07/22/96 WAR IS HELL FOR EUROPE'S PC MAKERS (int'l edition)

WAR IS HELL FOR EUROPE'S PC MAKERS (int'l edition)
Growth is slowing, and the Asians are coming
Last year, German computer maker and retailer Escom launched a bold expansion across Europe. Buoyed by growth in its home market, Escom already had become Europe's second-largest computer retail chain, with $1.6 billion in sales. But just as Chief Executive Manfred Schmitt snapped up British computer retailer Rumbalows' 235 stores in April, 1995, the German market tanked, wiping out Escom's razor-thin profit margin. Battered by losses of more than $120 million, the former highflier filed on July 1 for protection from its creditors.
Escom isn't alone. A slew of PC warriors are suddenly struggling for survival in Europe, where slower growth is producing a shakeout just when Asian rivals are planning a major assault. While the market grew at an average clip of 20% or better over the last 18 months, rising sales camouflaged strategic blunders. Now, with growth slowing this year to an estimated 10% to 14%, Europe has become one of the most unforgiving PC markets in the world. In early July, Digital Equipment Corp. blamed a $475 million restructuring charge partly on problems in the European PC market. Olivetti's prospects of surviving as a computer maker are in doubt. And France's Groupe Bull recently abandoned the personal-computer market, selling its Zenith brand to Packard Bell Electronics in a stock swap.
Although PC sales have also slowed in the U.S., margins tend to be even thinner in Europe because the cost of doing business in 16 different countries is higher and operations tougher to streamline. ``The market slowdown exposes those who are weak logistically,'' says Steve Brazier, senior PC industry analyst at market researcher Dataquest in Egham, England. Staying alive, he says, ``is all about high stock turnover and low inventory.''
Most of Europe's top five computer makers--Compaq, IBM, Hewlett-Packard, Apple, and Siemens Nixdorf--are profitable. It's a far cry, however, from the 1980s, when PCs sold for double the U.S. sticker price or more. Asian clones and homegrown brands such as Germany's Escom and Vobis arrived on the scene in the early 1990s and launched price wars. Margins shrank dramatically, but a robust market allowed a multitude of players to survive.
NO AMATEURS. Now, prices of personal computers in global markets drop almost monthly, matching steady declines in component prices. After a series of price reductions, 100 megahertz Pentium PCs today sell for $1,450 at Vobis Microcomputer in France, down about 37% in just the last six months. To survive, manufacturers must manage operations and inventory better than their rivals. ``Only companies for whom PCs are a strategic imperative will have the stamina to stick it out,'' says David C. Winn, general manager of IBM's personal-computer company in Europe.
It also pays to specialize. Dell Computer, which climbed to No.5 in Europe from No.11 two years ago, has prospered by building PCs only to order. With just 17 days of inventory at the end of the first quarter, it avoided the bloodbath suffered by such rivals as DEC that were stuck holding some 16 weeks of unsold stock just when market growth slowed. Dell can pass declining memory-chip prices on to consumers almost immediately. ``We're very aggressive on pricing,'' says Martyn Ratcliffe, senior vice-president for Europe.
Efforts to sell into Europe's mercurial home PC market, which represented 23.9% of total sales at the end of 1995, also have bedeviled manufacturers. For starters, European consumers ``don't have the urge to buy new technology, like Americans,'' says Fiona Macrae, senior PC market analyst at International Data Corp. in London. Some 25% of Europe's homes have PCs, vs. 35% in the U.S. In Italy, only 12% of households have PCs. Such cultural differences make marketing much more difficult. ``Europeans don't buy a new PC each time a new processor comes out,'' agrees Rana Mainee, a consultant at Inteco Corp. in Britain. ``They buy when their applications run out of horsepower.''
Forecasting sales growth is tougher, too. The expectations of PC makers for a big Christmas led to disastrous overproduction in the fourth quarter of 1994, which left Escom and others with a crippling level of unsold inventory that quickly became out of date. During the first quarter this year, home sales in Germany declined 8.9% from the same period a year ago, according to Dataquest, while in Britain they rose 46%. Companies that generate the bulk of their sales in one country, especially in home PCs, are likely to suffer whiplash from such gyrations.
ASIAN INFLUX. The squeeze won't let up soon. Asian PC makers such as Sony, Toshiba, NEC, Samsung, and Hitachi are the next threat. NEC Corp. is now the major force behind Packard Bell, with a 20% stake. Samsung has bought out American PC maker AST Research Inc., and Fujitsu Ltd. has taken over the PC business of Britain's ICL PLC, after ICL failed to capitalize on its brand name in Europe. Last month, Sony Corp. announced two PCs built around Pentium chips and Windows 95 that will hit Europe next year. ``I expect the Asian players to move up the charts,'' says Emmanuel Lalloz, senior analyst at market researcher Context Ltd. in London. ``Life will be much more difficult.''
So far, market leader Compaq Computer Corp. has skirted the PC crunch by boosting sales of higher-margin servers that connect PCs to form networks. Compaq Europe now gets about 30% of its revenue from servers. Meanwhile, IBM boosted its European PC market share from 9.1% to 10.1% in the first quarter, regaining second place behind Compaq's 12.3%, according to market researcher IDC. ``IBM finally has gotten its execution right,'' says IDC's Macrae. CEO Gerhard Schulmeyer's efforts to tighten control over operations at Siemens Nixdorf also have paid off, boosting the once ailing computer maker to No.4 in PC sales in Europe.
But staying on top will be like the relentless training for Olympic competition. Anything less than perfect execution is likely to send players tumbling. That's a cruel message for the also-rans.
By Gail Edmondson in Paris