06/17/96 LAPTOPS: SUDDENLY, IT'S 'PRICE, PRICE, PRICE'

LAPTOPS: SUDDENLY, IT'S 'PRICE, PRICE, PRICE'
As mobile machines go mainstream, everyone wants in
For the past few years, the laptop computer business has been the choicest place in the PC industry. Margins were hefty even if growth was slower than in desktops. The difficulty of engineering lightweight machines kept competition tame. In other words, it was Fat City for a tried-and-true threesome that dominated the business--Toshiba, Compaq, and IBM.
This year, all that is changing. Small- business and home-PC buyers--whose purchases have lifted the desktop market for the past four years--are now snapping up laptops. Larger businesses that once bought laptops only for traveling workers are buying portables in place of desktops. New players, including Japanese giants Hitachi Ltd. and Fujitsu Ltd., are jumping in, and prices are dropping.
``SOLE MACHINE.'' On June 4, the already volatile market got another jolt: NEC Corp. announced that it will merge its international PC operations with Packard Bell Electronics Inc., producing a laptop giant. The combination of NEC's Versa line and laptops made by Packard Bell's Zenith Data Systems unit should grab second place in world sales from Compaq this quarter, according to International Data Corp.
NEC's timing is impeccable. Analysts say worldwide laptop sales should grow 28% this year, to 11.5 million units--twice the growth rate in desktop PCs. Giga Information Group estimates that portables will account for 35% of PCs sold by 2000, up from about 26% this year. ``The notebook used to be a complementary product,'' says Steve Lair, vice-president of marketing and sales for portables at Texas Instruments Inc. ``Now, it's the sole machine.''
The downside of having laptops go mainstream, though, is that the business will look more like the desktop market: crowded, cutthroat, and less profitable. While laptops still require more engineering than desktops, building them is now less of a black art. There's an expanding supply of off-the-shelf components from Japan and Korea. And low-cost Taiwanese factories stand ready to crank out whatever Japa-nese and Western computer companies dream up. Chipmaker Intel Corp. is helping, too. It sells chip sets that make designing Pentium portables easier. Next year, it plans chip modules that will make it possible to move to more powerful proc-essors without redesigning the entire laptop.
It all adds up to a faster, less forgiving market. In the past, if IBM or Compaq or Apple bobbled a notebook introduction or couldn't keep dealers supplied, the company might fall behind for a few months but could count on quickly regaining share. Now, with such insurgents as TI, AST, and Hewlett-Packard ready to pick up the slack, big players can't afford to fumble.
Nor can they afford to set high prices. In the past six months, prices have been falling by 3% to 5% a month, according to TI's Lair. Margin pressure prompted Epson America Inc. to exit and convinced Digital Equipment Corp. to stick to a corporate niche. Analysts say margins in the crowded midrange (units selling for $2,000 to $4,000) should drop, from around 25% to near 20%. ``It will be price, price, price'' for the bulk of the market, says Dataquest mobile computer analyst Michael McGuire.
TI started this price war, and now Hitachi is joining in. Using laptops to lead its comeback into the U.S. PC market, it vows to keep prices 10% below those of laptop leader Toshiba. ``We need to be in the top three'' within four years, says David Hancock, president of Hitachi PC Corp. To help, Hitachi has alloted $30 million to promote its machines. TI has an even more ambitious plan. After two years of grabbing share with low-priced models, the company could wind up ``on the cusp of third'' in sales this year, says Lair.
Later this month, Fujitsu, Japan's No.1 computer maker, will also reenter the U.S. It has three notebook lines--Monte Carlo, Milan, and Montego--and says it will spend $21 million to promote them. Its goal: 55,000 machines by Dec. 31 and a shot at grabbing 5% of the market in three years.
Other laptop contenders include Hew-lett-Packard and Dell Computer Corp. HP used superior logistics to vault into the top six of desktop PC suppliers. Now, its stated goal is to be in the top five in notebooks by 2000. ``Privately, we're more ambitious,'' says Frank L. Cloutier, general manager of the mobile computing division. Dell reentered the notebook business in 1995, after a three-year hiatus. It says laptop sales are running at a $700 million annual rate, partly because it filled orders when IBM, Compaq, or Toshiba could not.
These days, PC leaders dare not skip the laptop business. Indeed, they're rushing to meet the needs of corporations that want laptops that do desktop duty, too. Such customers as Pacific Gas & Electric Co. and Wells Fargo & Co. already spend more on laptops than on desktop PCs. ``People are deciding not to upgrade their desktop and instead are going to a laptop,'' says John Danielson, PG&E's vice-president for computer and telecom services. So laptops are gaining built-in network connections, big screens, and other features, such as CD-ROMs. By yearend, some will have two gigabytes of storage and screens that are the equivalent of a 15-in. monitor.
``THIN-WIDE.'' IBM, a top supplier of corporate computers, is scrambling to restart its notebook business. Instead of emphasizing pricey models with exotic technologies, ``we are putting a lot of effort into getting very competitive in the $2,000 to $4,000 range,'' says IBM Vice-President Per Larson. It's also using more off-the-shelf parts to prevent the shortages that helped drive its market share from 13% in the first quarter of last year to 8.2% this year. IBM's new line, which includes a ``thin-wide'' design only 1.2 in. thick, has a lavish $45 million promotion budget.
Compaq also is in recovery: Its first quarter share is 9.4%, down from 12.2% last year. Starting on June 17, it will replace the entire LTE 5000 and Contura lines with a dozen new machines. The first will be a midprice line that includes an ultrathin design. Part of Compaq's plan is to use massive manufacturing capacity as a competitive edge. Already, Compaq beat IBM and HP to a 1,900-unit order from Eli Lilly & Co. by guaranteeing delivery when the rivals couldn't.
Apple Computer Inc., the leader back in 1993, has dropped to sixth place, and it won't have the new products it needs to stage a comeback this year. ``If we hold steady, that'll be good,'' concedes Steve Andler, Apple's Powerbook marketing chief.
That leaves Toshiba the untarnished leader in laptops. Last year, by enlisting retail chains such as Best Buy, it saw its market share jump by a third, to more than 25%. This year, Toshiba is aiming at 35% growth. One new tack is to add desktop machines so it can sell to corporations that want both from one source. That may be necessary now. But at the rate that laptops are evolving, such hairsplitting distinctions may soon be passe.
By Gary McWilliams in Houston, with Peter Burrows in San Mateo, Larry Armstrong in Los Angeles, and Stephen H. Wildstrom in Washington