Industry Outlook from Business Week: Chips and Computers
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COMPUTERS & CHIPS
After two years of bumpy results, executives in the computer
and semiconductor industries were looking forward to a
resurgence in 1998. But that was before Asia's economic
sniffles turned into a bad case of the flu. Now, next
year's projections of solid growth rates--14% for computers
and 17% for semiconductors--are clouded by the potential
impact of Asia's woes.
The high-tech crowd often brags about its worldwide reach,
but globalization can cut both ways. In 1996, Asia was the
helium that helped offset leaden results in the West. The
balance began shifting last year, and Asia will be the
laggard in 1998. Growth of personal computer sales in Japan
probably won't squeak past 5%--less than one-third of what's
in store for the U.S., predicts International Data Corp.
(IDC).
As for chips, the Semiconductor Industry Assn. expectation
of a 17% climb in 1998 world sales marks a welcome change
from the 9% decline in 1996 and meager 6% growth in 1997.
In Asia, though, the boost in chip revenues will dwindle to
12%. ''Korea is not the only fly in the ointment,'' says
Carl R. Johnson, president of Infrastructure, a Dallas
market watcher. ''Japan is certainly questionable, as are
Taiwan and other Far East countries.''
That could be especially painful for suppliers of chip-
manufacturing gear. Their stock has been slammed by Wall
Street since October. Asia accounts for 54% of global
semiconductor capital expenditures, so Morgan Stanley, Dean
Witter, Discover & Co. has halved its growth forecast for
''semi equipment'' to around 10%. ''Asian chipmakers could
have a hard time financing equipment purchases,'' says
analyst Mark L. Edelstone.
OVERREACTING. Sounds bleak--until you put it in perspective.
Even at lower-than-hoped-for growth rates, the computer and semiconductor duo is expected to expand nearly three times
as fast in 1998 as any other industry surveyed by Standard &
Poor's DRI. That's on top of average increases of nearly
33% a year since 1993. Despite periodic ups and downs, high
tech is still hot--and a big contributor to gross domestic
product.
What's more, many high-tech execs say Wall Street has
overreacted to the Asian mess. James C. Morgan, chairman of
equipment maker Applied Materials Inc., figures his sales
might get nicked 5% if Korea slashes spending on chipmaking
equipment in half, a retrenchment he considers overly
pessimistic. Yet tech stocks have been hammered as if Asia
were the world's premier market for technology.
In fact, it accounts for just 18% of worldwide spending on
information technology--a figure that shrinks to 2% for the
countries in deep trouble: Indonesia, Malaysia, the
Philippines, and Thailand. Even if their spending ceased,
in the big U.S. and European markets could easily
compensate.
On the other hand, with investor expectations so charged up
by earlier promises of a strong recovery, signs that the
Asian disease is spreading could trigger panic. But chip
and computer companies don't see that in the cards. In fact,
they figure that falling prices should spark increased
demand. The rise of cheap PCs, especially models priced at
less than $1,000, pushed up sales in 1997 and should add
fuel to PC fires this year. Sub-$1,000 PCs grabbed a quarter
of the market in 1997, says market researcher Dataquest Inc.,
and their share could top 33% this year. Thanks to these
low-priced machines, Dataquest adds, penetration of U.S.
households has edged above 40%.
Now, low-price PCs are spreading beyond the home market.
Early this year, look for producers to roll out $800 systems
geared for corporate desktops. ''All the competitors are
just killing themselves to get our [customers],'' says James
P. McDonnell, computer marketing manager at Hewlett-Packard
Co. ''It's driving all our prices down, down, down''--and he
hopes sending sales up, up, up.
Even so, PC unit growth in 1998 won't match recent years.
Some 90 million PCs will be sold worldwide, projects IDC, up
14% from 1997. Although that's a comedown from the heady 25%
jump in 1995, it's still 30 million more units than were sold
that year. Overseas, Europe will trail U.S. gains, with PC
sales climbing about 8%, while vigorous demand in China and
India could help Asia post 10% growth outside Japan.
One company that may not chalk up any improvement is Apple
Computer Inc. Its market share hit a new low of just 3.3%
in 1997--less than half of what it was in 1995 and a quarter
of its 1993 share. Analyst Michael K. Kwatinetz of Deutsche
Morgan Grenfell Inc. predicts that Apple will eke out a
small profit in its fiscal year ending next September. But
he forecasts a further decline in revenues.
PC price cutting exacts a toll on profits, especially among
suppliers of disk drives and other parts. But for computer
makers, the bargain hunting will be counterbalanced by
free-spending buyers snapping up costly--and highly profitable--servers and technical workstations. IDC
projects a 16% boost, to 2.6 million units, in sales of
servers. These are the centralized systems that store data
and run high-octane software such as databases and
intranets. Workstationscould surge 40%, to 2.7 million units.
Also caught by the tug-of-war between cheap PCs and high-end
systems is Intel Corp. The giant is raking in cash from its
near-monopoly in PC processors, but analysts expect earnings
growth to taper to just 11% in 1998--far below the past five
years. The company has a two-prong strategy to keep profits
up: churning out high volumes of cheaper Pentium IIs to fend
off rivals on the low end and pampering power users with
superfast designs that rev up to 450 megahertz.
Intel knows its competitors are tougher than ever. Advanced
Micro Devices Inc. (AMD) is rapidly scaling up production
of its K6 chip, a Pentium II alternative that sells for
one-quarter the price. AMD has won over such top vendors as
IBM and Compaq Computer Corp., which plan to use the chip.
If AMD makes good on its production goals, it could snag
more than 10% of the PC-processor market in 1998. Then
there's National Semiconductor Corp., which aims to harness
the processor technology it got last year by buying Cyrix
Corp. to create ''system-on-a-chip'' devices that cram all
the functionality of a PC into a single sliver of silicon.
These products aren't imminent in 1998, so National will
bide its time by selling Cyrix' popular Pentium rival, the
MediaGX.
LETHARGY. The prognosis for memory chips isn't as bright.
Although unit shipments of DRAMs soared 90% in 1997, you
wouldn't know it from dollar-sales figures. That's because
DRAM prices have been in free fall. They plunged 75% in 1996
and 65% more last year. As a result, the chip industry
seemed less robust than it really was, says Lawrence W.
Borgman, an analyst at Josephthal & Co. But a turnaround may
be in store. Despite the Asian crisis, DRAM revenues in 1998
could rise 20%, to $25 billion. That would be welcome news
to Japan, South Korea, and Taiwan, which account for 80% of
world DRAM production.
Beyond the current lethargy in desktop computers, many chipmakers see promise in new products. One area is digital consumer
electronics, including handheld PCs, digital videodisk
players, smart phones, digital TVs, and set-top boxes.
None of these markets is as large yet as manufacturers had
hoped, but they'll make headway in 1998. Smart phones will
climb to 1.5 million units this year, up from 800,000,
predicts Yankee Group. The biggest prize: set-top boxes,
which could surge 59%, to 13 million units, says Dataquest.
Intel and Microsoft Corp. are vying to set the standards for
these VCR-size computers--despite price tags as low as $300.
All this new business won't pull Asia out of the fire or
bring the 20%-plus growth rates that PC and chipmakers love.
But it's another rung on the ladder to recovery.
By Andy Reinhardt, with Peter Burrows, in San Mateo, Calif.,
and Otis Port in New York |
