Industry Outlook -- INFORMATION
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, gains 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. Workstations could 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 YorkReturn to top