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John G. Spooner

Staff Writer, CNET

As many as three of the top 10 PC manufacturers may be forced out of the global PC market by 2007, a new report by Gartner predicts.

The report, published Monday, said that lower demand for PCs between 2006 and 2008 will spur the next round of consolidation in the PC market. Earlier this month, Gartner cut its forecast for fourth-quarter PC shipments.

Dell, Hewlett-Packard and IBM rank as the world’s top three manufacturers in unit shipments, while Fujitsu, Fujitsu-Siemens, Toshiba, NEC, Apple Computer, Lenovo Group and Gateway rank fourth through 10th.

Gartner predicts annual unit shipments of 11.3 percent and annual revenue increases averaging 4.7 percent between 2003 and 2005. Despite that relatively profitable period, 2006 will bring tougher times as demand for new PCs slows and competition between vendors increases, the research firm said.

Many businesses and consumers will have replaced their oldest computers by the end of 2005, completing the latest PC replacement cycle. As owners typically replace desktops every four years and notebooks every three years, that should leave demand slack between 2006 and 2008. That period will see average annual unit shipment and revenue growth slow to 5.7 percent and 2 percent, respectively, Gartner predicted. So-called emerging markets such as China will deliver the best growth during that time, but will be unable to offset slack demand elsewhere, the Gartner report added.

If the predictions hold true, the 2006-to-2008 time frame will make for better times than 2000 to 2002. The market contracted in 2001 and grew only slightly in 2002, leading to the blockbuster Hewlett-Packard-Compaq Computer merger. Micron Technology also sold its Micron Electronics PC arm, now called MPC Computers. Gateway, whose financial troubles began during that period, acquired eMachines in March and embarked on a massive restructuring.

Gartner said that lower revenue and unit shipment growth in 2006 through 2008 will be just as traumatic for manufacturers as it was in years prior.

The research firm stopped short of predicting which of the top 10 companies is most likely to stumble. Instead, it laid out several scenarios. Facing the potential of slower growth, some manufactures might acquire or merge with others, as HP and Gateway did, or firms may retreat into the regional markets that gave them their start. Some companies–namely IBM or HP–might spin off their PC businesses and focus elsewhere, Gartner said.

But HP has no such plans, a company executive said.

“Our business is stronger than ever,” said Deb Nelson, vice president of HP’s Personal Systems Group, its PC business. “It’s a critical part of our broad portfolio of products and services. We’re in it for the long haul.”

IBM executives have said the same of their company.

“The bottom line here is that the vendor landscape will look very different in the next couple of years,” said Leslie Fiering, an analyst with Gartner.

There’s still time for PC makers to batten down their hatches and enact cost cuts and other measures that will help them ride out a storm of slow growth and price competition, she said.

“The vendor landscape will look very different in the next couple of years.”

–Leslie Fiering, Gartner analyst

For its part, Dell–which can use its relatively low operating costs to reduce prices and still profit–is in the best position for weathering a downturn in demand, Fiering said. The company did so between 2000 and 2002.

A Dell representative declined to comment.

Aside from stealing market share from competitors, the best opportunity for boosting shipments will lie in emerging markets, including China and India, according to Gartner. Unit shipment growth rates will remain relatively high in these markets during 2006 to 2008, Gartner predicts. The situation could help local companies gain more presence on the global stage and hinder larger multinationals, which tend to have a smaller presence in the regions.

Gartner isn’t alone in predicting slower PC market growth in the 2006 to 2008 time frame. During September, IDC lowered its forecast for unit shipment growth in 2005 and warned of even slower, single-digit growth rates in coming years.

“It looks like the unit growth from 2006 to 2008 is going to be in the 8 percent range…driven by nondeveloped markets and a steady replacement market in the developed world,” Roger Kay, an analyst with IDC, said.

The story is that PC market is maturing and thus moving beyond the stage of massive growth, Kay said.

“Effectively, the world has been explored and there’s not a lot of new markets out there,” he said. The “market could stabilize in the numbers we’re talking about now–150 million to 200 million units per year.”

IDC’s 2004’s PC unit shipment forecast is for shipments of 176.5 million, up 14 percent from 2003.