BW Online | October 25, 2002 | Palm's Helping Hand in China

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OCTOBER 25, 2002

NEWS ANALYSIS

Palm's Helping Hand in China
The PDA maker shipped the design and production of its new budget device to the Far East -- and boosted margins significantly

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A year ago, Palm Inc. (PALM ) looked like it might implode. The handheld maker stumbled in early 2001 by announcing its m500 line weeks before it became available. That caused inventories of old units to pile up as people waited for the new devices. Result: Layoffs in waves, and its stock price tanked as heavy competition pummeled profit margins even harder. Capping off a tumultuous year, CEO Carl Yankowski was shown the door in November.

Now the Santa Clara (Calif.) company looks to be poised for a comeback. On Oct. 28, Palm will launch two new high-end personal digital assistants (PDA) from its new Tungsten line that analysts call its best shot ever at cracking the lucrative corporate market. Getting back on the road to recovery so quickly clearly would not have been possible, though, without the help of China.

The Asian giant's rising influence as a technology-manufacturing center has become the centerpiece of Palm's daring rebound strategy. With the economic downturn, U.S. retail sales of PDAs have slowed considerably. Sales of handhelds through August have dropped 6.5% from the previous year, to 8.2 million. Worse, the average selling price for a Palm has fallen from $399 two years ago to $224 today, according to researcher NPDTechworld.

MADE TO ORDER. On the flip side, sales to enterprise markets are showing gains of nearly 10%. Better yet, margins on devices costing more than $399 often are better than 40%, compared to a low of 17% for cheaper consumer gadgets.

As Palm's cash reserves dwindled, China offered the solution, says Angel Mendez, a former Gateway executive who's now Palm's senior vice-president for global operations. For its new Zire $99 consumer handheld released Oct. 7, Palm decided to turn to Inventec, a member of China's growing design-and-manufacturing industry. Palm told Inventec what it wanted, then let the company design the product, buy many of the parts locally, and put it all together. Within weeks, Inventec presented Palm with a ready-for-the-shelves PDA. "Design, manufacturing, and packaging -- we moved it all to China," Mendez says.

The upshot? The Zire costs roughly 30% less to make than Palm's next-cheapest device, the m130. The slim, white handheld is similar in size to the m500 but is lighter and has just two main buttons, for address book and calendar functions. Combining its overseas production savings with other cost-saving measures such as using an older version of its operating system, Palm claims it's enjoying the same profits on a $99 device that it generates on a handheld costing two to five times as much -- a feat unheard of in the industry.

NEW RIVALS. Palm also won on another front. Its limited engineering staff was freed to focus on creating the Tungsten corporate handhelds. "We had to break a few paradigms to get where we are today," Mendez says.

Sounds good. Problem is, other handheld makers plan to break a few rules of their own. ViewSonic, known more for its computer monitors, recently surprised analysts with the announcement it will make a $299 handheld using Microsoft's Pocket PC operating system. That's the lowest price ever for a Pocket PC device, which typically sell for about $480.

Now, Dell -- another new kid on the block -- plans to sell its handhelds for $199 and $299 after a $50 rebate. The move is likely to touch off a price war in the high-end segment and could tip the fragile Palm recovery into the red zone again. Palm's response? "We think of China as the source for a lot of our production in the future," Mendez says. With that strategy, an industry pricing game of how-low-can-you-go may find Palm able to go very low indeed.

By Cliff Edwards in San Mateo, Calif.
Edited by Douglas Harbrecht

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