktops, anchored by that facility in Austin, had made it the envy of the industry.
Because of Dell’s low-cost manufacturing model and close relationships with suppliers like Microsoft (MSFT) and Intel (INTC), it held enormous sway over the PC market. When Dell wanted to gain share, it slashed PC prices and forced competitors to sustain painful losses. When Dell wanted to boost profits, it called off the price wars and benefited more than anyone. From an observer’s point of view, it seemed as if Michael Dell could simply pull a lever from his executive suite, and turn the market upside down.
But the world was changing. Apple CEO Steve Jobs was among the first to see it – he declared in January 2003 that the future was in laptop computers, not desktops. Critics saw this prophesy as self-serving at the time; the initial buzz had died down from Apple’s iMac desktop, and Jobs had a new line of laptops to sell. But the pronouncement from Jobs proved to be more than bluster. The PC was indeed evolving; no longer would it be a utilitarian gray box in the corner of the home or office – it was becoming a portable expression of the owner’s lifestyle and personality.
As the PC became more of an accessory than an appliance, people began to shop for them more like they shop for clothes, and less like they shop for water heaters. That meant seeing laptops in the store and touching the finish, not just buying them on spec from Dell.com. The result: the shift toward notebooks gradually erased Dell’s desktop manufacturing advantage, and played to the strengths of players like HP and Apple. Because of its size, HP could get the best deals from the Asian manufacturers who assemble substantially all of the world’s laptops, including Dell’s. Because of its design savvy and retail vision, Apple was ready to appeal to newly image-conscious PC buyers. Today HP is the top-selling PC maker in the world, mostly on retail sales of its laptops; Apple is among the fastest-growing computer brands.
Which brings us to Dell’s announcement that its once-fearsome Austin manufacturing facility will shut its doors. Lynn Tyson, who handles investor relations for Dell, plainly outlined the reasons on a corporate blog Monday: “Industry forecasts for the rate of growth of desktops have declined from 10.8 percent to 3.6 percent,” Tyson wrote. “And the desktop to notebook mix in the U.S. has declined from a 70/30 split in 2005 in favor of desktops to a 50/50 split today.”
It’s up to Dell to show that it can develop new advantages and mount a comeback in a changing market. If it ever was as simple as pulling a lever, it’s certainly not now.
