How to survive natural selection

Last year, Compaq made a song and dance about building PCs to order.

This year it is sitting on record unsold stocks.

Compaq will only break even in Q1,1998, compared with previous forecasts of $240 million net income. Worse than expected Q4 sales have sent Compaq inventories sky-high. It's not alone.

In a keynote speech at Internet World last week, Hewlett Packard chief executive Lewis Platt said overstocks would cause across-the-board price cuts for PCs and servers.

Eckhard Pfeiffer, president and chief executive of Compaq, said: 'We looked at our business plan once it became clear that sales out of our North American commercial channels were not meeting expectations. We are putting price reductions and aggressive promotions in place in the first and second quarter to reduce channel inventories and accelerate implementation of our optimised distribution model.'

According to the Wall Street Journal, these aggressive promotions include giving away monitors - which won't help monitor manufacturers. But then Pfeiffer has to do something to justify his salary - reported to be about $70 million last year. The inventory overhang affecting Compaq, HP and IBM all comes down to over-optimistic sales forecasts.

This year, US PC shipments will grow 15.4 per cent , against 19 per cent in 1997, according to IDC. More sales - but at lower prices. Will this be enough to offset the fall in value of the units shipped?

Compaq is big enough and ugly enough to stick it out. Garage-shop assemblers are too small to squash. But Compaq's aggressive promotions will squeeze tier-two players such as Gateway 2000, AST and Micron.

The US PC market looks like it is going to be a bloody place over the next few months. Especially when Compaq sells those unwanted Digital PCs at knockdown prices.

But will the UK be any better? Over supply means falling prices - but this hasn't necessarily stimulated sales. UK hardware sales have been patchy - the Christmas that never was, flat February and miserable March.

Intel's botched price cut plans haven't helped. Leaks on Intel's cuts posted on the Web have ensured systems builders are holding fire until April when the new price list comes into force. Worse, these price cuts have been published in user magazines, which hasn't encouraged departments to loosen their purse strings either.

Direct selling systems builders in the middle ranks look especially vulnerable.

In other industries, you would expect a wave of defensive mergers, but the UK systems builder channel operates on slightly more Darwinian lines.

Owner managers are too entrepreneurial and egotistical to pool resources with rivals they loathe. The Compaqs, HPs and Dells will pick them off, and only the fittest will survive.