NEWS ANALYSIS : Signs of a High-Tech Slowdown : As Sales Growth Slips, Some Analysts Fear Trouble Ahead


After four years of galloping growth, the technology sector is showing signs of slowing. And if cautious consumers put off buying the latest high-tech gadgets this Christmas, as a growing number of analysts fear they might, the industry could stumble badly.

Nerves are on edge throughout the high-tech world. A canceled chip order on Tuesday led to a broad selloff in technology shares, and tech stocks remained sluggish Wednesday in spite of a boom in the broader market. A surprisingly strong report on chip orders released after the market closed Wednesday may spark a recovery today, but the uncertainty will remain.

Although demand for tech products is still rising, growth rates of key products that have fueled the tech boom such as cellular phones and multimedia computers are off sharply. With new capacity for semiconductors and other high-tech products being ramped up at an unprecedented rate and new entrants pouring into virtually every tech market, any slowdown at all could be bloody.

Long-term, most analysts still see huge new opportunities in technology businesses, especially telecommunications and semiconductors. But there’s plenty of evidence that for now at least the tech sector is coming back to earth.


Growth in new cellular phone subscriptions, which had been cruising along at a 50% annual rate early this year, is now in the low teens, despite aggressive marketing by cellular carriers.

“Since the start of the year, things have progressively slowed down,” said Jim Caile, Motorola Inc.'s vice president of marketing. The market “isn’t growing as fast as the industry thought it would.”

Set-top boxes for satellite television and interactive television, once regarded as a vast new consumer market, have not been as big a hit as many expected. Sales of direct satellite television systems grew explosively last year but have now slowed.

Meanwhile, hopes that interactive television would drive sales of technology products have been dashed as telephone and cable companies cut back on costly plans to put in the infrastructure required for the systems. General Instruments, the nation’s leading producer of set-top boxes, has seen its stock price drop 50% from its high earlier this year.

Home multimedia computers have been another disappointment. They were the key to last year’s high-tech Christmas, with sales reaching 2.1 million in the final quarter of 1994, nearly triple the level of the year before. Dataquest Inc., a San Jose-based market research firm, says growth rates have moderated to the 15% to 20% level, with actual quarter-to-quarter declines in the first half of this year.

Not all signs point to sluggish growth. The Semiconductor Industry Assn. said Wednesday that preliminary numbers show chip orders climbed 55.7% in October from the year before. Analysts say that is the strongest year-to-year growth in 10 or 15 years.

But Fred Hickey, editor of the High Tech Strategist, a respected newsletter, points out that every major downturn in the tech sector in the past two decades has been preceded by a surge in chip orders as manufacturers over-ordered in response to widespread shortages.

“The trend is down, and it has been all year,” Hickey says. “We are going to get a pause where growth falls to about 10%.”

And with huge amounts of new chip capacity starting to come on line, “a growth rate of even 9% would be a disaster,” says Dan Hutcheson, an analyst at VLSI Research who finds widespread anxiety in the chip business.

The real key to the health of the technology sector is the prospect for broader sales of personal computers, which heavily influence purchases of communications devices, semiconductors and software.

The trend here is far from clear. PC sales growth has slowed to around 21% from last Christmas’ breakneck 32% pace. October sales at many retailers were weak. Same-store sales at Tandy, for example, grew just 1% over the year before.

But about 40% of PC sales typically come in the final quarter of the year, and a strong showing at Christmas could save everybody’s bacon. PC retailers are all predicting strong holiday sales.

Lower prices, impressive new games and Microsoft Corp.'s new operating system, Windows 95, are all expected to contribute to strong sales.

But for all Microsoft’s insistence that Windows 95 has been a blockbuster success, sales of the software have not been as strong as originally predicted.

Dataquest, for example, forecast that Microsoft would sell and install 14 million units of Windows 95 within a few weeks of its release and ship 30 million copies by the end of the year. Now the firm predicts that only 17 million copies of the software will actually be sold to customers by the end of the year--and that assumes a significant pick-up in sales. Millions of copies of Windows 95 will be left in the channel as inventory or returned to Microsoft.

Then there are the brutal realities of household economics. Tom Miller, who conducts technology surveys for Find/SVP, a market researcher, says the number of people indicating an intention to buy personal computers in its summer survey dropped significantly from the year before.

“A 30% increase in PC growth was in the cards in most people’s forecasts, but it’s hard to imagine reaching that,” says Rick Whittington, analyst at Stamford, Conn.-based Soundview Financial Management.

In some respects, moderating growth can be healthy. Manufacturers are less likely to face shortages of components, for example. Competition from new vendors and increased supply should push down prices, and that could in turn reignite growth. Herschel Shostek, a cellular phone expert, expects that to happen late next year in the wireless area.

But analysts doubt the notoriously volatile high-tech sector can manage a soft landing. Minor shifts in supply or demand dramatically boosted profits in the third quarter but could cut them equally dramatically.

And skeptics say investors shouldn’t take comfort in any positive long-term prospects. A prescient investor who predicted the PC boom and invested in the top PC companies 12 years ago would not have done very well. Today, most of those companies are gone.

* CHIP ORDERS: Semiconductor industry says orders rose in October. D7


Slowing Down?

Shipments of home multimedia PCs skyrocketed over the last two years but may be slowing down. Estimated quarterly shipments in millions:

1995: 1.67

Source: Dataquest