Dell reaches road's end

I recommended a computer to a friend made by a company called  "PCs Limited". They were built by a kid in Texas who’d started building them in school.

PCs Limited made great products. They copied the big guys, focused on quality, and eliminated retail channel costs. They got bigger, and even did some innovation of their own.

Later they decided their business was process improvement, and they could leave innovation to someone else. They became full time parasites. They fired all their engineers and their creative people. They were so successful as parasites, they killed their hosts.

Then came Foxconn and China, and the margin fell out of the low cost imitation market.

Dell has been dying for years, but they’re entering the end game…

In Suit Over Faulty Computers, Window to Dell’s Fall - NYTimes.com

After the math department at the University of Texas noticed some of its Dell computers failing, Dell examined the machines. The company came up with an unusual reason for the computers’ demise: the school had overtaxed the machines by making them perform difficult math calculations.

Dell, however, had actually sent the university, in Austin, desktop PCs riddled with faulty electrical components that were leaking chemicals and causing the malfunctions. Dell sold millions of these computers from 2003 to 2005 to major companies like Wal-Mart and Wells Fargo, institutions like the Mayo Clinic and small businesses.

“The funny thing was that every one of them went bad at the same time,” said Greg Barry, the president of PointSolve, a technology services company near Philadelphia that had bought dozens. “It’s unheard-of, but Dell didn’t seem to recognize this as a problem at the time.”

Documents recently unsealed in a three-year-old lawsuit against Dell show that the company’s employees were actually aware that the computers were likely to break. Still, the employees tried to play down the problem to customers and allowed customers to rely on trouble-prone machines, putting their businesses at risk. Even the firm defending Dell in the lawsuit was affected when Dell balked at fixing 1,000 suspect computers, according to e-mail messages revealed in the dispute….

… For the last seven years, the company has been plagued by serious problems, including misreading the desires of its customers, poor customer service, suspect product quality and improper accounting.

Dell has tried to put those problems behind it. In 2005, it announced it was taking a $300 million charge related, in part, to fixing and replacing the troubled computers. Dell set aside $100 million this month to handle a potential settlement with the Securities and Exchange Commission over a five-year-old investigation into its books, which will most likely result in federal accusations of fraud and misconduct against the company’s founder, Michael S. Dell.

The problems affecting the Dell computers stemmed from an industrywide encounter with bad capacitors produced by Asian PC component suppliers. Capacitors are found on computer motherboards, playing a crucial role in the flow of current across the hardware. They are not meant to pop and leak fluid, but that is exactly what was happening earlier this decade, causing computers made by Dell, Hewlett-Packard, Apple and others to break.

According to company memorandums and other documents recently unsealed in a civil case against Dell in Federal District Court in North Carolina, Dell appears to have suffered from the bad capacitors, made by a company called Nichicon, far more than its rivals. Internal documents show that Dell shipped at least 11.8 million computers from May 2003 to July 2005 that were at risk of failing because of the faulty components. These were Dell’s OptiPlex desktop computers — the company’s mainstream products sold to business and government customers.

A study by Dell found that OptiPlex computers affected by the bad capacitors were expected to cause problems up to 97 percent of the time over a three-year period, according to the lawsuit.

As complaints mounted, Dell hired a contractor to investigate the situation. According to a Dell filing in the lawsuit, which has not yet gone to trial, the contractor found that 10 times more computers were at risk of failing than Dell had estimated. Making problems worse, Dell replaced faulty motherboards with other faulty motherboards, according to the contractor’s findings.

But Dell employees went out of their way to conceal these problems. In one e-mail exchange between Dell customer support employees concerning computers at the Simpson Thacher & Bartlett law firm, a Dell worker states, “We need to avoid all language indicating the boards were bad or had ‘issues’ per our discussion this morning.”

In other documents about how to handle questions around the faulty OptiPlex systems, Dell salespeople were told, “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”

“They were fixing bad computers with bad computers and were misleading customers at the same time,” said Ira Winkler, a former computer analyst for the National Security Agency and a technology consultant. “They knew millions of computers would be out there causing inevitable damage and were not giving people an opportunity to fix that damage.”

Mr. Winkler served as the expert witness for Advanced Internet Technologies, which filed the lawsuit in 2007, saying that Dell had refused to take responsibility for 2,000 computers it sold A.I.T., an Internet services company. A.I.T. said that it had lost millions of dollars in business as a result. Clarence E. Briggs, the chief executive of A.I.T., declined to comment on the lawsuit….

… Dell’s supply chain had always stood out as one of its important assets. The company kept costs low by limiting its inventory and squeezing suppliers. If prices for components changed, Dell could react more quickly than its competitors, offering customers the latest parts at the lowest cost.

But the hundreds of Dell internal documents produced in the lawsuit show a company whose supply chain had collapsed as it failed to find working motherboards for its customers, including the firm representing Dell in the lawsuit, Alston & Bird….

Apple also had severe capacitor problems with iMacs, but they couldn’t hide them. Apple customers screamed. Apple fixed some iMacs, but many died just out of warranty. To my knowledge, however, the fixes worked.

I don’t think Apple’s strategy was very different from Dell’s, except Apple customers communicate loudly and are harder to ignore. What saved Apple was a much better customer relationship, and innovative products in the pipeline. Dell’s customers have been unhappy for many years, and Dell doesn’t do innovation. Dell didn’t have a cushion to protect them.

In an era where Foxconn builds everything, we’re likely to hear more about collapsing supply chains for years to come.

Incidentally Nichicon is dismantling its company in anticipation of the settlements ahead. It’s a Japanese corporation.

See also:

• The end of Moore’s Law and the future of Dell 
• Fake Steve Jobs- Why Dell will not bounce back (2008)
• Dell has jumped the shark- Spyware pre-installs (2006 – we knew they were dead then)
• Dell aphorisms – from 2004 when they were still “on top” – but I wrote “I think Dell makes fairly lousy products that cost too much. Their web services are poor and their customer support worse…”

Update: In the light of Dell’s ending, it’s interesting to read this leaked Apple memo on their iPhone antenna debacle …

1. Keep all of the positioning statements in the BN handy – your tone when delivering this information is important…

2. Do not perform warranty service. Use the positioning above for any customer questions or concerns…

4. … ONLY escalate if the issue exists when the phone is not held AND you cannot resolve it.

5. We ARE NOT appeasing customers with free bumpers – DON’T promise a free bumper to customers.

There’s not a great difference between Apple and Dell corporate culture. The real differences come with the obnoxious Apple customer base (folks like me), the media attention Apple gets, and the benefits Apple delivers along with their bungles.