IBM Pushes PCs Out Door

Decision due to weak economy, rival vendors' less-expensive PCs.

IBMs decision last week to farm out the manufacturing of its desktops marks the latest bid by a PC maker to rein in expenses amid weak sales and eroding profits. But the growing emphasis on cutting costs may lock away the key to the industrys resurgence—innovation.

Overall, PC makers have become averse to gambling on new technologies and designs, with the notable exception of Apple Computer Inc., which last week unveiled a radically redesigned iMac.

"With the industry trying to imitate Dell [Computer Corp.]s low-cost model, theres no interest in taking risks," said Roger Kay, an analyst for International Data Corp., in Framingham, Mass. "Even Dell has been burned by taking minor risks with new form factors, different colors [and so on]."

Corporate customers have increasingly come to see PCs as office supplies, noting little difference between brands and focusing more on price.

"PCs are all pretty much the same inside the box," said Mark Bizub, IT manager for Kim Lighting Inc., in City of Industry, Calif. "What it comes down to now is finding ones that do what I need at a reasonable price."

Because of falling PC prices and contracting profits, big computer makers that once relied on PC sales are scrambling to save their businesses by slashing expenses via layoffs and mergers or by exiting the PC market.

Hewlett-Packard Co.s proposed merger with Compaq Computer Corp. is the most notable symbol of the trend. While the last year has been gloomy for most PC makers, it was good for Dell, which rode a price war to the top spot among global PC vendors. Its profits have fallen, but the Round Rock, Texas, company has seen its market share expand as it lures cost-conscious buyers.

"Were really down to bare nails as far as our spending right now, so weve got to make the most of our dollars," said Sam Avera, technical services manager at the Aging and Adult Services Administration, in Olympia, Wash., which last year switched to leasing PCs from Dell.

And although IBM may produce good PCs, Avera said, corporate customers are becoming increasingly unwilling to pay a premium for them. "IBM must realize that the economy isnt all that great, and outsourcing is probably the best way for them to go to enable them to cut their prices," he said.

IBMs PC sales have suffered for years from the encroachment of rivals less-expensive PCs. The Armonk, N.Y., company was replaced as the worlds top PC vendor by Houston-based Compaq in the early 1990s.

IBMs problems were most evident in 1998 and 1999, when analysts said the companys PC division lost more than $1.5 billion. It wasnt until October 2000 that IBMs PC division reported its first profitable quarter in more than two years. But that coincided with the beginning of an industrywide PC sales slump that forced deep cutbacks and layoffs at all major U.S. computer makers.

IBM officials conceded that saving money was the driving factor behind its decision to turn over its PC making facilities in the United States and Europe to Sanmina-SCI Corp. in a three-year deal valued at $5 billion. While the company stressed that PCs are still important, IBMs focus in recent years has shifted to services and support, from which the company draws a majority of its revenue.

While such cost-cutting measures can help companies weather downturns, its innovation that will reinvigorate the industry.

"You never save your way out of a recession," Intel Corp. CEO Craig Barrett told developers at a gathering last year. "The only way you come out of a recession stronger than when you went into it is by creating great new technology, great new products."