Computer Industry Slump Persists but Bright Spots Emerge
A few signs of life in the computer business have leavened the gloom of the past year, but it might be a case of the glass appearing half full instead of half empty. The latest economic indicators show that the high-technology slump remains deeply entrenched.
Wall Street has already recorded a slightly improved outlook with a 20% climb in prices of semiconductor stocks over the past month. One economic newsletter urges, “Buy now and beat the computer industry rebound.”
But improved sales of scattered products in recent weeks, ranging from mainframe computers to software for personal computers, are being discounted by many analysts as either too fleeting or too narrowly based to warrant much excitement.
The best that can be said about July, analysts and industry executives say, is that it wasn’t any worse than June--and it usually is. It is now generally believed that the slide reached bottom in April and May. But, chastened by their excessive optimism of the past, observers predict that any recovery will be grudging and, by the high-growth standards of the computer industry, unspectacular.
Moreover, in semiconductors, the U.S. manufacturers are likely to be left with a smaller piece of the sales pie because of the big bites taken by low-priced Japanese and Korean chips since last year.
“I do think the gloom and doom seems to have abated somewhat, but it’s not what I would call a big turnaround,” said Gwen Peterson, head of business systems research at Dataquest in San Jose. “I don’t expect a full upswing until sometime next year.”
Said Larry Jodsaas, president of the computer products group at Control Data in Minneapolis, where mainframe sales are up: “I do not yet see a light at the end of the tunnel. Maybe just a flash now and then.”
One of the more intriguing signs of improvement comes from El Segundo-based Wyle Laboratories, the largest West Coast distributor of semiconductors, which reports three straight months of a positive “book-to-bill” ratio. That means more orders came in than shipments went out, even though shipments rose slightly. Wyle said its improved orders came mostly from computer-related customers who have finally worked off their huge inventories and are beginning to run short of chips.
The book-to-bill ratio, a widely used barometer of manufacturing health, turned negative in May, 1984, for semiconductor distributors and in September for the chip manufacturers. Charles Clough, head of Wyle’s electronic distribution unit, said that, because distributors of chips are closer to the users, his firm’s improvement in orders should precede the chip makers’ by about five months.
“This is the first sign I’ve seen that is significant,” said Clough, a longtime Texas Instruments executive regarded as an astute observer of the semiconductor market. “If we’re typical, this is the first tick in the up cycle.”
Wyle apparently isn’t typical, at least not yet. The comparable ratio for all semiconductor distributors to be published this week by the National Electronic Distributors Assn. shows that new orders continued to trail new shipments in July and that both categories fell slightly from June. And figures due out this week from the Semiconductor Industry Assn., trade group for the chip manufacturers, are expected to show the outlook unchanged.
Dean Witter analyst Michael Gumport agrees, however, that inventories have been largely worked off--eliminating one big cause of the semiconductor industry’s worst-ever slump in demand and prices. The industry’s extreme buildup in inventories early last year was based largely on orders from a personal-computer industry that expected to sell about 3 million more machines than it did. Accordingly, chip orders tumbled.
Now, as customers begin placing orders, a chain reaction will occur. Buyers, who had been putting off orders because chips were available on short notice at rock-bottom prices, suddenly face longer lead times and firmer prices. To beat price increases and ensure timely supplies, customers begin placing bigger orders, production cranks up and the excess chip-making capacity that had sent prices plummeting subsides.
Gumport predicts “a reasonably swift return of balanced supply and demand” and said there might even be a temporary chip shortage while manufacturers scramble to step up production. But he said that, because July is normally a weak month for semiconductor firms, it is hard to read last month’s improvement.
“July is usually awful, so this year it was less awful than usual,” said Gumport. “But we like the semiconductor group.”
Longtime office automation consultant Amy Wohl of Bala Cynwyd, Pa., said her minicomputer and mainframe clients with up-to-date products report that “things are moving along a little better, backlogs are getting better, orders are picking up. But July and August are dead bottom. It’s too soon to know.”
Wang Laboratories, the struggling minicomputer company based in Lowell, Mass., told financial analysts last week that based on July’s results it is “cautiously optimistic” about exceeding year-earlier revenue in the current quarter, reversing a period of declining sales.
Production Boost
Control Data’s Jodsaas, head of the mainframe operations, said the company has stepped up production to accommodate demand that is running about 15% ahead of expectations for medium- and high-end mainframes, the powerful number-crunchers used by industrial firms, colleges and other big institutions.
Analysts say IBM’s announcement earlier this year of its newest generation of mainframes helped the market because buyers then placed orders that had been put on hold. Said Dataquest’s Peterson, “The mainframe markets are starting to open up to a degree. All the cards are on the table as far as IBM is concerned, and that’s made a difference.”
But, as is frequently the case in the diverse computer industry, Control Data reports no improvement in other parts of its business, such as add-on equipment for computers. Jodsaas is unexcited because the mainframe orders are from old customers “who have been serious about computers for a long time,” not from new sources of business.
One eye-opening statistic being played down by the people who collected it was a 60% surge in sales of personal-computer software from May to June and a smaller gain in personal-computer sales. Market researcher Infocorp, of Cupertino, said the software spurt might have been a one-month phenomenon.
However, such signs of activity help put the slump in perspective. While the demand for semiconductors is expected to plummet 23% this year from last because of the bloated inventories, overall demand for computers and software has merely slowed in its growth. Analysts note that the firms hardest hit by the slowdown were those with the wrong products as the market shifted and those structured for continued high growth.
“Even with the doldrums, a lot of people are doing well. The market as a whole is doing well,” said James Haughey, chief economist for Cahners Publishing, whose publications include Purchasing Magazine and Electronic Business.
Increase Projected
U.S. sales of all computers and related equipment are projected this year to increase 10.9% to $101.8 billion after an unusually high 16% gain in 1984 over 1983, according to the Computer and Business Equipment Assn. The trade group also says that average annual compounded growth from now until 1990 will be 9.7%, heralding a new age of slower growth in the young industry.
Softsel, the big Inglewood-based distributor of software and accessories for microcomputers, continues to project a 50% leap in revenues to $250 million this year over last, despite the severe price-cutting that has characterized the software market. Softsel says sales are generally stronger than suggested by the industry’s rash of layoffs, mergers and plant closings.
“June was an excellent month, and we also had an excellent first quarter. April and May were the only problem,” said David Blumstein, marketing and sales vice president. “Modems, printers, monitors are selling extremely well. But you look at the IBM market and you see one thing, and you look at the Apple market and you see another. It’s not a homogeneous market.”
Forecast Revised
In personal computers, Dataquest recently slashed its 1985 forecast again, to U.S. sales of 8.95 million machines--still a 12% gain over last year. However, it compared with a 38% leap in the previous year. As for a pickup from current depressed levels, Dataquest analyst Kenneth Lim said, “We are expecting it to happen, as it always does, in the third and fourth quarters.”
In Charlotte, N.C., longtime retailer Ted Hartsock, whose Office Systems Inc. sells $5 million worth of microcomputers annually, doesn’t know what all the fuss is about. Sure, prices are down, he says, but he’s selling more machines.
“We’ve got banks around here that bought 75 computers last year, and this year they’re buying 200,” Hartsock says. “Unit sales are way, way up. That’s not a slump. A slump is when you sell fewer units.”
