Price increases resulting from new tariffs could dampen laptop and tablet sales if manufacturers don’t adjust quickly
The sluggish PC market rebounded slightly in the second quarter of 2019 as demand for Windows 10 machines increased and inventory of Intel processors improved, according to Gartner and IDC. However, the market analyst firms are warning that the rally that broke two consecutive quarters of sales declines could be short-lived if new tariffs in the ongoing U.S.-China trade war go into effect.
The Lowdown: Gartner says the trade war, which has imposed billions of dollars in import tariffs on goods manufactured in China, had little impact on U.S. PC sales in the second quarter (April to June). Worldwide PC sales increased 1.5% as businesses and consumers sought to replace machines running Windows 7, the popular operating system for which Microsoft is discontinuing support at the end of the year. Another contributing factor, Gartner says, is that Intel’s inventory of Xeon processors – which fell short of market needs in late 2018 – is showing signs of opening up.
IDC notes similar trends in inventory shipments, and credits the positive upswing partly to the trade war. IDC believes some vendors shipped more units out of China in the second quarter to build inventory ahead of potential tariffs. IDC doesn’t see the trade war causing businesses and consumers to rush to buy PCs. “The fear of increased tariffs and a potential trade war are great topics for conversation but aren’t manifesting into a tangible increase in demand yet,” IDC wrote.
The Details: Strong sales of desktop computers offset declines in mobile devices. Overall, PC manufacturers shipped more than 63 million units – up 1 million units shipped in the same period in the previous year. Overall, Lenovo vaulted to the top market share number worldwide, as it now holds a 25% share on 16% year-over-year quarterly growth. HP holds the No. 2 slot with a 22.2% market share sustained on 2.6% growth. And Dell is in third place with a steady 17% market share maintained by 2.1% growth. Apple sales are virtually unchanged. All other PC manufacturers posted significant sales declines, led by Acer (down 14.4%) and ASUS (down 10%).
In the United States, the world’s largest PC market, HP remains at the top of the market with a 29.8% share on 1% growth. Dell is No. 2 with a 28.4% share on .5% growth. Lenovo picked up 2 points in market share, but remains in third place with 17.3% market share on 12.2% growth. All other manufacturers lost share, led by Acer (down 13%), Microsoft (down 7.5%), and Apple (down 5.6%).
Internationally, PC sales in the European market increased by 1.7% on the same conditions in the United States, as businesses seek to refresh their PC fleets to Windows 10. Asia sales decreased 1% largely on the weak China market and businesses tightening spending due to economic and trade uncertainties. Latin America sales decreased by 3.9% as that region is also grappling with economic uncertainties and higher exposure to limited processor inventories.
The Impact: The trade war looms large over the PC market. U.S. vendors including HP, Dell, and Apple design PCs in the United States, but source components and assemble their products in China. Even Lenovo – a Chinese company that’s headquartered in North Carolina – follows the same offshore manufacturing strategies. As a result, Gartner says PCs could face significant price increases if new tariffs go into effect in the coming months. If vendors don’t react quickly by absorbing the tariff costs or shifting product sourcing, PC prices could rise and cause businesses to delay new purchases despite the rapidly approaching Windows 7 end of support.
Background: The trade war and other supply chain disruptions are forcing technology companies to rethink their China offshoring strategies. Several reports state that U.S. tech companies relying on low-cost labor to build their products in offshore markets are pulling some to all of their manufacturing operations out of China. The trade war is a contributing factor, but not the only one. Economic growth in China and India is causing wage inflation. The result of increased wages is increased cost, which makes these countries less advantageous for manufacturing. The ongoing trade war and tariff increases only exacerbate the economic situation, thus causing a rethinking in sourcing and manufacturing strategies.
The Buzz: “While the U.S.-China trade war did not impact the PC market in the second quarter of 2019, the next phase of tariffs could have significant impact. Most laptops and tablets are currently manufactured in China and sales of these devices in the U.S. could face significant price increases if the punitive tariffs are imposed and vendors do not take quick action to respond,” said Mikako Kitagawa, senior principal analyst at Gartner.
“Supply for Intel’s processors improved markedly during the quarter, allowing most PC vendors to fulfill old orders while also shipping a healthy supply of new PCs into the channels,” said Jitesh Ubrani, research manager for IDC’s Mobile Device Trackers. “Additionally, the threat of increased tariffs led some PC makers to ship a surplus of desktops and notebooks, thereby artificially propping up the PC market during the second quarter.”
Counterpoint: Chances that tariffs alone will cause PC sales to derail is unlikely. PC vendors have been slogging through declining demand for years. New models are coming with higher prices, causing businesses to extend service lives as long as possible. The end of support for Windows 7 will undoubtedly force many businesses to upgrade to machines that can support Windows 10. Roughly 48% of the market still runs Windows 7, meaning there remains a huge installed base that needs refreshing. That said, IDC believes the PC market will see a steady migration to Windows 10 without spikes seen in previous refreshes because the market is already well ahead in the migration.