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Merrill Lynch Sees Tough Times Ahead For PC Makers

Shares of PC makers tumbled in morning trading Aug. 12 after Merrill Lynch, in a report entitled An Industry Under Siege, said the influx of low-cost PCs over the next few years could have an "overwhelming depressive effect on average price units." For 1999, 2000, 2001, and 2002, Merrill Lynch forecasts average unit prices will decline by 11.5%, 12.1%, 11%, and 10%, respectively, despite lower channel inventories, a return to more normalized component cost declines, and an improving sales mix favoring notebooks, servers, and workstations. "We don't believe that demand elasticity or vendors' efforts to bundle more add-ons will be able to offset AUP (average unit price) declines over the long term," the report said. The company said that IBM, Gateway, Hewlett-Packard, Dell Computer, and Compaq, players that comprise 41% of the worldwide market, would all benefit from consolidation as pricing pressures continue. Despite efforts by indirect vendors to reengineer the supply chain, Merrill Lynch said, the direct model will continue to enjoy better economics, driven by leaner inventories and the absence of reseller markups.

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