The PC Clone-Makers

The clone-makers - like Dell or Packard Bell in the USA, Vobis or Schmitt in Europe and some Taiwanese manufacturers - can be considered as the big winners in the upheaval in the PC sector, at least at the beginning of the 1990s. The background of their climb from a less important phenomenon in 1985 to be the winners in the upheaval starting in 1990 will be described in more detail in the following.

RAM (1MB)

As figure 10 (level June 1992) shows, the clearly lower prices of the clone-makers (category C in the figure) compared with the suppliers with average prices like Tandon or Schneider (category B in the figure) or expensive PCs from IBM, Compaq, Hewlett Packard, or SNI (category A), have primarily three causes:

The lower costs for components, which in turn result from the possibility of realizing inexpensive cost prices through mass purchases - often on spot-markets - on the one hand, the use of low-quality components on the other hand.

The lower costs for R&D, as they are merely assemblers of prefabricated components.

The less expensive sales organization. 8

We will first examine the first point, the advantages of clone-makers when purchasing com­

ponents. Manufacturers which develop their PCs themselves have to buy the components which they will install in their computers early in their product planning. Their make-or-buy decision comes very early - around six months before the begin of the series production. Their buyers purchase the components at fixed prices, although their price often falls rapidly in the six months between the order and the begin of series production. With the large quantities which the self-developers purchase, this adds up to a considerable profit reduction.

The clone-makers proceed differently in this point:

As the delivery period for a PC is only a few days, and clone-makers do not have to take the long span of product development of about eight to ten months from the concept to the begin of series production into account, their price calculation by purchasing is much more favor­

able. In their case, the price fall between the ordering of components and the delivery of PCs is only a fraction of what the self-developers have to carry. If sales and production are so clo­

sely connected that the assembly of PCs only takes place after a certain number of orders have been placed, then storage costs are also avoided, a factor which self-developers always have to reckon with.

Clone-makers often buy components on the spot markets at a very low price, advertise PCs which are to include these components, and begin the assembly only after a certain number of orders have come in.

We will now look at the third point, the low sales costs. Whereas the manufacturers of expen­

sive PCs spend about 23% of the price for sales, the sales costs amount to only 7.4% for the clone-makers (see figure 10). And while the sales mark-up for expensive PCs makes up 17.5%

of the sales price, this share is only 8.5% for the clone-makers. They save enormous amounts

8 A point of respectively higher importance is the cancellation of 10.000-15.000 DM contrail costs.

in sales by not offering their equipment in specialist stores, where technically trained per­

sonnel aims at customer service. The computers are offered rather in supermarkets and department store chains. But, increasingly, other sales channels are being opened up which contribute to enormous sales advantages for the clone-makers. Prominent in this regard is the ordering of computers using the telephone or through the mail. This alone explains the savings of over 20% of the sales surcharge for clone-makers.

This strategy is successful when the components have been standardized to the extent that their assembly is no great problem and when the time factor, as we have seen, becomes a cen­

tral factor of the competitive situation. A manufacturer which only assembles components to produce a computer can react much more rapidly to changing market needs than a company which must calculate eight to ten months development time.

The ca. 400 Taiwanese PC manufacturers play an important role as sources for the European and American clone-makers. As OEM suppliers, they frequently deliver complete PCs, often also with the label of the end retailer. In 1991, Taiwanese manufacturers produced 49% of their 2.5 million computers for others (it was 33% in 1990)9. The Taiwan manufacturers work with a profit margin of 10%, which is being continually decreased in the ongoing price war for PCs.

These companies have considerable cost advantages due to the possibility of shifting labor- intensive production sequences, like producing and mounting motherboards and extension boards, as well as producing plastic parts, to China. The final assembly is frequently also shifted to the neighboring countries.

Up to now, however, the suppliers from these countries have been users of basic technologies for personal computers which were developed in the USA or Japan. Furthermore, Taiwan, e.g., also remains dependent on the two leading PC nations for the technologies of the equip­

ment (like the monitors, processors, hard disks and other components for example). For more simple equipment, like keyboards and mice, Taiwanese manufacturers have 35% and 72%

shares of the world market (in CHIP, October '91, p. 298), whereas their world market share of personal computers is about 10%. The low technological potentials of the clone-makers and the limitation of competitive advantages primarily to effective organization of sales and stock support the conjecture of many experts that the clone-makers will not have a great importance for the future of the industry.

9 Business Week, May 18,1992, p. 80.