Supply Constraints to Persist, But Stockpiling Helps

Strong demand is good for the PC business, but suppliers have to source enough components to meet that demand. That’s not an easy task amid ongoing global supply constraints.  

The top 3 PC makers — three multi-billion dollar corporations — have strengths that their rivals just cannot match,  like buying power and relationships with suppliers. Naturally, the companies will continue to use these advantages to support their business growth. In particular, HP admits it overbuys CPUs to make sure that it has them when it needs them. 

“To improve assurance of supply, we are carrying higher levels of owned inventory, and as we said, we do this to navigate during this time,” said Marie Myers, the chief financial officer of HP. “So, HOI at this point is likely to stay elevated to support business growth. That includes strategic buys […] particularly in CPUs.” 

Chinatimes reports that in addition to strategic CPU procurements, HP has also secured a large supply of power ICs, network controllers, display drivers, and other chips from companies like Realtek, Richtek, Spectrum, MPS, NXP, Renesas, and Silica. Furthermore, the chief exec of HP met with AU Optronics to secure panel supplies. To ensure that it can ship the maximum number of PCs possible, HP reportedly buys more chips than it needs and stockpiles them. Meanwhile, industry observers believe that Dell and Lenovo will follow suit to stay competitive. 

“The component supply situation remains constrained, and we expect component cost to be inflationary in Q2 and probably are going to be inflationary in the second half as we think about it today,” said Thomas Sweet, the chief financial officer of Dell. “That is principally coming out of displays, DRAMs and NAND. […] I do think as it relates to pricing, it is our intent that we will price the input cost increases as appropriate, keeping a thoughtful eye on the market and making sure we are in a competitive position.” 

Lenovo, which has its own manufacturing capacities, also procures components with long-term contracts and stockpiles them.  

“Lenovo has a unique [business] model,” said Yang Yuanqing, chief executive of Lenovo. “We do 50% outsourcing and 50% in-house manufacturing. So this unique model gives us advantage to approach upstream vendors and the better relationship with that. So, in a shortage like this, we can leverage this relationship to get better supply situation. So, I am confident that, that we will continue to outperform the market and the key competitors and enjoy sustainable growth.”  

Overall, stockpiling may not be a bad idea for large PC makers as it stabilizes pricing and reduces their risks. However, stockpiling makes it harder for smaller vendors to procure parts. 

In addition to component costs, other factors impact the PC vendors’ business. Logistics are becoming more expensive, so they have to book containers and air freight well in advance (hence, the companies actually have to secure the supply chain). 

“We are seeing [increasing] component costs and logistics costs in both [PCs] and print, and they will be an incremental headwind both quarter-on-quarter and year-on-year, and those overall baskets of commodities, particularly in panel, ICs and PS and then ICs and resins in print,” said Myers. 

Supply is actually improving as the industry ramps up the production of various components, but demand is also ramping. Therefore, Lenovo expects shortages to persist for another 1 – 1.5 years, but the company doesn’t expect them to worsen. 

“Moving forward, I do not expect the further [shortages] deterioration, but for sure we continue to face the shortage for the next 12 to 18 months and coming, not only from PC demand but also from other products, automotive and so on,” said Lanci.

“Currently there is not enough supply to keep up with the robust demand and the resurgence of COVID in Southeast Asia is creating additional pressures on our supply chain,” said Enrique Lores, chief executive of HP, during the company’s conference call with analysts and investors, according to SeekingAlpha. “We expect supply constraints to continue at least through the end of 2021. […] We are seeing an increase in backlog across both PCs and printers.” 

PC Demand Set to Remain High for Years to Come

“In 2019, the serviceable TAM for the broader client ecosystem was approximately $600 billion and looking out to calendar year 2025, it jumps to a projected $750 billion,” said Jeff Clarke, chief operating officer of Dell, during the company’s conference call with analysts and investors. “This expansion in TAM is driven by increased systems per household, faster refresh rates with higher notebook mix, and investments in a hybrid and remote workforce.”

Today, consumer PC sales are particularly strong as many people continue to work and learn from home. As offices reopen later this year, demand for business PCs will increase to regular levels (as businesses replace their systems from time to time). Meanwhile, demand for consumer-grade computers is not expected to go down significantly (although it will likely be somewhat lower than today), as many people have realized the importance of home PCs and can now work from home. As a result, overall PC demand will remain strong for quarters to come, meaning shortages will continue because the industry has yet to build the production capacity necessary to serve the existing demand. 

“Talking about PC demand, […] there are a lot of companies in the world [that] are finally opening up,” Gianfranco Lanci, chief operating officer of Lenovo, told analysts and investors at the company’s recent conference call, according to a SeekingAlpha transcript. […] I see [strong] PC demand […] moving forward [in] the next following quarters. I think the real difference is not because people working from home, learning from home, playing from home, everything from home, but I think the major difference is [that] people start to realize [that] they need the one PC [per person] and not one or two PCs per household.” 

The existing fleet of outdated PCs is another driver for the PC market. Lenovo expects customers to not only buy additional machines but also to buy newer PCs in a bid to be more productive and/or play the latest video games. 

“We have a very old install base — four, five or six years old at huge numbers,” said Lanci. “Because if you want to get a good experience, you need a brand-new PC, not a four- or five-year-old PC. So, I am quite optimistic [about demand going forward].” 

All of the PC makers agree that PC sales are set to grow in the short term. Meanwhile, Dell appears to be extremely optimistic about the longer-term future. Dell is confident that the client PC ecosystem will expand to a whopping $750 billion by 2025, which means that the market will consume more chips, more panels, and more materials.