Dell to custom build cheaper laptops

The company revolutionized the desktop-PC industry by selling made-to-order desktop machines directly to customers. But notebook PCs are tougher to assemble from scratch, because their parts are so small. As a result, they still tend to be manufactured en masse, usually in Asia, limiting manufacturers' control over inventory.

Now Dell (Nasdaq:DELL) is attacking notebooks with the powerful strategy that has let it rack up huge gains in the rest of the PC market: assembling competitively priced machines in-house to customer specifications. With the average price tag on a corporate notebook down 8.5% to $2,330 in the past 12 months, price-savvy consumers have increasingly become the market's sweet spot, market researcher PC Data Inc. says.

The first Dell-assembled portables in six years rolled out of a revamped Austin, Texas, factory late last month. Their prices started at $1,999, about 20% below comparably equipped machines in the company's corporate line.

Aggressive pricing
In the past, Dell hasn't courted notebook PC buyers aggressively on price. But then, price alone hasn't been the big selling point for any of Dell's machines. When rivals introduced desktop PCs priced below $1,000, the company at first resisted chasing such low-margin business, finally releasing a $999 desktop machine only this spring.

Dell believes that doing more of its own manufacturing will let it cut prices and still meet corporate profit goals, says Tim Peters, general manager of the notebook business unit. The low-cost notebooks are built on the same production line that handles final assembly of the company's other corporate notebooks. By the end of the year, that notebook line should be assembling 65% of its materials itself.

Dell's past successes have made it a business legend. Last year, it had $18.24 billion in sales, and it recently passed IBM Corp. (NYSE:IBM) as the second-largest U.S. PC seller. A $1,000 investment in its stock at the end of 1993 would have been valued at $103,500 by the end of last year.

This year, though, has been tougher. While Dell's market share is expanding, its stock has been beaten down on worries that its phenomenal growth rates are slowing. Wednesday, its shares closed in Nasdaq Stock Market trading at $35.75, up $1.125 but well off its February high of $55.

By handling manufacturing at home, Dell recoups the payments that went to a Far East manufacturer and eliminates the cost of shipping semifinished units from Taiwan. Just cutting out the shipping has slashed nearly one percentage point from the notebook's material costs, says Glenn E. Neland, a Dell vice president. A new design also makes the machine easier to repair, reducing the company's warranty costs.

But the strategy will work only if the company can reduce its incremental operating expenses on each PC, says Vadim Zlotnikov, an analyst at Sanford C. Bernstein & Co. If selling an increased number of lower-priced machines forces Dell to boost spending on marketing and service, its gains will be lost.

Separate lines
And rivals say they aren't about to let Dell repeat the success it had with desktop PCs. They are adopting Dell's custom-assembly tactics for their notebooks and surrounding Dell's limited laptop line with a broad array of models and prices. Compaq Computer Corp. (NYSE:CPQ), for instance, offers separate lines of laptops for small businesses, corporate buyers and consumers, with prices starting at $1,400. "For Dell to grow, it's going to have to play outside its traditional two or three models in the $2,500 to $3,500 price range," insists Ted Clark, vice president of marketing for Compaq's Portable PC Division.

Dell's Peters counters that bringing design and production in-house may have advantages in addition to price. It could allow the company to offer customers a selection of notebook pointing devices and color schemes. In the future, for example, the color of a case might match a company's logo. Dell will also be able to introduce new machines more quickly. A faster version of its low-priced model is already planned for release in late August, half the usual six months between model releases.