Bottlenecked supply chains and chip shortages are bedeviling HP Inc. more than any other personal-computer maker, and the chief executive expects more of the same through early next year.
“We continue to see very strong demand, and expect to enter next year with a significant backlog,” HP
CEO Enrique Lores told MarketWatch in a Zoom briefing Wednesday before launching a meeting with investors and analysts that is expected to include financial guidance for next year.
HP’s stock, which has struggled as the backlog has increased, is falling in late-afternoon trading. Shares have declined 12.7% in the past six months, as the S&P 500 index SPX has increased 9.3%.
Lores, who is scheduled to share with investors strides the computing pioneer is making in gaming (more than $2 billion in revenue), peripherals ($500 million for instant ink), and digital services in HP’s first investor day since 2019, said the PC maker is taking aggressive steps to meet surging demand as offices reopen. However, customers and partners should expect ongoing constraints due to the nettlesome issue of unavailability of integrated circuits, which are used in the IT industry across most categories, including the server and storage businesses.
Lores said HP executives are “taking three key actions” to address the issue. The company has started signing agreements with components suppliers to manage access to components directly; designing its products so that more devices use the same components; and initiated a new enterprise resource planning system to optimize its ordering for components and ease an order backlog equal to a quarter’s worth of PC sales, or about $10 billion.
“The pandemic has shown how fragile the supply-chain system is,” he added.
Though world-wide PC shipments grew from 1% (according to Gartner) to 4% (according to IDC) in the third quarter, HP suffered mid-single-digit declines in both reports. HP also lost its No. 1 status to Lenovo Group Ltd.
according to both third-party analyses, thanks to a decline of 6% while Lenovo shipments grew 2% to 3%. Dell Technologies Inc.
and Apple Inc.
also posted significant percentage gains as HP declined.
Lores credited the slowdown to two trends: Surging demand for desktop PCs at a time when more people are working and learning remotely, and component shortages that are expected to persist into the first half of 2022. Adding to the chaos, many businesses are attempting to equip employees with two devices — one for the home and one for the office. HP said PC use today is 130% of what it was before the pandemic.
The trick for PC makers is bridging the delta between demand and their ability to fulfill backlogs, which often “comes down to small nuances that could lead to vastly different outcomes,” Daniel Newman, principal analyst at Futurum, told MarketWatch.
During HP’s most recent earnings announcement, Lores addressed the company’s plan to more closely manage its original design manufacturers, or ODMs. HP also must contend with competitors like Lenovo and Dell, which benefit from higher volumes, which can create even more competition for limited supply.
“I don’t see the secular trends like remote work and learning changing, nor do I see the supply chain fix being short-term — especially with the long tail to build additional manufacturing capacity and the workforce shortages likely to continue,” Newman said.
Many of HP’s ills start with what analyst Patrick Moorhead describes as “the size and breadth of HP’s supply chain,” which is smaller than those of Apple, Dell and Lenovo.
HP’s de-emphasis of an outsourcing model, in which ODMs managed relationships with components suppliers in addition to managing production, could be the long-term solution, analysts say.
“What I’ve picked up is that they have a much more hands-off approach when it comes to ODMs,” Moorhead, principal analyst at Moor Insights & Strategy, told MarketWatch. “ODMs would manage supply of those pesky USB controllers and chips used for power management.”