War of Words Between Rival Manufacturers of PCs Gets Ugly : Computers: Packard Bell accuses Compaq executive of racism. Compaq has sued over rival’s reuse of parts.

A bitter legal and marketing battle between two giants of the personal computer industry has taken an unusually nasty turn with Packard Bell denouncing remarks made by a Compaq Computer Corp. executive as an indication of “unadulterated racism.”

The two companies are locked in a fierce duel for preeminence in the consumer segment of the personal computer business, and Compaq last month raised the stakes with a lawsuit accusing Packard Bell of putting used parts in its computers. Packard Bell says it follows standard industry practices on the reuse of parts and accused Compaq of “diversionary tactics.”

Now closely held Packard Bell is taking umbrage at remarks made last week by Ross Cooley, vice president for North America for Compaq Computer, during a computer expo in New York.

Cooley was quoted as saying that Packard Bell President and Chief Executive Beny Alagem has been unable to take the company public because investors fear that without him, the company would be nothing but “some Mexican factories and four Chinese engineers.”

“Clearly Compaq is feeling the heat, but there is no excuse for its executives to make racial slurs,” Alagem said in a prepared statement.

Marshall Grossman, an attorney representing Packard Bell, was even more vehement: “It’s particularly ironic that Compaq, as a company headquartered in the Southwest, would be so insensitive to such a large segment of the population.

“It also underscores that Compaq’s vendetta against Packard Bell is driven both by anti-consumer sentiment and sheer, unadulterated racism.”

Cooley conceded that he had made the remark, but he said it should be viewed in context of a discussion about Packard Bell’s practice of hiring outside contractors to do much of the company’s work. “It is absurd to construe my remarks as derogatory to any ethnic group,” he said in a statement.

Bob Beach, a spokesman for Houston-based Compaq, said Packard Bell is trying to divert the public from the “real issue” of whether the company employs used parts in its computers.

Meanwhile, Westlake Village-based Packard Bell said it will begin disclosing that some computers sold as new may have parts that were recycled from computers returned by consumers. Spurred by allegations from Compaq, attorneys general in 12 states have been investigating whether Packard Bell installs used parts in its PCs, and the two companies are embroiled in a lawsuit over the issue.

Compaq has also sued Packard Bell alleging patent infringement.

Packard Bell called the suits “diversionary tactics” aimed at forcing it to incur legal expenses and pass those costs on to the consumer. Packard Bell has thrived by selling inexpensive computers via discount electronics stores and other mass merchandisers--a part of the business that has grown enormously over the past two years and thus become much more important to Compaq.

Packard Bell said it will cooperate with the inquiry on used parts and will invite the attorney general of Florida to its headquarters for a personal tour.

Grossman admitted that some parts in Packard Bell PCs sold as new were in fact previously used in Packard Bell computers. But he said they come only from computers that have been returned and that they are used only if they are in perfect condition. Grossman characterized the practice as common in the industry.

“Computer chips have a lifetime of 1,000 years,” Grossman said. “For a company to throw such chips into the trash would be an obvious waste of money.”

Another major manufacturer of PC clones, Austin, Tex.-based Dell Computer Corp., said it rigorously tests computers returned within 40 days of purchase in order to reuse parts. If the computer tests perfectly and individual components test perfectly in subsequent tests, the parts might go into a new computer, said Dwayne Cox, a Dell spokesman.

“We fully and clearly disclose” the practices on the computer’s warranty, Cox said. Packard Bell will begin to include the disclosure used by Dell, Grossman said.

Both companies said in April that they were cooperating with a Federal Trade Commission inquiry into the practice.

Compaq was the No.1 supplier of personal computers last year, with 10% of the world market, according to the market research firm International Data Corp. of Framingham, Mass.

But Packard Bell, with $3 billion in sales last year, has a strong position in mass-market retail channels and is the choice among many consumers buying PCs for the home, one of the fastest-growing segments of the market.