IBM starts price war with 27% cut: Personal computer rivals prepared to match reductions to protect market share during build-up to Christmas sales

INTERNATIONAL Business Machines, the fourth-largest seller of personal computers in the first half of the year, renewed a price war yesterday by cutting its prices by 27 per cent.

The move, which affects its PS/2, ValuePoint, ThinkPad and PC Server lines, came a week after Compaq, IBM's rival and the new market leader, announced cuts averaging 22 per cent. Analysts believe Compaq will make further reductions and Bruce Chaflin, IBM general manager, said that the group would respond to more cuts.

Analysts said Apple Computer, the second-best selling manufacturer, and Packard Bell, which has also outsold IBM since January, are almost certain to join the fray to protect their market shares and rekindle the price wars that devastated industry profits in 1992.

The biggest PC makers have been re-engineering their manufacturing and resourcing components, and are poised to 'shake loose the unfit', Jerry Michalski, managing editor of a New York computer industry newsletter, said.

'In a market where price is king, anyone who can't afford to cut again and again is absolutely dead in the long run,' he said.

After falling more than 35 per cent in 1992, PC prices have been fairly stable, according to a study by Dataquest, a California computer consultancy. While prices dropped on individual systems, the typical PC configuration has sold for about dollars 2,000 ( pounds 1,300) in the US for the past year and a half.

But other industry observers noted that Compaq and IBM both have unusually large inventories, and may simply be pricing existing stocks aggressively to clear their supply in time for the fourth quarter, when the lion's share of PCs are sold. The two companies will discontinue some lines and introduce a range of new products in time for the pre-Christmas rush.

IBM is still struggling with leftovers from a dollars 600m inventory build-up from the final quarter of 1993, while Compaq has accumulated dollars 2.2bn worth of stock, double the levels it maintained at the beginning of the year. Apple and Dell, the direct-mail manufacturer, are also believed to have substantial inventories.

Compressed price cuts have become the norm in the past few years, as PC makers prepare for the fourth-quarter spending spree, said Ted Julian, a specialist with International Data Corporation in Framingham, Massachusetts.

'If anyone were really out to fundamentally restructure the industry's pricing structure, the way Compaq did in 1992, then we would have seen far deeper cuts than we've had.'

Compaq, whose profit margins are about 27 per cent - the industry's highest - has room to cut prices further. The company said it would be happy with a margin of 22 per cent, a reduction of 15 per cent from current levels, Kimball Brown, a Dataquest analyst, said.

Other analysts pointed out that PC makers' costs are falling quickly. Intel, the leading producer of computer chips, has started its own price war, cutting its 486 and new Pentium processors' prices by 40 per cent. IBM's PC division had seemed on the road to recovery last year, regaining the rank of top PC seller with the popular Thinkpad and ValuePoint lines. But it has stumbled badly this year, with shipments falling 29 per cent while rivals improved their sales.

It now has 7.9 per cent of the market. Compaq has 14 per cent, followed by Apple's 11.2 per cent and Packard Bell's 9.3 per cent.

Prices in the UK and Continental Europe traditionally follow those in the US, but cuts made by IBM and Compaq this year have so far had little effect.