NEC'S NOT-SO-EXCELLENT PC ADVENTURES
After years of struggling to develop a beachead in the U.S. personal computer market, Japan's NEC Corp. thought it had found its opening in June of 1996. It merged its International PC Div. with U.S. retail PC heavyweight Packard Bell Electronics to form Packard Bell NEC, which projected $8 billion in 1996 revenue and claimed the title of America's No. 1 PC maker.
Those were the days, but they didn't last long. Simply put, the hoped-for synergies between NEC and Packard Bell haven't materialized. NEC had high hopes for charismatic Packard Bell co-founder Benny Alagem, who gained a reputation as something of a super-salesman during Packard Bell's rise and has served as chairman, CEO, and president of Packard Bell NEC since the merger. But in the midst of one of the strongest PC booms in history, Packard Bell NEC has fallen to the No. 5 spot in the U.S. market, with an 8.0% share in last year's fourth quarter, according to researcher International Data Corp. That's down from 10.3% a year earlier, and way down from the 15.1% the company boasted just 18 months ago. Privately held Packard Bell NEC, which is also partly owned by France's Groupe Bull, won't disclose its sales or profits, though it said last fall that it expected revenues of $7 billion in 1997. Analysts question whether it hit that number and speculate that the company is only erratically profitable.
Is there a way out of this hole? What the company has said reveals a surprising plan: Try to boost margins and milk profits from the weakening Packard Bell brand, begin expanding the NEC brand, and at last achieve the company's six-year goal of going public. Then throw the full weight of that public company behind an effort to sell NEC-brand machines into what for NEC has been an all-but-impenetrable corporate market. Ultimately, says Mal D. Ransom, vice-president for marketing, Packard Bell NEC wants revenues from NEC-branded PCs to exceed those from its currently much larger Packard Bell consumer business. In other words, the PC maker's Japanese uncle, NEC Corp., is in danger of coming full circle to where it was 18 months ago -- minus the $1.3 billion that has been shoveled into Packard-Bell NEC so far.
The company's turnaround plan is nothing if not risky. First, increasing margins from Packard Bell will require a makeover in its consumer business. That operation, which has often been tarred with a reputation for dubious quality, rose to prominence as a low-price leader. But lately, Packard Bell is getting beat at its own game. While it tries to hold the price on basic PCs to $999, bruisers such as Compaq and Hewlett-Packard have dropped similar machines to $799. How much sense it makes to hold that $999 line will depend on how many machines Packard Bell can move. "Fat margins won't matter if they don't sell any units," says Roger Kay, an analyst at International Data Corp.
On that score, Packard Bell NEC is headed in the wrong direction. In 1997's fourth quarter, Compaq and Dell posted unit sales gains of 52% and 62%, respectively, compared to the same period of 1996. They finished the quarter with 18% and 10.2%, respectively, of the U.S. PC market. Gateway 2000 recorded a 45% fourth-quarter gain, for a 8.3% market share. But Packard Bell NEC's shrunken 8% share makes it harder to match its rivals' economies of scale. That's one reason it "has had trouble making money in the retail niche that Compaq is making money in," says IDC's Kay.
The other half of Packard Bell NEC's strategy -- making the NEC brand a corporate standard -- faces daunting challenges as well. The company kicked off this campaign last August, when it launched NEC Now, a program for selling NEC-brand computers directly to consumers and corporations, instead of through retailers and resellers. The idea is to mimic the strategy that has propelled Dell Computer Corp. to No. 2 in U.S. PC sales. In late December, NEC Corp. announced a further $300 million infusion, on top of the $1 billion it had already invested in Packard Bell NEC, and raised its stake to 49%. That money is earmarked for NEC Now, mostly for advertising and sales support.
The company says sales of Packard Bell NEC's NEC Computer Systems Div. (NEC CSD) doubled from August to December, 1997, and continue to climb. But at the end of last year's third quarter, NEC-brand PCs had only 2.1% of the U.S. market, down from 2.5% in the year's first half. In fact, the NEC brand has been a perennial underperformer in the U.S. market for years. NEC is known for solid products and reasonable prices, but not for market-share growth.
"The marketing and execution [in the past] wasn't what it should have been," concedes Packard Bell NEC Executive Vice-President Luis Machuca. He argues, though, that with the new direct-sales strategy "we now have a better ability to convey the message, and we will do better marketing. All of our marketing staff are new." NEC CSD says since August, 1997, it tripled its sales staff, to around 350 in December.
NEC Now took shape shortly after Machuca came on board in September, 1996, fresh from a 15-year stint at Intel Corp., where his last job was director of desktop product marketing. After his arrival, Packard Bell NEC execs reviewed the NEC brand's market share, says Machuca, and decided "that it was nowhere near commensurate with our product offering." His analysis of the competitive landscape also told him that "the industry is at a crossroads." Previous shifts in the PC business have been "shaped by inflection points of technology," says Machuca. "[But] this inflection point has to do with distribution and logistics" -- the shift to the direct-sales model. The new marketing plan for NEC CSD came together quickly, and by last April the team had "cooked the formula up," Machuca says.
NEC CSD's approach is really a hybrid. Typical direct-sales models, such as Dell's, eliminate the middleman and send all transactions through the manufacturer. NEC CSD feels that "customers should be deciding how they acquire the technology we sell," says Machuca. So customers who don't want to buy directly from NEC have the option of going through some 250 "direct-friendly" resellers who take orders and hold customers' hands, but rarely stock inventory. They make their profits by selling additional services and through discounts and commissions from NEC CSD. However, analysts question how enthused even these remaining resellers really are, citing that many are uncomfortable with the competition they see the direct channel posing to their core business.
Internally, the transition to NEC Now hasn't been easy. "We had to walk away from a huge amount of return and make an even huger investment," says Machuca. He notes, though, that while sales of NEC-brand machines may have dropped during the switchover, "with the direct model, all sales are sell-through, not inventory clearance." Under the old model, forecasting miscalculations could force fire sales of excess inventory at the end of a quarter or product cycle, while the direct model's build-to-order component minimizes these inefficiencies. Improving "sell-through share means money," says Machuca. "This will help us attain profitability."
Machuca declares that NEC Now has turned the corner, but others aren't so sure. Tony Amico, IDC's director of channels research, thinks NEC CSD may have rushed into the program before the back end was entirely ready. Consequently, he says, it isn't as efficient as it should be. He adds that NEC Now's delivery time lags behind that of direct-sales pioneers Dell, Gateway, and Micron Electronics, despite NEC's smaller volume.
Even if it corrects such problems, Packard Bell NEC will have to deal with larger pressures in the PC marketplace. The business is especially tough for second-tier PC makers such as Packard Bell NEC, Toshiba, AST, and others that are big enough to show up in market-share charts but trail the so-called Big Four -- Compaq, Dell, IBM, and Hewlett-Packard -- in clout and depth of offerings. According to IDC, a first-tier player needs not just market share but a full-range product line, from laptops and desktops to servers and beyond, with a major emphasis on corporate sales. Second-tier players are left "fighting on all fronts without adequate resources," says IDC's Kay.
What must NEC CSD do? For "long-term success as a very large player they have to really establish themselves in larger enterprise accounts," says IDC senior analyst Kevin Hause. Given the competition, he adds, "that will be a long, hard battle."
In its sixth month of operation, NEC Now does boast some small accounts, but it lacks a big corporate win. "We are executing exactly what we envisioned," says Machuca, who adds that the company hopes to finish 1998 as the No. 3 U.S. producer of notebooks -- an NEC strength. But he declines to list any other market position goals. And despite all the changes, the results may fall short: While the NEC brand's latest machines have been well received by the PC press, analysts don't view NEC Now as the runaway success that Packard Bell NEC needs to break out of the minor leagues.
If all else fails, NEC Corp. could probably take tighter control, ousting Alagem with a boardroom coup -- it holds three of Packard Bell NEC's nine seats and owns a 20% stake in Groupe Bull, which has two more. Or it could simply reabsorb its American cousin with a relatively minor additional investment. What it might end up with, though, is a company in danger of losing its beachhead and being driven back into the sea.
By Patrick Lambert, Staff Reporter for Business Week Online
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Copyright 1998, Bloomberg L.P.