Goodbye, PC Direct

By Chris Barton

In about four weeks you won't be able to buy a New Zealand-made PC Direct machine any more. A decade of local sales success ends. Exit the Kiwi.

The name will still be on the side of the landmark Cook St store in Auckland, but inside a very different brand - Gateway - will be on sale.

Later this year, the signage will be replaced with the United States PC manufacturer's distinctive black and white bovine motif. Enter the cow.

Is this the end of home-grown PC manufacturing? Most would say yes, that the might of the global PC brands - Compaq, Hewlett-Packard, IBM, Dell and Gateway - has crushed the Kiwi entrepreneurs.

But about 20 or so local PC manufacturers would disagree, claiming that even if they are consigned to the status of bottom-feeders they can still run a viable business.

Gateway, which ranks about sixth or seventh in world PC sales, bought PC Direct just before Christmas for about $7 million.

"It gave us a good leg up for market share. It puts us in the top five [in New Zealand]," says Gateway Australia managing director Peter Lees.

He says the companies are very similar. Both manufacture and sell direct, with no middleman retailer involved. Both also have a strong consumer and Soho (small office, home office) focus and pride themselves on delivering quality service and support.

But there are differences, too, mainly in size.

In 1998 Gateway reported revenues of $US7.5 billion selling 3.5 million units worldwide. In 1997 PC Direct hit an all-time high of $75 million Australaisan sales and was the number three PC vendor (about 18,000 units) in New Zealand behind Compaq and Digital, but ahead of IBM. The North Sioux City, South Dakota, headquartered company employs 19,000 people worldwide - 130 of whom were formerly with PC Direct.

Strictly speaking, PC Direct hasn't been a New Zealand company since October 1996. That was when Sharon Hunter and Maurice Bryham, who founded the company in May 1989, sold out to Eric Watson's Blue Star and later cashed-in their US Office Products shares for a cool $30 million.

On the face of it, Gateway, which entered the New Zealand market in August 1997 with a single store in Auckland's Victoria St, got a bargain.

Based on share values at the time, PC Direct cost Blue Star about $35 million.

Two years later the New Zealand business is worth $7 million.

Blue Star retains ownership of PC Direct's Albany assembly line and warehouse premises worth about $5.75 million and will lease about 60 per cent of the space to Gateway. The purchase price also included a sum to cover the existing PC Direct warranties which Blue Star retains but which will be serviced by Gateway.

Blue Star keeps the Australian PC Direct business, which hit a high of $A23 million in sales in 1997 but slumped to about $A10 million last year. Up in the air, too ,is PC Direct's sponsorship of Team New Zealand and Sir Peter Blake's America's Cup campaign, which has not been picked up by Gateway.

Mr Lees reasserts that Gateway has not bought PC Direct for asset stripping, that it will continue to service existing customers PCs and that he doesn't anticipate any staff redundancies.

Gateway plans to use PC Direct's Albany plant for assembly of its own PCs, servers and notebooks, which will be shipped there partly assembled from the company's first-line manufacturing plant in Malaysia. The existing service and support structure remains too, and Mr Lees is working on ways to provide a combination of the Australasian call centres with a view to providing greater support hours.

"We could turn on support starting at 7 am in New Zealand and then finishing at 9 pm in Perth."

Customers will also have the benefit of a one-stop shop, with the entire Gateway range spanning PCs, notebooks and its recently acquired ALR servers.

At this stage, says Mr Lees, there are no plans to introduce Gateway's famous country stores - huge training and technical centres featuring a barn-like shop fit-out complete with prairie scene murals, cow pictures, fake water tanks and grain silos. But as in Australia, the New Zealand showrooms will get some of the rural flavour, which is a reminder of where Gateway founder Ted Waitt got his start - selling PCs from his father's barn in Iowa.

Although not in a barn, PC Direct started in a similar fashion - from a small
shop in Ponsonby with $62,500 to start buying components from Taiwan.

It's also the way most New Zealand PC manufacturers get started - in backyard rooms and garages.

Microsoft New Zealand, which keeps records of the number of Windows operating systems it sells to local PC assemblers, says it has about 200 such operations on its books - although only about 20 are building PCs in significant numbers.

The PC Company, Arche Technologies, Total Peripherals Group and Edge Computer are the largest - each making between 8000 and 10,000 PC units a year. Other local PC names, each with 2 to 3 per cent market share of the estimated 268,000 PCs sold here last year, include Green PC, TMC, Ultra, Quay Computer, Cyclone, Modern Technology, Insite and TL Systems.

Individually, they don't make much of a dent in the numbers the larger brands sell, but collectively and including PC Direct's 18,000 or so 1998 sales they account for about 40 per cent of the market.

Most of them maintain that despite the US brands now occupying the top five spots they will not only survive but flourish.

The view is contrary to that of PC analysts, who all say local assemblers don't have the economies of scale and buying clout of the large brands. But savvy PC buyers can still find at least $500 difference in price between similarly configured "white box" PCs and the brands.

The US companies counter that their PCs signify greater quality and reliability - and that they are in the business for the long term.

So will Gateway, with its global might and direct sales advantage provide better prices for the consumer?

Says Mr Lees: "If you compare like models with the brands sold by the consumer resellers, our PCs will always be priced less than them."

Perhaps the local assemblers do still have an opportunity.

Pictured: Gateway chief executive Peter Lees. HERALD PICTURE / PAUL ESTCOURT