Strange Sitings from the PC Wars

The PC market is an obviously competitive one, but some stories (via Slashdot.org) show a number of odd things happening right now. For example, Microsoft is apparently in a sales jam, because it has launched a "fact rich" program to convince customers that they should adopt Vista now, according to The Investigator blog at APCMag.com:

"Some customers may be waiting to adopt Windows Vista because they've heard rumors about device or application compatibility issues, or because they think they should wait for a service pack release," the company said in a newsletter.

"To help partners and customers get the real story, Microsoft has created a comprehensive set of fact-rich materials illustrating how Windows Vista is ready today and tomorrow."

However, a link in the newsletter leads customers to a place only available to computer makers that will sign a non-disclosure agreement - which pretty much means that they can't tell you what they just read, and so, theoretically, can't pass on any of the information they just learned. But then, the story proceeds:

What we do know, however, is that Vista service pack 1 is, in the company's own words, designed to address "deployment blockers and high impact issues", suggesting that until the release of SP1, you will have to contend with ... deployment blockers and high impact issues. Hardly the basis for proceeding with confidence.

Maybe the facts are a little too rich for customers. But this puts Microsoft into an awkward position. They clearly released the system before it was ready to use - probably because of pressure of hardware manufacturers and, possibly, demands from those corporate clients that had already paid for the product through site licensing of Windows.

Money has to be a big issue. Yes, Microsoft got a big financial boost earlier this year and was claiming market success with Vista. But what many journalists covering the story missed was that the company does a lot of this site licensing. By accounting standards, although they collect the money, they don't get to treat it as income until they ship a product. Lack the income, and your stock looks bad. But now it's gone through that initial wave and needs the next chunk of money, which generally means the smaller purchases and consumer sales.

But people aren't adopting the way management wants and needs because Vista has received such bad press about the "deployment blockers and high impact issues." In other words, if your computer isn't pretty new, it won't work, and even if you do have a new machine, the system can run incredibly slow, as I've heard from people I know who are using it.

So what might happen is maybe another quarter of "good" results but then a pot hole when the continued sales don't continue. It sounds like Microsoft was hoping that people would buy anyway because, well, they always have. But I think users are tired of paying for complete and total crap. That's why Dell has started selling XP on systems again and why Linux continues to expand, particularly with Ubuntu offering what is supposed to be a more user-friendly version.

This all makes the second story sound even odder: Dell refuses to sell a system with Ubuntu to a business. So why won't it? Is there some licensing agreement with Microsoft or someone else that makes it impossible for them to do so? Or do they want to upsell into a more expensive model with an operating system that adds a bit of additional margin dollars?

What is going on with these companies? They seem to have lost sight of how important customers are. To play such games - because that's what they are, playing with people for your own ends - is essentially is the essence of the con job. You may not get caught, but when you do, it's painful. Better to forgo some profit today and keep your customers than to pump up your numbers for one quarter and find that no one likes doing business with you.

Lots of Labor That's Cheap - So Far

No matter what industries you find interesting, if you are remotely connected to manufacturing - professionally, economically, or politically - you should read this article at ExtremeTech.com. Mark Hachman opens his piece as follows:

About ten years ago, I was given a tour of a Visioneer scanner factory in San Jose. Even though I knew that only global companies like Toyota could essentially afford to build a car through an almost entirely automated process, I was nevertheless amazed at how many people were required to actually assemble a scanner. And I'm not talking about management, but hands-on "put this widget there" assembly.

That's the intellectual setting. The physical location, though, is Gigabyte Technology, one of the big Taiwanese manufacturers of motherboards, a key component in PCs. Although there is enormous room for consolidation in the industry, the company claims about 10 percent market share, with $1.41 billion revenue and 1,249 patent applications on file. It also builds PC power supplies (a fiercely competitive market), complete computer systems, and cell phones. And it does a whole lot of work by hand, as you can see in the pictures that Hachman took.

What makes this so important for business is that manufacturing, on which all of business ultimately rests, for years has seen a tug of war between automation and cheap labor to keep expenses down. Either a company would use computers and robotic approaches to building and assembly, or they'd try to find ways to drop the cost of having people do tasks. In the U.S., automation has, I think, been the predominant force because it's difficult to get people to work ever more cheaply. But in Asia, in one of the most high-tech endeavors you could possible imagine, at one of the globally key companies making a foundation product from PCs, the work is often manual. In other words, the slight savings (because labor, at least in high tech, is typically 5 percent of the total cost of goods) that companies see relies on incredibly low costs of labor. Not slightly lower, but monumentally so.

What happens when people get tired of having their hours subsidize corporations, particularly when they're making the very products that are symbols of economic success? China is already seeing an increase in the visibility of organized labor - look at this BusinessWeek interview with China's 80-year-old All-China Federation of Trade Unions with 137 million members that wants to unionize ... Wal-Mart.

If groups in China can start pushing like this, it could happen elsewhere in Asia. Add the increasing pressure for Beijing to allow it's currency to trade at more realistic values (an increase up ward of 40 percent), and there could be problems for companies outsourcing their manufacturing.

With so much actual work done by hand - and I've heard from a number of sources that China in particular lags by far in factory technology - then that dependence might balloon the impact of increased labor costs. That's already happending with qualified IT help (as I learned in a Computerworld article about two minutes after posting this piece). Finding people is extraordinarily tough and salaries there are climbing 20 percent to 30 percent a year with high turnover. That means you can add additional amounts for recruiting and training that go right out the window with the departing employees.

Companies have jumped on the outsourcing bandwagon without considering the true costs of doing so: inescapable dependency on others for fundamental business processes, increased inventory costs when goods take 50 to 70 days to arrive by boat, affect of leaping fuel prices on shipping expenses, and now extensive sensitivity to labor prices.

I get a sense that there is a disaster in the making that has been building for years, and companies will only become aware of their vulnerabilities when they feel themselves beaten up.

PCs and Customer Disservice

Computerworld has an interesting article about just how bad call centers can be. CFI Group Worldwide LLC in Ann Arbor published a study of customer satisfaction with phone service in six industries. On the top were catalog companies - no surprise, as customer unhappiness means losing sales. And at the bottom were PC vendors. Between offshoring and having inadequately trained people to save money, the companies actually paying a heavy price:

According to the survey, nearly 73% of the people who have bad experiences with their PC companies' call centers said they will consider purchasing their next PCs from another company, while 85% of customers who had their problems resolved by calling a PC call center said they would continue doing business with the company. But only 33% of customers whose problems were not resolved said they would continue doing business with a PC company, according to CFI Group.

The PC industry is particularly bad, but many companies treat customer service as an expense. That is foolishness. Customer service and handling complaints is in reality one of the most effective forms of marketing the business can have. When you satisfy someone, you make it far more likely that they'll do business with you again. That lowers overall costs for new customer acquisition and increases the lifetime value of customers, which should translate into higher profitability. When you think you're saving costs by sending work offshore - and actually, experts say that the real savings is only about 20% of what the business function would run domestically - you're actually undercutting your own business. For gosh sakes, 25% of the callers to the PC companies hang up before they can get an issue resolved. That's a powerfully large group of people to antagonize. It's another example of short-term thinking and not seeing how the parts of a business come together.

Dell to Sell in Wal-Mart - Future Profit Hell?

Dell is going to start selling two sub-$700 model multimedia computers through Wal-Mart. According to the New York Times story, and other analysis I've seen, this is the first step to Dell reforming its sales strategy so that it's not entirely dependent on direct sales.

I think it's also the beginning of the end for the theory that Dell can do no wrong. The PC business has extremely tight margins. Dell has been able to keep it's profits about three times that of its competitors. According to electronics market analysts I've spoken with, it has done so by beating up on its suppliers. From what I've heard - and I've tried talking to Dell about this in the past, but they wanted no part of the story I was writing at the time - the company pushes prices down so far that the vendors essentially have no profit, and then says that the manufacturing volume will give the vendors the economies of scale to make bigger profits from their other customers. In other words, the manufacturers are supposed to have other customers essentially subsidize Dell's business.

Some have pushed back. When Dell was coming out with its first PDA, for example, there were three firms bidding. Then Dell said what it wanted to pay and allegedly two of the Asian manufacturers walked away from the business because it didn't make any sense to take it. In an industry used to margins of just a few percent, that would have had to be a low number, indeed. Also, some of Dell's suppliers have been hearing from their other clients who have said, "Don't expect us to fund your work with Dell."

There is probably little to no room to move on the price of components. So, from where is the margin for Wal-Mart going to come? It will have to be Dell's margins. Now consider the volume of business the retailer does. This is going to change the overall margin that Dell sees, and that's even before the additional sales support demands that will drive Dell's already over-burdened and under-performing technical support function to needing life support itself.

Eventually companies come across the realization that growth isn't infinite and that high industry margins may not be sustainable. Hopefully for Dell its investors will be understanding, but that's even less likely.