Chip prices to eat into Dell's profit

Dell, the world's leading direct seller of personal computers, warned yesterday that profits would be hurt by the rising price of memory chips. The increased cost is a direct result of the earthquake in Korea, where most of the memory components are made.

Higher memory chip prices will add about $75 (€69) to the cost of making a computer, Dell said. Its average machine sells for about $2,200, and its lowest-priced for about $800. Dell employs 3,500 people in its Irish manufacturing plants in Limerick and around 850 people in a support and services centre in Bray, Co Wicklow.

Shares in Dell fell by over $3 in trading yesterday, closing at $37.94. Earlier, Dell touched $37 in its biggest drop since May. Although Dell has been the best-performing stock on the Standard & Poor's 500 index in each of the last three years, it has risen by only 3.7% in 1999.

Memory prices jumped last month after an earthquake hit Taiwan, where many PC parts are made. Dell said it will reduce the amount of memory in its PCs to hold prices down.

Customers who want more will have to pay for it, prompting analysts to predict that sales may slow if buyers are not interested in less powerful models.

"Our concern is a lot of customers won't buy into this proposition," said Mr Steve Fortuna, an analyst at Merrill Lynch in New York who rates Dell shares "neutral".

"They may defer purchases until the first part of next year," he said. Bear Stearns analyst Mr Andrew Neff cut his rating on Dell to "attractive" from "buy" and made the same cut on Gateway, the number two direct seller of PCs.