Dell and HP Margins
Dell has been on the bad side of Wall Street for a while now, the stock is some 30% lower than it was in 1999. I might comment more later on Dell's troubles, there is a lot of debate about “what's wrong with Dell?”, including this article from Slate, with an inappropriate “Is Dell Dying?” headline. Come on, this is a growing, profitable company. They're only “dying” from a Wall Street perspective.
The Slate article does point out two things correctly: 1) it's hard to maintain a constant percentage growth rate as your revenue grows. Going from $1B to $1.3B (30%) is not the same as trying to go from $50B to $65 (also 30%) in a year. 2) With falling prices, Dell has to increase production volume by 25% to have sales revenue increase 15%. But, Wall Street is obsessed with growth. If only they were obsessed with quality, customer service, and lean production. I guess that's the price one pays as a public company (well, Michael and many working-class “Dell-ionaires” got rich in the process, at least).
One thing I'll say in Dell's favor is that they still seem committed to manufacturing here in the U.S. They seem to take the Toyota-like approach of building close to your customers, maintaining assembly work in Austin, Nashville, and soon to be opening in North Carolina (another case of government “creating jobs”, I guess)
HP has moved 100% of their production to China, as reported here. HP is obviously following typical MBA, finance, and Wall Street thinking that they “have” to go to China and its low wages in order to compete. But, they have a bloated supply chain between the factories and U.S. stores.
So how do the following companies stack up?
- HP, with 100% of its production in that manufacturing hallowed ground, China
- Lenovo, a Chinese company that absorbed IBM
- Dell, with significant U.S. assembly
“…this year its operating margins on computers are expected to be twice as high as HP, at 8 per cent, while Lenovo is barely at break even,” according to this news source.
An educated guess is that labor is a small percentage of a PC's cost. So, even if HP and Lenovo PC's were built in Chinese prisons with slave labor (I'm not suggesting that, Wall Street), does their bloated supply chain outweigh the labor cost savings? Apparently so.
I hope this is a lesson to other industries…. Dell can compete against China by staying close to customers. So does American Leather, another Texas company. And so does Toyota. You can too.
Update (5/18/06): Hello to my Wall Street readers, you might also want to check out this posting about insightful analyst comments on Ford and how some of the lean manufacturing world reacts to your guidance.
What do you think? Scroll down to comment or share your thoughts and the post on social media. Don't want to miss a post or podcast? Subscribe to get notified about posts via email daily or weekly.