HP's bad quarter could prove bad for America

China on verge of being world's top PC maker, and the PC business of HP or Dell could be headed there too

 Unless Hewlett-Packard gets its act together quickly, Lenovo will soon become the world's number one PC maker.

If that happens, it's going to create a moment of national angst.

Headlines would declare: Chinese firm becomes world's top PC maker, displacing U.S., or, more simply, Chinese firm now leads world in PCs.

A Lenovo lead in the PC market would prompt widespread commentary about how the U.S. is losing its place in the world as the tech leader.

Some others in the technology chattering class could try to rationalize it, declaring that the PC is just a commodity and that we've entered the post-PC era.

That would be wrong. We're no more in the post-PC era than we are in the post-car era. The PC is, and will remain, a monumentally important part of getting work done.

Thanks to HP's most recent -- and dismal -- quarter, the U.S. may be only months away from turning over PC leadership to China.

Overall, HP posted an $8.9 billion quarterly loss, much of it due to its IT services division. But the personal systems group's 10% decline in revenue may be as significant as it just may be enough to help get Lenovo to the top of the PC market by year's end.

Declining global PC share

Gartner's report on second quarter PC shipments, released last month, showed HP with 14.9% of the world's PC market, and Lenovo with 14.7%. Most troubling for HP in the Gartner report were the PC growth rates -- HP's share declined by more than 12% while Lenovo's share increased by nearly 15%.

IDC's latest market share numbers give HP a little more breathing room. The Framingham, Mass., research firm listed HP's second quarter worldwide PC share at 15.5%, and Lenovo at 14.9%.

IDC found HP's market share decline similar to the percentage in Gartner's report, but it also found much faster year-to-year growth rate for Lenovo -- just over 25%.

Either way, both research firms had Lenovo close to being the world's top PC maker. "Lenovo has been making great progress around the world," especially in the Asia-Pacific region, said Crawford Del Prete, an analyst at IDC. A big consumer push is helping Lenovo as well.

The decline in the PC business isn't a new problem for HP.

Last year, former CEO Leo Apotheker even floated the idea of spinning off the PC division -- an idea, along with some other issues such as the TouchPad disaster, that led to his ouster.

New CEO Meg Whitman decided to maintain the PC unit, reasoning that it'stoo important to the HP brand and supply chain to abandon.

Michael Dell had reached a similar conclusion about his own company, saying that he expected the number of PCs in the world to grow from 1.5 billion to 2 billion in not too many years it would be crazy to sell off the division.

But that was last year.

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Stock Market Computer Glitch Plenty to Worry About

Last week Knight Capital Markets, a brokerage firm that was responsible for over 10 percent of all trading in U.S. company stock, suffered a raft of computer glitches that executed millions of non-existent orders in less than 30 minutes. Knight lost $440 million and its stockholders took a bath. As usual, the reaction on Wall Street was to describe the event as nothing to worry about.
I think there is plenty to worry about, and I sure don't mean I worry about Knight's stockholders. I worry about what the series of High Frequency Trading computer malfunctions we have experienced -- Knight being just the latest -- are doing to the confidence level of individual investors in our markets.
That confidence level was certainly shaken by the Flash Crash of May 6, 2010, when the markets fell 9 percent in minutes. It took regulators five months to install some ineffectual circuit breaker band-aids without addressing the fundamental market structure problems. This year, before Knight, we had already seen the BATS Global Markets and the Facebook fiascos. HFT played a major role in both.
HFT didn't really exist before 1999 and is essentially unregulated, much less understood. During the 12 years HFT has expanded to account for over 50 percent of all trading, and we grew from two regulated stock exchanges to over 50 different venues including essentially unregulated "dark pools." I believe our markets, once the envy of the world, have been allowed to run amok.
In August 2009, before the Flash Crash, I wrote SEC Chair Mary Schapiro pointing out the explosive growth of HFT and the new off-exchange trading venues. I asked the agency to institute a consolidated audit program (CAT) to investigate the effects of HFT and these venues on the operation of our markets, and what the impact these new developments had on retail investors.
Shortly thereafter, Ms. Schapiro endorsed the importance of a CAT and the intention of the SEC to implement one. It took three years, until last month, for the agency to announce a CAT. Unfortunately, I agree with SEC commissioner Elisse B. Walter that the result is "disappointingly weak."
In August 2010, I wrote the SEC again. This time I proposed a comprehensive review of the market structure issues that had accompanied HFT's rapid evolution. I requested an independent zero-based regulatory review of a broad range of market structure issues, "analyzing the current structure from the ground up before piecemeal changes built on the current structure increase the potential for execution unfairness." My proposal included eight pages of possible market structure solutions.
A month later, speaking before the Economic Club in New York, Ms. Schapiro endorsed a comprehensive investigation of market structure issues, saying:

We must carefully consider whether our market structure rules have kept pace with the new trading realities... The important questions are to what extent is our structure meeting or failing to meet its goals of fair, efficient and transparent markets, and how can we modify the structure to preserve the advantages and eliminate the flaws?

"Answering these questions," she said, "will not be easy, but I do know this: hard and careful work to strengthen our equity market structure will bring important dividends to investors, companies, and the economy as a whole."
Two years later, it remains a good speech. Nothing resembling a truly zero based, comprehensive investigation has been presented.
Part of the blame for this must go to the current House of Representatives, which not only opposes virtually any new Wall Street regulations but has actually proposed cutting SEC funding by $200 million.
Thomas Joyce, Knight Capital Group's CEO, has for years been a leader in the fight against any regulation of HFT. Defending his firm's fiasco on Bloomberg Television, he said, "You cannot keep people from doing stupid things. That is what happens when you have a culture of risk."
Really? The fact that people do stupid things in a culture of risk is the very reason I have been fighting for at least a basic understanding of the effects HFT has had on our markets. The markets don't belong only to people like Mr. Joyce; they should and must belong as well to individual investors. Congress and the regulators must recognize that action is long overdue.