September 22, 1999
Taiwan Troubles for Cheap PCs
By Alec Appelbaum
THE EARTHQUAKE in Taiwan, the
worst in the island's history, caused
vast human suffering and devastating loss of life. It will take months, if not
years, to rebuild. While Taiwan struggles to recover, makers of cheap
computers may also be fighting for their lives.
Why? It all stems from memory chips -- the hardware that lets computers store
files and call up programs -- 12% to 15% of which are fabricated in Taiwan.
Drops in prices of DRAM (dynamic random access memory) chips fueled the
price war in PCs, enabling newcomers like eMachines and Microwerkz to sell
computers for $500 or less. Between 1996 and 1998, the average price of a
DRAM chip dropped by more than 90%. Even before the earthquake disrupted
Taiwanese production, rising demand had pushed the price of a 64-megabit
DRAM chip from $4 in June to $15 last week. The quake is almost certain to
send those prices even higher -- and cheap-PC makers may not even be able
to get chips at any price.
As this suggests, the price of DRAM chips is one of the more volatile
ingredients in the computing mix. According to market-research outfit Semico
Research, PC makers such as Dell Computer (DELL) started keeping their
inventories of memory chips very low, in order to avoid holding a lot of chips
when prices went down. But analysts say demand for computers with
bulked-up memory to handle Internet downloads and graphics-intensive
applications kept growing right along. As a result, Semico analyst Bob Merritt
says memory-chip prices could increase by at least 10% per quarter into next
spring, and the disaster in Taiwan could add a couple of percentage points to
that hike this quarter. (IC Insights analyst Brian Matas says fewer than 5% of
the popular 64-megabit chips come from Taiwan.) Dataquest analyst Bruce
Bonner says the Taiwan earthquake could trigger an increase in memory prices
on "emotional" grounds, as sellers and buyers assume that their world has
been disrupted.
The companies that really might have to sweat all this out are cheap-PC
specialists like eMachines and Microwerkz. "Low-end PCs tend to use
chipsets from a couple of Taiwanese companies," says Bonner's colleague Jim
Handey. Worse than price increases, Handey says the earthquake in Taiwan
could cut off these companies' supply of chipsets and other ingredients, leaving
them with nothing at all to sell. Danny Lam, a principal with
semiconductor-research concern Fisher-Holstein, agrees, saying the
earthquake creates a "very high risk" of rationing by memory-chip makers to
PC makers. "It could be that, pricing aside, there is going to be an availability
problem," Lam says. If that rationing takes place, companies with strong
supplier relationships should be better-equipped to sweat out the shortage. On
the other hand, those that have been very tough with suppliers -- like, Lam
says, the folks at Compaq Computer (CPQ) -- could be in for a rough time.
And the quake could create problems for cheap-PC makers in other elements
of the production process. The economics of the business "depend on cheap
offshore assembly," according to Dataquest's Bonner. While this assembly
takes place in Malaysia and Thailand as well as Taiwan, he says, Taiwan has
a reputation for excellence in "high-quality" assembly. If the labor force that
puts together cheap PCs has no factory in which to work (or any home in
which to rest), cheap-PC makers could reel.
But don't expect any of them to fall down right away. Sherry Garber of Semico
Research points out that cheap-PC makers can always load "as little memory
as they can" onto their bare-bones machines. And so what if rising costs
squeeze their margins even further? These manufacturers are increasingly
following the lead of the cell-phone industry, analysts say, taking losses on
machines in order to make money on services like Internet access.
While the quake's impact on chip prices is likely to be temporary, analysts
expect the longer-term squeeze in the market to worsen. As whizzy Internet
access and zippy graphics continue to drive demand, DRAM prices could well
keep rising. And increasing costs would make that cell-phone model pretty
costly. The financial aftershocks from this disaster may be felt for some time to
come.
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