A Positive 2Q for PCs, Driven Partially by Tariff Fears

According to IDC’s preliminary results, the traditional PC market did better than expected during the second quarter of 2019. Shipments of notebooks, desktops, and workstations into the market grew about 4.7% year over year, to hit nearly 65 million units during the quarter. Typically, this would be good news for a market that has seen more than its fair share of struggles in recent years. Unfortunately, this unexpected growth wasn’t driven purely by market demand. Some of it was the result of vendors operating with a high level of fear, uncertainty, and doubt about the status of the U.S. trade war with China and the potential impact of an escalation that could lead to tariffs on finished PCs.

The Good News
The prelim results showed growth across a wide swath of countries and regions. Of note: Canada continued its 12-quarter growth streak with a whopping 11% year-over-year gain, Japan continued to grow its commercial segment, and India grew thanks in large to part a huge education tender that drove more than 1 million units during the quarter. The U.S. also returned to growth after a slow start to the year.

There were three primary positive drivers during the quarter: Shipments for the back-to-school season, an easing of supply constraints from Intel on processors, and the upcoming Windows 7 end of life. On January 14, 2020, Microsoft will no longer provide security updates or support for Win7 PCs. Unlike the Windows XP EOL, which drove massive shipment gains back in 2014, companies are much further down the road to moving off the old operating system. So while this transition drove some volumes in the second quarter, and will positively impact the second half of the year, we don’t expect to see the huge increases we saw around XP.

The Bad News
Unfortunately, at least part of the shipment volume increases in the second quarter was the direct result of the ongoing trade tensions between the U.S. and China. While this primarily impacted those two countries, the issue permeated the entire industry. In the U.S., it appears some vendors shipped higher-than-needed volumes into the channel because they feared the U.S. would implement its List 4 tariffs, which would directly impact finished PCs.

At present, we don’t have a great sense of just how much oversupply is in the system, and it certainly varies by vendor. Of course, we now know the U.S. administration didn’t implement this escalation during the quarter. However, the threat remains, and this could lead vendors to continue to overstuff channels to beat the system in the second half of the year. So we could see more artificial growth in the months to come.

In China, the impact of the tariffs has caused the opposite result: Commercial organizations are holding off on needed PC purchases due to the resulting slowdown in the Chinese economy. A large number of companies there are likely to continue to hold off on purchases while they wait to see how the rest of the trade war plays out.

Looking Ahead
Tim Bajarin recently wrote about tech manufacturing moving out of China, and that’s an ongoing topic of discussion throughout the PC market. PC vendors and their ODM partners are looking for options to move some or all of their manufacturing out of China, and some have already begun the process. These companies are looking at both new countries as well as places that were previously major producers (such as Taiwan). While many companies had been looking at moving some manufacturing out of China due to rising costs there, the trade war has forced these companies to divert resources toward speeding up this process. If a trade war escalation causes these companies to make drastic moves, the results could be a disruption in supply.

The other underlying challenge for manufacturers looking to move out of China is the fact that there’s a chance that the U.S. administration could, in turn, levy tariffs on additional countries. For example, some vendors have looked at moving some manufacturing to Mexico, only to have the administration threaten (and then shelve) tariffs on that country.

Ultimately, all of this uncertainty results in companies having to divert resources, which results in a negative drag on a PC market that’s been trying to return to sustainable growth for years. While the threat of tariffs may drive short-term shipment growth as companies try to “beat the clock” in a given quarter, oversupplying channels isn’t a sustainable business model. With no clear end to tensions between the U.S. and China in sight, expect these issues to continue to impact the PC market for the foreseeable future.