Perspectives PC Watch Monthly Newsletter PC Watch provides an invaluable source of information on European PC Production and related issues. This Neiusletter brings together the combined intelligence of the Worldwide Electronics Applications Group and the Worldwide Personal Computer Group. Packard Bell Acquires Zenith Data Systems Page 1 Intel Introduces Fourth Generation Pentium Chip Sets Page 2 Memory Developments in the PC Market Page 3 Intel's Motherboard Operation's Semiconductor TAM Page 5 Dell Computer Corporation—Channels and Manufacturing Page 7 Packard Bell Acquires Zenith Data Systems Packard Bell, Groupe Bull and NEC have reached an agreement that gives Packard Bell control of the Bull subsidiary. Zenith Data Systems (ZDS). Under the agreement, NEC will contribute $283 million in new investment alongside Bull's transfer of ZDS, which is valued at $367 milUon. Groupe Bull and NEC will receive convertible preference shares in the combined organization, giv­ ing each 19.9 percent of the new company, just below the 20 percent level at which they would have to consolidate the new company's results in their own figures. Dataquest estimates that Packard Bell was the world's fourth-largest PC maker in 1995 and the second-largest behind Compaq in the United States. ZDS was the thirteenth-largest PC vendor in the world and fourteenth in the United States. Combining their shipments would still leave Packard Bell fourth in the world. It would, however, become the largest PC vendor in the United States. In Europe Packard Bell was seventh and ZDS was thirteenth. Combining the two w^ould result in them rising to fourth position after Compaq, IBM and Apple. DataQuest Program: PC Watch Product Code: SAPC-EU-MN-9601 Publication Date: February 29,1996 Fiiing: Perspectives 2 PC Watch Dataquest Perspective The immediate impact of the transaction on Packard Bell is a strengthened balance sheet. The company has been short of cash on several occasions over the past few years, and it was widely rumored that the company recently had to borrow money from Intel. Cash is king, and the $283 million invested by NEC will help Packard Bell put the second half of 1995 behind it. Packard Bell stated that the combined revenue of the companies was $5.5 bil­ lion in 1995. Significantly, the ZDS contribution to total revenue is more stable than Packard Bell's as ZDS has a broader product portfolio (including mobile computers and PC servers) amd is in more predictable markets. The server and mobile computer businesses enjoy significantly higher margin structures than the home desktop market. This may enhance Packard Bell's ability to borrow money inexpensively in the future and help fuel additional expansion and business growth. ZDS' business has been stagnating over the past few years. While the com­ pany continues to grow and has fairly balanced geographical coverage, total unit volumes have yet to break the 400,000 per-year mark. Packard Bell's Western European business is virtually the same size as that of ZDS. The dou­ bling of business in Europe clearly helps, but is not that significant on a pure volume basis. Both companies still lack penetration in regions outside the Uruted States and Western Europe, although Packard Bell has made great stiides in recent years to remedy this. It can be argued that, from NEC's vantage point, there are several benefits from increased investment in Packard Bell. First, a healthy Packard Bell means more DRAM and multimedia subcomponents to sell. This hardly justifies a further $283 million investment, but it helps if one considers Packard Bell as a captive buyer. There might also be strategic opportunities in using Packard Bell volumes to drive NEC's new standards or technologies to market. A more realistic view is that NEC wanted to protect its previous investnient in Pack­ ard Bell. We have questioned NEC's previous investment of $170 milUon, but assuming that made sense, its new investment does also. A healthy global commercial systems business from ZDS is a potential long-term way to do this. We think this strategy could pay dividends that a nondiversified Packard Bell never could. At some point, Packard Bell will need access to far more money than is available internally. The public markets would not be an option without a healthy commercial systems business. However, even considering the above factors, we think there is more in it for NEC here than meets the eye. Apart from the global economies of scale in component-purchasing abilities that the new company will create, there is also the combination of the market­ ing skiUs of ZDS and Packard Bell and the technological expertise of NEC. One of the other low-lpng fruits waiting to be plucked in Europe is a quick rationalisation of the shared factories in Angers, France. Intel Introduces Fourth Generation Pentium Chip Sets Two new Pentium chip sets previously known as Triton II and Triton VX have been formally launched as the 430HX and 430VX respectively. The current Triton chip set is renamed 430FX as part of the launch. The 430HX provides reliability and high performance for the business PC segment, and the 430VX suppUes the maxim.um multimedia capability and low system costs required by the SOHO market segment. The chip sets are the first to provide support for the USB (Universal Serial Bus). Another common feature is the support of Concurrent PCI where system performance is enhanced by simultaneous activity capability on the CPU, PCI and ISA buses. SAPC-EU-MN-9601 ©1996 Dataquest February 29,1996 PC Watch Beyond these features the chip sets diverge as described in Table 1. Table 1 Comparison of Fourth Generation Pentium Chip Sets 430VX 430HX UMA Support Yes No Synchronous DRAM Yes No ECC Memory No Yes Dual CPU Support No Yes Packages 2X100 pinQFP 1X324 pin BGA 2X208 pinQFP 1X208 pin BGA Cost (10,00 Units) $33.0 $37.50 Intel is sampling both chip sets now with volume production scheduled for the secoTid quarter of 1996. Dataquest Perspective The 430VX originally focused on the low-end, UMA configurations and the inclusion of SDRAM support will increase memory bandwidth, minimizing performance loss resulting from the CPU and graphics controller accessing the same memory. Of course, a fundamental corvflict exists because UMA tar­ gets low-end price points, which are the least likely to bear the incremental premium that will be charged for SDRAM relative to FPM or Extended Data Out (EDO) DRAM. Instead, look for SDRAM to be used initially in premium top-end machines where it can be used as a performance differentiator against EDO-equipped competitors. The 430HX is really only of use in servers where the reliability offered by true Error Checking and Correcting (ECC) memory is of some advantage as is the ability to run two processors. Another benefit is that the 430HX is optimized to give approximately 10 percent improvement in performance with EDO DRAMs compared with the current Triton chip set. Memory Developments in the PC Marketplace The second half of 1995 and the switch to Pentium brought two major devel­ opments in the PC memory market, both in their own way brought surprises for mennory vendors. EDO Avalanche Throughout 1995 EDO or Hj^erpage mode was touted as the memory of choice for Pentium-based systems: the arrival of Intel's Triton chip set in late first quarter of 1995 started the bandwagon rolling. The production ramp was catered for by early EDO suppliers such as Toshiba, NEC and Samstmg. How­ ever, in the late third quarter the trickle turned into a flood as all manufactur­ ers of Pentium systems saw the need to feature EDO memory. The wholesale change to EDO caught DRAM suppliers by surprise because they had not anticipated such a fast transition and had not planned the appropriate mix of Fast Page Mode (FPM) and EDO products for the fourth quarter. Worse for some vendors was the fact that the size and organization of the devices they had introduced were not the optimum fit for the Pentium's 64-bit bus. Cou­ pled with this was that the preferred speed for EDO memory is 60ns, which was not yielding well at some manufacturers. SAPC-EU-MN-9601 ©1996 Dataquest February 29,1996 PC Watch The optimum device for the Pentium bus is the 1Mb x 16 device as this enables the minimum fit of 8 MB to be achieved with tw^o 72-pin SIMMs, each containing two devices. The next best alternative would be the 1Mb x 4 device, where each SIMM needs eight devices. Using the above devices achieves a granularity for memory expansion purposes of 8 MB. This enabled PC vendors to offer 8 MB as a standard fit with the ability to offer another eight or more megabytes as a dealer-fitted upgrade, thereby maximizing their margins. As the fourth quarter 1995 progressed, more memory vendors started to ship increasing quantities of EDO parts and some PC vendors decided that they could afford to offload their unwanted stocks of Fast Page Mode product. For the first time in three years this led to spot market prices that were below con­ tract pricing, this trend has continued into the first quarter of 1996 as the avail­ ability of more EDO products enabled more FPM products to be offloaded. Aggravating the problem was the fact that several companies, of which Intel was the most public, were left with excess inventory following a poorer-than- expected fourth quarter. This inventory has to be shifted and many companies are doing this by continuing to offer it on the spot market and thereby driving spot market prices even low^er than they were late in the fourth quarter.