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Compaq Gets Down And Dirty In Dresden (Int'l Edition)


International -- European Business: GERMANY

COMPAQ GETS DOWN AND DIRTY IN DRESDEN (int'l edition)

It's betting no-frills Presarios will dent a hard-to-crack market

In a former Communist electronics factory in Dresden, Germany, the 10-member procurement team of Schafer IT Logistics gathers every morning over coffee. Working the phones and the Web, the techies comb the world for the cheapest semiconductors and hard drives. The operation isn't all that different from a dozen other generic shops that assemble brawny, no-frills personal computers for the price-obsessed German market. But in the factory behind the office, the PCs coming off Schafer's line are Presarios, the consumer brand of world PC leader Compaq Computer Corp.

Compaq's new partnership in Dresden is part of the company's latest assault on Germany--the world's third-biggest computer market and one of its quirkiest. In the rest of Europe, where Compaq thrives, many consumers follow the U.S. pattern of buying fully equipped, name-brand computers. All Germans care about, though, is power and price. So Compaq for the first time is shifting from regional mass production to a country-specific approach. If the experiment is successful, the company may customize production in other European countries to beef up its market share. "The key is to fight fire with fire," says Toon Bouten, vice-president for consumer products.

If it works, the new scheme promises to boost sales in Europe, where the computer market is growing at 17% a year--the fastest in the world--and local producers account for 68% of consumer sales. But Germany is the acid test. When it comes to computers, Germans are so focused on value that they are virtually brand-blind. Generics dominate, with local producers accounting for 78% of computers sold in the consumer market.

The market's peculiarities have meant big headaches for U.S. name brands. Most of them stick to the business segment, where 3.2 million machines sold this year. Dell Computer Corp. doesn't even venture into Germany's consumer market. IBM simply licenses its name to Aachen-based Vobis, the local market leader. Compaq has been chugging along in 10th place, with a 3% share.

But now, in hopes of beating Germany's no-name companies at their own game, Compaq is going native. Instead of selling fully equipped Presarios from its factory in Erskine, Scotland, it has its Dresden partner build machines with no speakers and no modems. The computers are rushed to retailers at prices around $1,000, just a few dollars more than the generics.

In this market, product cycles shift weekly with the availability of microprocessors and other components. And because Germans like to customize their computers themselves, the country has turned into one of the world's leading dumping grounds for parts. Occasionally, entrepreneurs channel the parts onto idle production lines in eastern Germany or Asia, slap together a few thousand bare-bones machines, and unload them for $700 apiece at weekend sales, often in supermarkets. "They sell computers right next to the sour cream," sniffs an IBM executive in France.

Compaq launched its first German-made PC in mid-September, loading it with a 333-Mhz Pentium II and selling it for $1,000. A mere two weeks later, the company got its hands on more powerful 350-Mhz Pentium IIs and rushed to offer heftier machines for an extra $60.TIGHT MARGINS. Compaq claims that speeding its products to market cuts costs and boosts cash flow. Spot procurement brings in components just in time, with practically no inventory. And the low-price computers don't linger on retailers' shelves. "We're making a triple-digit return on invested capital," says Compaq's Bouten. The goal is to climb into fifth place, with 8% of the 1.7 million-PC market, by next March. "Margins are way down," says Thomas Reuner of Gartner Group Inc. "But if they get the right approach for one market, they can make money."

Although Compaq is off to a smooth start, disruptions lie ahead. German retailers are bracing for another weekend extravaganza this fall, which could dump 100,000 machines on the market. But it should be good practice for the price wars to come.By Stephen Baker in Munich


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