Integrators face one Dell of a challenge

It seems that several VARs have grown tired of Dell, with some going as far as making formal complaints to the EC alleging anti-competitive behaviour based on unfair selling systems. Mark Ballard looks at the issues surrounding the complaints.

A small band of anxious British PC assemblers have begun taking their fate into their own hands after concluding that they can no longer compete on the terms being set by Dell.

One such firm is VAR Compusys – a £60m British manufacturer of PCs – which has stuck its head above the parapet and said what most in the industry are only saying from under their desks.

At least five other national PC manufacturers have lent their support to an emerging campaign from Compusys that has resulted in a formal complaint about Dell being submitted to the European Commission (EC) competition police for alleged anticompetitive behaviour.

The allegation made to the EC is that Dell has been abusing a dominant market position to gazump local rivals in government tenders by selling its hardware at a loss.

Local manufacturers and resellers have been at a loss to explain how Dell’s prices could be so low. Calculations made by British manufacturers based on what they know of volume prices of PC components and the cost of assembly lead them to the conclusion that Dell must be either selling PCs at a significant loss or slashing prices with marketing funds provided by its leading suppliers.

The result, according to many in the channel, is that Dell is decimating the already shrinking UK PC business.

Sukh Rayat, European vice-president of components distributor Avnet, said: “What Dell has done over the last few years is crush the marketplace. By leaning on their suppliers for better pricing, their suppliers have given in, and the result is that [British] companies have gone bust.

“There is unfair practice here. They have got the volume behind them, but if vendors did not go wobbly at the knees they would keep Dell’s pricing in a certain band.”

Bob Lewis, a general manager of PC manufacturing operations at Centerprise, was managing director of his own £4m PC manufacturer, the Welsh CFL, until it went bust in March. He has claimed that this was because of Dell.

“Dell is trashing the market. It is difficult to get [prices] low enough to win the business,” he said.

CFL would price government business at £30 margin a box, said Lewis, and Dell would undercut them by about £35. “In one case, Dell was £100 cheaper than us. We were buying components at competitive rates. There is no way they could have been that much cheaper than us. It was this MDF [marketing development funding] money they get,” he alledged.

Regardless of whether the charge against Dell can be vindicated, it is clear that the industry has not been coping well in direct competition with the self-styled direct-selling giant.

Rayat said his customer base of indigenous assemblers has dwindled. He has shored up revenues only by diversifying out of components. According to the PC Association, there are now only half the number of PC manufacturers and assemblers in Britain that there were 10 years ago.

Shipment figures collected by research firm Context show that Dell’s desktop PC sales grew 40 per cent in 2004. Its laptop sales grew by between 80 and 90 per cent depending on the sector (though from a smaller base). The PC sales of British manufacturers shrank by two per cent across the board.

Resellers are not suffering. Indirect sales as a proportion of total PC sales remained between 53 and 62 per cent for the last three years, according to Context. Many resellers are selling Dell, but many more are selling the PCs of other tier-one manufacturers that have both the muscle to compete with Dell on price and the brand clout to match it in marketing.

Yet Dell’s market share has been growing fast, according to IDC. It accounts for about a third of all UK sales of the top-10 PC manufacturers. Its share of all UK sales grew from one fifth to a quarter between 2002 and 2004. This may since have exceeded one third.

Any EC investigation of Dell will hinge on how much power this share gives it over the UK market (or Europe, as manufacturers in other EU countries are also said to be mustering their forces).

But the question of Dell’s dominance and the likelihood of an investigation are not certain. Any EC action would only be warranted under European competition law if Dell were first found to be in a dominant position and then found to be abusing it.

Even if both of these conditions were satisfied, an investigation could still drag on for years and even then, action against Dell would be far from certain.

The anti-trust campaign waged by AMD against Intel is a case in point. AMD has been trying to nab Intel in court over anti-trust charges since the late 1980s. Government anti-trust probes of Intel have drawn blanks in both the US and the EU. The Japanese Fair Trade Commission found against Intel in March, but Intel claimed the ruling a victory after conceding to abide by the authority’s terms of business but refusing to admit any wrongdoing.

The EC has been probing Intel for almost five years over similar complaints to those brought in Japan. Intel is accused of abusing its dominant position by tying marketing funds to conditions that prevent or discourage its customers buying microprocessors from competitors.

Industry sources privately express their suspicions of a link between Intel’s rebates and Dell’s cutthroat prices. But these allegations may remain unproven, all the while British firms cower, as they admit they do, in fear of reprisals for standing up to these multinational firms.