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The Laptop Race: Can The U.S. Hold Its Lead In Lap Four?


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THE LAPTOP RACE: CAN THE U.S. HOLD ITS LEAD IN LAP FOUR?

The Great Laptop Saga, Chapter One: Japanese personal computer giants figure out how to cram 30 pounds of circuitry into lightweight machines. Toshiba and NEC take the lead in an exploding market. Chapter Two: American rivals figure it out, too. Chapter Three: With better technology, U.S. laptop makers Compaq, Apple, and IBM seize control of the market for notebook-size computers.

Now for the latest installment: a free-for-all. Japanese makers, notably NEC Corp. and Toshiba Corp., are coming back with new technology. Tandy Corp. has beat a retreat, announcing the sale May 26 of its GRiD notebook subsidiary and two plants to AST Research Inc. for $175 million. IBM--surprise!--is nursing a hit. Apple, meanwhile, is closing in on the No.1 spot.

And Dell Computer Corp. is stuck in the mud. On May 25, Dell said it was pulling the plug on key notebook projects and rethinking its strategy--leaving it essentially productless in the critical laptop segment. Dell took a $20 million first-quarter charge, knocking earnings to $10.2 million from the expected $28 million and slicing 23% off its share price, to 24 3/4.

There are two morals to this tale. First, the laptop business is moving faster than any other segment in the computer world. Worldwide manufacturer shipments will jump 54% this year, to $12.9 billion, according to researcher InfoCorp. Computer makers are falling over each other to grab share in what is still a fairly immature market.

INHERITED MESS. Second, it's becoming clear that an aggressive laptop strategy requires more than a purchasing department and an advertising campaign. The most successful players now--Apple, Compaq, and Toshiba among them--are companies that have invested heavily in their own design, engineering, and, often, manufacturing capacity.

Hence the problems at Dell, which has relied almost entirely on outside engineering and manufacturing contractors. That low-overhead strategy has worked in the company's desktop systems, which still enjoy 100%-plus revenue growth. But Dell is the only major company still without a notebook based on the industry-standard 486 microprocessor from Intel Corp. And Dell products lack the state-of-the-art displays and embedded pointing devices found on rival machines. Competitors fault Dell's suppliers, who were slow to adapt the new technologies. Dell CEO Michael S. Dell accepts some blame himself: "Fundamentally, we did not fully comprehend the complexity involved in the design and manufacture of notebooks."

Dell has handed the mess to former Apple Computer Senior Engineer John K. Medica, who will decide how much development to contract out to big-name laptop makers--possibly in exchange for access to Dell's vaunted distribution channel. Dell already has talked with NEC and other Japanese and Taiwanese PC makers about such a deal, says a company source.

COMPETITORS REGROUPING. Rival laptop companies are making similar decisions. AST bought Tandy's laptop operations in part for the additional engineering and manufacturing capacity that could help it cut costs and speed new products to market. Likewise, Zenith Data Systems Corp., a unit of France's Groupe Bull, now resells powerful PCs made by Intel while it focuses development on laptops. "There's no margin left in [the desktop] business," says Executive Vice-President David F. O'Connor. "We'll invest in portables."

Meanwhile, the technology bar is rising ever higher and faster. Toshiba will unveil a 17-pound multimedia portable in June that features a CD-ROM drive, built-in speakers, and sound board. NEC wowed the crowd at last week's Comdex trade show with its Ultralite Versa, a modular notebook that features interchangeable screens, disk drives, and memory. And both IBM and Toshiba have incorporated slots in their computers that allow customers to plug in credit-card- size tools such as communications modems. Dell, meanwhile, is missing the action. The Laptop Saga's next few chapters may well be written without it.Peter Burrows in Dallas, with Gary McWilliams and Paul M. Eng in Atlanta, and bureaureports


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