Computers and Chips
Business Week Jan. 10, 2000 Article:
In 2000, personal-computer makers will try to forget the monster they let loose on themselves in 1999: the almost-free PC. They'll go back to selling PCs the old-fashioned way-charging as much, rather than as little, as possible. But don't be fooled by the seeming return to normalcy. It won't last.
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To be sure, PCs will remain hot, with unit shipments jumping an estimated 19% this year. But come next winter, PCs could be upstaged by a flurry of newfangled Net appliances--not just from relatively unknown pioneers such as TiVo and Research in Motion (RIMM) but from such heavies as Compaq (CPQ), Gateway (GTW), and HP (HWP). Fortunately, 2000 will provide a healthy backdrop for the new thrusts. 'All of our customers are just doing fantastic right now,' says Michael E. Marks, CEO of Flextronics Inc. (FLEX), a contract manufacturer that serves a wide swath of the electronics industry.
For chipmakers, all the new-product activity is icing on the cake--adding promises of lucrative new markets to go with the welcome relief from years of overcapacity and soft prices. Sales set a monthly record last October--$13.4 billion--and 2000 will be another best year ever, predicts Walter G. Lahti, an analyst with consultant Integrated Circuit Engineering Corp. Overall, he looks for a 17% increase in chip sales, to $169 billion. That's $25 billion more than the industry's previous peak in 1995. And surging chip sales mean increased demand for semiconductor production equipment, says James C. Morgan, CEO of market leader Applied Materials Inc. (AMAT) 'With DVD players and high-definition TVs and all those new applications for the Internet, there's a lot happening out there,' he notes.
Much of the action is in chips for wireless communications and Net equipment, with more innovations on the way, judging from trends at Texas Instruments Inc. (TXN), a big supplier of chips for digital phones. Last year, small upstart companies working on new telecom systems bought 30% of TI's output, up from 22% in 1998, says Foreward Concepts Inc. market watcher William I. Strauss.
All the new-product development is exacerbating a tight chip-supply situation stemming from recent capital-spending cuts by Asia's chipmakers. As a result, supplies should be tight all year, says Kenneth F. Potashner, CEO of chipmaker S3 Inc. Indeed, prices for flash memory chips--used in digital cameras and MP3 music players--have jumped 50% in recent months. The beleaguered makers of commodity memory chips, led by Korea's Samsung Semiconductor, are also cheering. From 1995 to 1998, their revenues dropped more than 50%, to $25 billion. But the memory-chip business is on the mend. It grew 38.3% in 1999, and sales should increase 33% more this year, to $44 billion, says Dataquest Inc. analyst James Handy.
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PC makers probably will get their holiday from steep, 30%-a-year price declines. Analysts project a drop of just 10% in average price, to roughly $1,200. And given the likelihood of a chip-supply squeeze and high parts prices, PC prices could even rise. There's also less demand for 'free' PCs. The percentage of retail buyers willing to sign up for long-term Internet service to earn hefty rebates fell from 4.1% in July to only 1.4% in November, according to Allison Boswell Consulting Inc.
Besides, PC demand remains strong. While IDC pegs unit growth at a brisk 19%, that could turn out to be low. 'With all the Y2K uncertainty out of the way, I think it's going to be a great year,' says G. Carl Everett Jr., senior vice-president of Dell Computer Corp. (DELL) Analysts look for major gains in laptops and smaller, simplified PCs such as Dell's new WebPC and Gateway's Astro. Apple Computer Inc. (AAPL) is expected to polish off the year with 20%-plus revenue growth. And in Japan, PC sales have also been rebounding.
In fact, PC makers are likely to have trouble getting enough chips and notebook displays to satisfy demand. Analysts say fourth-quarter PC production dipped more than 15%, in part because of supply dislocations from the Taiwan earthquake in September. 'A lot of the third-tier guys are being forced out of business because they can't get parts,' says Gilles Bouchard, operations chief for HP's home-PC division. 'I haven't seen that in years.'
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