Suffering Parts Suppliers Watch PC Firms Cash In
Date: 3/2/98
Author: Nick Turner
It's truly a tale of two cities in the personal-computer industry.
For PC makers, it's the best of times. Dell Computer Corp. last week announced its sales and earnings have hit new highs. Market leader Compaq Computer Corp. last month reported its best quarter on record. And even anemic Apple Computer Inc. showed some profit in its most recent quarter.
But for companies that make PC parts, it's the worst of times. A glut of disk drives and memory chips sent component prices into a free fall last year.
There are signs of improvement, but disk-drive makers such as Seagate Technology Inc., Quantum Corp. and Western Digital Corp. still are reeling. Chipmakers such as Texas Instruments Inc. and Micron Technology Inc. are getting burned as well.
Don't expect PC makers to lend a helping hand to their tech brethren any time soon. There is growing pressure on computer builders to cut costs as PC prices drop well below the $1,000 level.
''PC makers aren't stopping at a sub-$1,000 PC or even a sub- $800 PC. All those guys want to do a sub-$500,'' said Jim Porter, president of Disk-Trend Inc., a market research firm in Mountain View, Calif. ''They are out beating their suppliers over the heads and shoulders to come up with components that will enable them to do that.''
Besides, this rich man/poor man dichotomy isn't counterintuitive. After all, PC makers benefit from lower-priced components. And the phenomenon isn't new. Both the chip and disk-drive markets always have been cyclical.
But the industry landscape is changing. Not only are PC makers lowering prices to drive more units into the market, they also are trying to cut parts inventories so they can save on costs.
The bottom line is that component makers need to find new ways to make cheaper products, as well as deliver exactly the right parts - fast.
Before they accomplish any of that, though, makers of disk drives and other parts first must solve oversupply problems. Growth in the PC market is expected to soak up much of this excess capacity.
PC shipments grew about 15% last year, according to International Data Corp., a Framingham, Mass.-based market research firm. And hot segments, such as servers and portable PCs, grew much faster.
Yet many makers of PC parts still have inventory piling up.
Take disk- drive companies. Two years ago, some industry watchers thought severe boom-and-bust cycles were over for disk-drive makers. A series of mergers were supposed to cure industry ills.
But Asian manufacturers, such as Japan's Fujitsu Ltd. and Korea's Samsung Group, continued to fight hard for market share. They and others have flooded the market with products, forcing some manufacturers to unload inventory at fire- sale prices.
U.S. disk-drive makers are doing their best to be prudent, Porter says. They've cut back on production and refuse to sell products at a level below cost.
As sub-$1,000 PCs rise in popularity, though, the demand for cheap drives is strong. Drive manufacturers acknowledge they must find ways to more efficiently produce the devices. PC makers currently pay $90 to $100 for a low-end drive. But as computer prices drop toward $500, PC builders will demand drives for $50 to $60, Porter says.
''The challenge for us is to get to market with very cost-effective drives,'' said Bob Blair, a spokesman for Western Digital of Irvine, Calif. Right now, makers of sub-$1,000 PCs ''are not being supplied with drives specifically designed for that purpose. Instead, they're being supplied with excess drives.''
As they adopt a ''build to order'' mentality and shed inventory, PC makers also are pressuring suppliers to provide parts ''just in time'' - or only when assemblers need to put them into machines.
Of course, direct PC sellers, such as Round Rock, Texas-based Dell and North Sioux City, S.D.-based Gateway 2000 Inc., long have used this strategy. So, even if Compaq and others adopt build- to-order plans, drive makers should be able to adjust.
''It's not a change in their lifestyle,'' said Porter. It's been part of their financial results for at least the last year, he says.
Makers of memory chips, meantime, face their own challenges. Thanks to a glut, dynamic random- access memory, or DRAM, chips have been selling at or near cost since late '96, says Jim Handy, analyst at Dataquest Inc. in San Jose, Calif.
The market was worth about $22 billion last year, down 14.5% from '96, Handy says. And he sees no relief for some time.
''There won't be a shortage until the year 2000,'' he said.
The Asian economic flu could make matters worse. Most DRAM chips are manufactured in Japan and Korea. So far, says Handy, Korean companies have gone along with prices set in Japan.
But shifts in exchange rates could allow them to sell products for much less. The fortunes of U.S. manufacturers, such as Boise, Idaho-based Micron and Dallas' Texas Instruments, hang in the balance.
To be sure, oversupply isn't a problem for all makers of PC components. Intel Corp., the largest producer of microprocessors, is facing more competition this year, and the Santa Clara, Calif.-based company is cutting prices aggressively. But that doesn't mean there's a glut of microprocessors - chips that form the brains of a PC.
Intel rival Advanced Micro Devices Inc. can't seem to meet its production schedule for its chip, the K6. Pundits say the Sunnyvale, Calif.-based company will have no problem selling every chip it can make.
But there's always a chance that Asian chipmakers will try their luck in the microprocessor market, analysts say. That would put new price pressures on U.S. processor makers.
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