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Rising PC parts prices: Who will pay?


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August 25, 2005

Rising PC parts prices: Who will pay?

Peter Burrows

In reporting our story on an expected fall in notebook PC profitability over the next couple of years, we got some interesting confirmations regarding tightening supplies and pricing pressure for some key PC components in the short term. In a fast-moving industry where annual price declines for parts are almost always well into the double digits, that sets up a kind of financial duck-duck-goose for this Christmas selling season. Someone will have to eat the added cost: either PC makers, their suppliers, or us customers.

Normally, on the rare occasions when parts prices rise or stop falling, PC makers pull out all the stops to maintain their sticker prices--often by emphasizing sales of configurations with slightly smaller capacity drives, slower chips and such. That may dampen customer demand, but at least they don't have to take it out of their own profit margins. After all, in an industry in which Dell has been the only consistently profitable PC maker in recent years, there ain't much profit margin to cut.

This Christmas selling season could be different--because there's a bigger-than-usual cadre of PC makers determined to lock up share in the booming notebook PC business, margins be damned. While the trend from desktop to portable has been clear for years, it's now reaching heights few industry insiders expected. Hewlett-Packard, for example, sold more notebooks than desktops to consumers last quarter, for the first time ever. And with the price premium for a notebook now running just a few hundred bucks more than a similarly configured desktop, every supplier knows this is where the future growth will be. “There are weeks and even months in which mobile has outsold desktop [in retail stores]," says Chris Cloran, director of the mobile division of chipmaker AMD. "It's not a total reversal yet. But a few years ago, nobody would have thought the almighty desktop would give way like it has.”

So what will happen this time? Certainly, big Western companies such as Dell and HP insist they are putting profitability first. That suggests they'll try to get shoppers to pay for the increased parts costs. Whether they can do that when aggressive Asian rivals are eating the increases themselves to give shoppers the best possible deals--particularly in critical, fast-growing markets such as China--remains to be seen. "Acer's been a disruptive force for the past few years," says Brian Dexheimer, executive vice president of drive maker Seagate Technology. "They're growing faster than anyone."

So which components are causing the problem? First of all, keep an eye on the 2.5-inch drives found in notebooks. "There may not be enough drives supplied to meet demand" in the months ahead, says Dexheimer, in part becuase Microsoft expects to need three million to roll out its new X-Box 360. Dexheimer doesn't expect Seagate to be able to raise prices. But while prices usually fall 8-10% a quarter, that decline may be more like 5% in the months ahead.

Then there's flat panels, as my well-sourced colleague in our Hong Kong bureau, Bruce Einhorn, learned. He spoke with Tony Wang, associate vice president for PC manufacturer Asustek. Wang sees prices for display panels heading upwards by about $5 a month for a while. Yet Wang thinks share-hungry PC makers will push for low sticker prices just the same. “We see ASPs (average selling prices) continu[ing] to drop by $30 to $40 [by end of year],” he says. “We see most of the branding companies want to grab more market share and they will use price to (do it).”

Of course, suppliers of these parts can expect some unpleasant calls with their big PC customers--who are sure to be throwing their weight around to get the best possible deals. Whether any of this results in any serious financial damage for anyone remains to be seen. But here's my prediction: it'll still be great a great shopping season for bargain-loving shoppers.

08:03 PM

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I think at this point in the operating system life cycle, some slowdown should be expected. Windows XP has been on the market for a full 4 years now and Microsoft has finally started publicizing Windows Vista. The number one reason for new computer purchases has been o/s upgrades in the past couple years. When Windows XP came out, it was easier to buy a new machine with it preloaded than to get an upgrade for an older, slower PC. Hence my prediction that computer unit sales will not be markedly higher until Vista ships next year, assuming that prices are static due to increasing parts cost.

Vista's release also coincides with the release of 64-bit dual-core processors for mobile computers. I think I'll skip the computer purchase this year and save towards a new laptop for next Christmas season.

Posted by: Wes at August 26, 2005 11:13 AM


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