Dell Faulty PC Case Could Become PR Nightmare

 
 
By Nicholas Kolakowski  |  Posted 2010-06-30
 
 
 

Dell Faulty PC Case Could Become PR Nightmare


Dell faces a potentially massive public-relations battle in coming weeks, as recently unsealed court documents allege that the manufacturer knowingly sold nearly 12 million defective computers between 2003 and 2005. The OptiPlex PCs in question reportedly had a failure rate of 97 percent over a three-year period, due to faulty capacitors manufactured by Japanese supplier Nichicon.

Those defective computers are the focus of an ongoing lawsuit filed against Dell in 2007 by AID (Advanced Internet Technologies). Legal documents in the case, recently unsealed and profiled in a well-circulated June 29 article in The New York Times, described Dell employees' alleged attempts at a cover-up after the computers, which were sold to major enterprises such as Wal-Mart, began to break down.

"Dell documents indicate strenuous efforts to attribute OptiPlex failures to customer use and site conditions even when Dell knew that defective capacitors were to blame," reads a plaintiff's memo, filed May 28 in U.S. District Court for the Eastern District of North Carolina, Western Division. "Dell documents indicate that Dell concocted 'individualized' solutions to what Dell knew to be an 'industrywide' problem that affected all customers alike."

The memo continued, "Dell documents show that its competitors, notably Hewlett-Packard, and even Dell's suppliers who provided the defective capacitors, had proactively communicated the capacitor defect to their respective customers. Dell consciously avoided emulating this example. Instead, Dell orchestrated a policy of obfuscation."

Furthermore, it added, "Dell was providing limited warranties and obtaining consequential damage waivers from customers knowing that its computers were defective and that replacement parts were continually in short supply."

Although the shipments of defective computers took place years ago, the New York Times piece and attendant media buzz-more than 100 articles had been written about the topic by the afternoon of June 30, according to Google News-present headaches for Dell at a time when the company is trying to reverse negative perceptions. The manufacturer is currently in negotiations to settle allegations of financial misconduct brought by the Securities and Exchange Commission.  

"The Nichicon issue is old news, and the implication that this situation affects Dell currently is incorrect," a Dell spokesperson wrote in a June 30 e-mail to eWEEK. "The AIT lawsuit is three years old, and the Nichicon capacitors were used by Dell suppliers at certain times from 2003 to 2005. Dell worked with customers to address their issues, and Dell extended the warranties on all OptiPlex motherboards to January 2008" in order to address the issue.

Moreover, the spokesperson added, "Faulty Nichicon capacitors affected many manufacturers. It is speculation to suggest that Dell was affected more than other companies. The AIT lawsuit does not involve any current Dell products."

Spotlight Falls on Dell


 

Nonetheless, public focus on the issue could hurt Dell, according to analysts.

"The problem for Dell is one of image, and the reason this is being done is to force Dell to the table to settle for a big number," Rob Enderle, principal analyst of the Enderle Group, told eWEEK June 30. "In effect this is legal blackmail and, unfortunately for Dell, a very textbook and successful strategy."

Enderle added, "Even though the problem is half a decade old, it reflects on the company's brand and image badly as long as it is in ink, and it is in the plaintiff's best interest to keep it in barrels of ink." Engaging AIT in open court, he said, would ultimately be the best solution: "The judgment will likely be far less and the combination of litigation cost and return become unattractive to other potential litigants."

It would also serve as a very public sign that Dell continues to clean its house and address issues.

But whatever the final outcome, Enderle wrote, the lesson for Dell and other companies is clear. "This does showcase the risk associated with trying to cover up a problem and becoming excessively cost-focused." The ramifications go far beyond IT: "This issue was caused by the same kind of decisions that led to the BP oil spill and the initial inadequate response. Excessive focus on reducing costs and a big attempt to contain the bad news created a big problem and made it much worse."

Now, the longer the trial, the more ink generated over Dell's corporate issues.

"Once the trial's under way, there'll be contentions of fact right along the line," Roger Kay, an analyst with Endpoint Technologies Associates, told eWEEK June 30. "Some of the details are things that only AIT could verify. It could be pretty nasty."

One point in Dell's favor, Kay said, was the lack of a true catastrophe related to the faulty capacitors. "A capacitor leaking, that could potentially cause ignition, which could lead to toxic fumes; you breathe those fumes and something bad happens," Kay said. "That's the sort of thing attorneys like to see. But here, that sort of smoking gun doesn't really exist."

AIT does cite economic losses, however, from the "high incidence of failures" associated with the 2,000 OptiPlex PCs it purchased from Dell. The lawsuit alleges OptiPlex failures at other companies, including Wal-Mart, the Mayo Clinic, Wachovia, Merrill Lynch, the University of Texas and a law firm retained by Dell.

Dell Tries for a Turnaround


 

This public attention comes just as Dell has been trying to engineer a rebound. During a June 24 gathering at the company's headquarters for financial analysts and media, CEO Michael Dell described the company as focused on boosting its traditional PC business, where it has fallen behind competitors such as Hewlett-Packard and Acer in terms of total shipments.

"We are feeling much better about our outlook this year in our commercial business, which is the bulk of our business," Dell told the analysts. The company estimated that its commercial PC business is worth some $46 billion annually, although it has also focused recently on consumer electronics such as smartphones and tablets. 

Perhaps the brightest light at the end of Dell's tunnel, however, is the universal need for a tech refresh; many enterprises and small and midsize businesses, grappling with slashed IT budgets during the global recession, delayed upgrading their now-aging hardware and operating systems. As money begins to trickle back into the economy, many of those companies have been slowly replacing their years-old systems; companies such as Microsoft, which is relying on increased sales of Windows 7 to boost its own bottom line, have noticed the resulting increase in commercial IT spending.

Dell could also benefit. "Given Dell's outsized exposure to the strengthening commercial PC market ([about] 67 percent of client revenue) and modest exposure to Europe ([about] 25 percent of revenue), we are not surprised that Dell is blessing consensus numbers for FY11," read a June 24 Raymond James research note.

A part of any Dell turnaround would likely need to involve settling its past business-which means closing out the AIT lawsuit, for better or worse.

"I would call [the case] a flesh wound," Endpoint Technologies' Kay said. "It's not life-threatening to Dell, but it needs to be treated immediately. The damage is to Dell's reputation."

Rocket Fuel