Direct-mail supplier has the edge in PC price war: Razor-sharp prices help Elonex survive in a cut-throat market. Richard Lander reports

IN A less than salubrious trading estate in north-west London, near the bridge that the IRA blew to bits last April, a little bit of California sunshine flows in every day.

The sunshine takes the form of a video conference between the headquarters of Elonex, one of Britain's fastest-growing personal computer makers, and its R&D facility 5,000 miles away in Santa Clara. As Israel Wetrin, Elonex's founder, sits in his boardroom he can look into the eyes of his top technicians and hear them report on work in progress.

Today, Mr Wetrin will be at the Business Computer Show demonstrating the most advanced product to come out out of his Santa Clara plant - a lightweight portable machine that the company describes as the 'best notebook in the world'. It hopes the new machine - which boasts long battery life, interchangeable screens, hard disks and central processing units - will blow the opposition out of the water.

The omens are good. Mr Wetrin, an emigre from the land that gives him his forename, started Elonex from his flat six years ago. By offering products at razor-keen prices Elonex is today Britain's largest direct-mail supplier of PCs, according to Romtec, the market research group. In the overall market it stands sixth, with a share of around 5 per cent. That should translate this year into sales of 100,000 machines totalling more than pounds 80m.

Elonex, Dell, Opus and other direct suppliers have grown from nowhere to turn the PC market upside down, bypassing the high- street dealerships and tearing away at the dominance of the industry giants, particularly IBM and Compaq.

'IBM and Compaq had it good for so long. When the recession came, their traditional corporate customers looked again at their budgets and saw they would be better off going to their rivals,' Mr Wetrin said.

As he pointed out, a car can be anything from a six-litre luxury saloon to a one-litre runabout. A PC, using standard components, is a PC. 'If you comply with the standards, it performs. The design may be different but the machine does the same thing.'

Customers include a host of universities, government departments and corporate names from British Aerospace and GEC to Wimpey, where in the contracting division Roger Brown will be ordering the great bulk of his 150 or more new PCs this year from Elonex. 'Price is the main reason,' he admitted.

The cut-throat competition in the PC industry has produced a form of ruthless guerrilla warfare on the supply and marketing sides.

'As volume grows and competition grows, everyone is fighting for survival. We need to be aggressive,' Mr Wetrin said. Suppliers of components - such as chips, disk- drives, memory - are reminded that there is always someone else to do the business more cheaply if they cannot reduce their own prices. Any reductions that result from such friendly persuasion are passed on to Elonex's customers.

The result is that Elonex's line- up of models changes more often than Graham Taylor's national football team - though with somewhat more success. The specification of its basic 'entry- level' machine has changed at least three times during the past year and now includes Intel's powerful 486 chip, which hardly a year ago was regarded as the property of high-level business users. Yet as specifications have risen, the price has fallen. From pounds 995 a year ago, the cheapest, far more highly- specified, model from Elonex now costs pounds 795 plus VAT.

Of course, the giants are not lying down. Compaq and IBM have introduced new, cheap lines of PC in an attempt to fight back at Elonex, Dell et al. Mr Wetrin is not worried. 'When you're used to profit margins of 40 per cent plus and enormous overheads of around 30 per cent, you can't suddenly change the culture; you have to start from scratch.'

An example is IBM's new budget Ambra range. 'They took months to design the machine and it's already obsolete. They don't understand the market.' The basic Ambra, with the slower 386 chip, is just pounds 36 less than the cheapest 486-chipped Elonex.

Overheads at Elonex are kept down to about 10 per cent, with the London HQ working on what is virtually a just-in-time basis. The basic PC boxes with electronic components are shipped in, assembled with disk-drives, memory and other components according to customer specifications and dispatched. Turnaround from order to delivery is about five to six working days.

Fresh expansion is imminent. Mr Wetrin is looking for a suitable site within the M25 for a pounds 5m plant where Elonex can carry out its own electronic component assembly, a task hitherto farmed out to companies in Taiwan or Scotland.

It is also in the process of building a new sales team that will actively chase large corporate customers rather than wait for them to call Elonex. The new team will also build on 25,000 existing contacts in the company's database, building relationships to meet customers' needs for computer networks.

One item low on the agenda is a stock market float. While keen to provide share option incentives for key employees, Mr Wetrin sees what pressure 'screaming shareholders' can put on a company such as IBM, and is in no hurry to meet them just yet.

Besides which, he hardly needs the money. Santa Clara aside, the PC business needs little up-front investment - other firms have done the expensive R&D for the basic components. At the same time, the cash floods in with the orders and should help pre-tax profits to exceed pounds 10m in the year to next May. It seems the Stock Exchange needs Elonex more than the other way around.

Business computing, pages 30-35

(Photograph omitted)