Aaron,
Thank you for a good article. The power of the i-net has just increased. I'm going to serve up some long term bullish demand elasticity.
Korea's Woes Could Cause PC Price Drop
(12/29/97; 12:06 p.m. EST)
By Todd Wasserman, Computer Retail Week <Picture>The continuing currency crisis in South Korea has created only minor ripples in the U.S. retail market, but it could lead to further price drops for PCs, components, and monitors this year, industry watchers said. As South Korean companies wait for a promised $55 billion bailout from the International Monetary Fund (IMF), they face a credit crunch at both home and around the world.
To stage a comeback, the affected companies may undercut rivals and overproduce in the region, resulting in cheaper PCs in the United States. The effect of South Korean overproduction has already been felt in the DRAM market. In mid-1996, the OEM cost of memory hovered between $30 and $40 per megabyte, but a worldwide glut that year led to current prices of about $3 or $4 per megabyte.
Analysts have said overproduction by The Samsung Group, LG Electronics, and Hyundai led to decimated pricing. And some South Korean companies say they will try to sell their products at lower prices to stay afloat.
The first dent in the market came in October, when Tae Il Media Company, South Korea's largest computer-parts maker, started facing serious cash-flow problems and then declared bankruptcy. Tai Il's problems hurt profits for TechMedia, a United States-based vendor, that had an exclusive deal with Tai Il. "Many people assumed TechMedia went bankrupt when Tai Il did," said Steven Cart, TechMedia's director of marketing, "and our competitors wasted no time spreading rumors about it." The Tai Il bankruptcy caused a product shortage, which hurt TechMedia's third quarter profits. TechMedia has since found a new supplier.
AST Research, one of the first vendors to introduce a sub-$1,000 PC in the United States, has been directly affected by the crisis. In December, the company cut about 40 percent of its staff after having laid off about one quarter of its employees in April. The vendor, a wholly owned subsidiary of Samsung, exited the U.S. retail market last summer.
Samsung, one of South Korea's top multinationals, or "chaebols," with its hands in businesses ranging from PCs to automobiles to shipbuilding, may be hurt more by the situation than smaller companies with a narrower focus, said Richard Zwetchkenbaum, an independent analyst based in Marlborough, Mass. "Even though one part of the business may be healthy, they're going to be hit on other sides," he said. "The impact is going to be greater than with companies simply rooted in one business."
Samsung's notebooks are sold though resellers, but its wireless telephone handsets are sold by PrimeCo, a PCS provider. Samsung has also announced a cable modem for the U.S. retail market. Samsung officials declined to comment on the situation, but released a statement detailing plans for a 30 percent downsizing that will not affect Samsung's U.S. operations, as well as a 30 percent cut in expenses and a 10 percent pay cut for Samsung's top executives. LG Electronics has not faced any currency crisis-induced problems yet, said Bennett Norell, the company's marketing manager. "We've been a lot more conservative than some others," he said.
Daewoo, which produces monitors and MPEG-2 compression boards (and is expected to offer DVD products in the United States), declined to comment, but a source at the company said employees recently received pay cuts. No layoffs have been announced. "These days we just wait to see what happens," the source said. Jack Legg, vice president of sales for South Korea-based TriGem, said the company can no longer do business on credit. All South Korean companies now share that problem. Typically, such companies work with South Korean banks, which provide them with letters of credit for goods and services. But since no companies today are accepting these letters of credit from the banks, TriGem must wire money directly to its business partners.
While the credit factor will make it more difficult for South Korean companies to do business, Legg predicted a resurgence fueled by the deflated costs of doing business in the region. "Right now, all the Korean companies are saying, 'What happened?'" Legg said. "But after they shake that off, they're going to be really competitive."
Despite the hard lessons such companies have learned in the DRAM market, competitively priced component production may be their only route to rehabilitation. Bae Chang Kyun, a manager at LG Electronics, recently told Business Week that the crisis will give LG "a competitive edge of between 10 percent and 15 percent in price terms" over Taiwanese monitor manufacturers.
Daewoo Electronics, meanwhile, predicts that its monitor exports will grow by 30 percent to 40 percent in 1998, from 2.1 million this year, according to Business Week. And at least one U.S. PC vendor has applauded the crisis's likely effects on the PC market in the United States. Hewlett-Packard is hoping the devaluations will boost sales in the United States by shaving $50 to $150 off computer prices due to the lower cost of components bought from Asian plants.
"Most of the components have roots in Asia, whether it be [South] Korea, Taiwan or Malaysia," said Jim McDonnell, worldwide marketing manager for HP's PC group. "Talking about the Asian market is one thing, but the U.S. market is going to benefit with lower-priced PCs." |
