Aggressive price moves from top-tier PC vendors and shifting computer component costs are forcing second- and third-tier competitors to shake up their businesses to remain competitive.
As name-brand PCs fall below $100 after ISP rebates, and memory prices soar, smaller vendors are finding it hard to compete with the likes of Compaq, Hewlett-Packard and IBM -- resulting in companies filing for bankruptcy protection, merging with another small vendor, or placing themselves on the selling block.
Build-to-order (BTO) manufacturer Proteva filed Chapter 11 in a Chicago federal bankruptcy court August 30 and is in talks with several potential buyers, according to the company.
Monorail is seeking new financing and is up for sale, although company president/CEO Andrew Watson claimed the firm's situation is due to excessive growth and not industry turmoil. Racer PC is about to merge with RS1 Data of Los Angeles. And CTX exited the computer business in May to focus exclusively on monitors after Taiwanese parent Chuntex filed Chapter 11 bankruptcy.
Robert Luke, former CTX sales VP and current sales VP for Custom Computer Group (CCG), said, "The retail environment is very difficult unless you can find a way to deal with excess inventory, price protection and return of merchandise. The depreciation value of the returns is so great that after a quarter or two, you put yourself in a vulnerable situation." Luke also said refurbishing is important, and "very few companies have a good grip on that."
Executives at AMD attribute the recent upheaval in the lower-tier market to pressure from the top-tier players. "Tier-one PC companies have been more aggressive than ever in their attempts to capture market share," said sales and marketing VP David Sheffler. "The opportunity in that space is changing."
"The phenomenon of tier-two and-three players coming in and out of the market has been going on for a number of years," Sheffler added. "Look at Leading Edge, Videotech, TechMedia, Acer and the old CTX. For these kinds of companies to be successful they have to spot market shifts faster and stay ahead of the curve. E-machines is currently in that category."
Several industry members said the woes of small vendors are aggravated by escalating memory prices and exacerbated by the recent earthquakes in Taiwan that caused more chip shortages.
"Clone vendors are struggling now because of memory pricing. They can't compete with Compaq, IBM and HP because the big guys buy on contract up to 120 days out so their memory prices are locked in. So the clones are having a terrible time," said one computer buyer.
Racer PC's sales and marketing VP Steve Morris said, "We order product on a just-in-time basis, so we are hurt in the short term in that we have to raise prices or take some risk. The big guys have a pipeline for awhile at the lower price, but it will run out. And when the prices come back and Taiwan corrects the situation, we will be able to be much more aggressive, and the top tier will have the pipeline at the higher prices."
Proteva said it is in talks with potential buyers but would not comment further. According to Proteva's retailers and competitors, a top prospective buyer is Systemax, which operates Global Computer Systems, TigerDirect and Midwest Micro, among several other companies.
Monorail said its headaches are related to its growth rate of 300% or 400% over last year.
"In our fiscal quarter ended in June we did more business than we did our entire previous year, and in our second fiscal quarter ended in September we were 170% above our first quarter," said Watson. "The bad-news part of that is we have to recapitalize the company, and we are looking at a variety of paths to do that. Our credit is fine for a company of our size a year ago, but today we just far exceed our credit facilities."
Watson said Monorail has generated "some interest by larger companies in the way we do business, in our logistics, our ability to do BTO and direct-ship, and our business model of being able to operate effectively on 6% SG&A [sales, general and administrative expenses]. Our sales per employee is about four times what Dell's is. Our inventory turns are sizeable, probably 50% better than Dell's inventory turns."
In its two-plus years in existence Monorail has gone through several business-model permutations. The company helped kick off the sub-$1,000 market in 1997 with an all-in-one PC that landed in several retailers, including
CompUSA. In 1998 it dumped the entry-level consumer market and attempted to attract the SOHO market with a business PC line. Monorail then reverted to the consumer market but did not return to its low-cost roots.