Dell Now Battling Quality Control Problems, On Top Of Everything Else?

Recent data points indicate that on top of mounting corporate governance and sluggish growth issues, Dell may be also battling quality control problems. The quality problem relates to low end servers, laptops, and desktops, not the high-end server models. Channel checks indicate a noticeable increase in the number of machines that need to be serviced by Dell in the field shortly after delivery, and also units returned to Dell for replacement/repair.

For the most part, Dell outsources assembly to offshore partners in Taiwan and China. It is not clear yet if the issues are caused by sloppy manufacturing or design flaws. We suspect the former, and will continue to check field data. In addition, Dell is struggling through early adoption of the Microsoft Vista operating system, and users may not be able to differentiate whether the problems they are having with new laptops stem from poor build quality, design issues, instability in the operating system or incompatibility in application components with Vista. Quality issues with Dell laptops are nothing new - we routinely saw evidence of that last year.

The rise of problems with low end servers and desktops is troubling -- and our checks indicate that it is costing Dell money and starting to erode its brand. The timing of this quality lapse could not be worse for management, considering the recent announcements about errors in accounting and lax financial controls.

Bottom Line: We are extending the time-line of an expected Dell recovery into 2008. Given the growing list of problems for management to resolve, it is increasingly likely that Dell will not have its act together in time for the all-important 2007 back-to-school and holiday seasons.

Disclosure: None