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To: Calvin who wrote (142525)	9/22/1999 10:21:00 PM
From: Calvin	Read Replies (1) \| Respond to of 176387

Taiwan Troubles for Cheap PCs By Alec Appelbaum SINKING CHIPS 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.