Computer Chip Gap Will Grow

The demand for silicon wafers, a key component in the production of semiconductors and hence of computers, exceeded worldwide plant capacity in the first half of 1990, and the shortfall is going to get more serious before it gets better.

The shortage is expected to last through 1992 and be especially tight next year. The shortage exists because manufacturers stopped building plants in 1985 when the market was glutted.

U.S. and Pacific Rim semiconductor manufacturers are at highest risk. In 1989, South Korean and Taiwanese manufacturers purchased 65% of their silicon wafers from U.S. plants, which are now sold out. In addition, the two Asian countries have the fastest-growing demand for silicon, which is spurred by very strong growth in semiconductor production. South Korea is in a somewhat more secure position because manufacturers there have signed long-term contracts with suppliers.

U.S. semiconductor manufacturers are particularly vulnerable because they typically rely on year-to-year contracts. Lead times already are running in the range of 20 weeks and are forecast to grow longer.

As a result, spot prices have increased 10% to 20% on some wafer sizes in recent months. A four-inch wafer, the most commonly used in U.S. semiconductors, costs $12 today, up from $9.45 last year.

The supply of silicon wafers is also very tight in Japan. Japanese plant expansions coming on-line in 1990 and 1991 will help to alleviate the short supply of the larger-diameter wafers. But, because of expected growth in Japan for large-diameter wafers, Japanese plants will have little excess product to export.

European semiconductor manufacturers will increasingly feel the crunch, largely because they are dependent on U.S. plants for 19% of their wafer supply. In addition, there has been no investment in new capacity in Europe for five years.

Software Needs More Retail Space

About 6,000 firms develop PC software in the United States. Most rely for distribution on computer specialty stores, software-only stores and wholesalers. However, these distribution channels can’t effectively support more than the 25 most popular products.

Thus, most software products lack a distribution champion. Competition for presence in retail stores is intensifying as demand for computer specialty store shelf space far outstrips supply. Computer stores and software-only stores sell more than 58% of all PC software.

Securing and maintaining effective product distribution and adequate shelf space may prove to be the two most important factors in a software publisher’s success.

Mail-order represents about 23% of product sales to end users. However, most mail-order revenue comes from the sale of software packages that first became popular in specialty stores.

It is difficult for software publishers to obtain shelf space by virtue of leading-edge technology or price.

In effect, software publishers must also help to finance computer dealers by offering millions of dollars worth of support in the form of cooperative advertising, personnel training and product discounts. An established publisher will spend from $3 million to $5 million to introduce a product.

Workstation Leasing Is Booming

The U.S. computer leasing industry, quick to catch growth trends in the market, is riding the crest of popularity of technical workstations.

Factory revenue for U.S. technical workstations reached $3 billion last year. Of that amount, lease revenue accounted for $625 million, or 20%. Lease revenue is expected to reach $2 billion by 1993.

There are more than 300 computer leasing firms in the United States, about 10% based in Los Angeles, Orange and San Diego counties. Since 1984, most have begun to move from mainframes to more lucrative technical workstations.

Mainframe computers were once the stars of leasing because of low obsolescence and high resale value.

However, recent moves by the major mainframe manufacturers to form their own leasing subsidiaries have cut into profit margins of independent leasing companies.

Because technical workstations also retain their value, they still provide independents with a healthy return on investment.