Industry Outlook 1999 -- INFORMATION
Computers and Chips
Is that a ray of hope on the silicon horizon? Maybe. After three years of tough times, the semiconductor and computer industries could finally get some good news in 1999. But it's not a sure thing: If there's no sign of a return to global stability--or worse, if Asia's crisis spreads--the longest silicon slowdown could set a new record.
This time last year, the hope was that high tech would bounce back from a disappointing 1997. No such luck. The Asian crisis and a U.S. inventory glut conspired to clobber makers of chips and computers. Semiconductor companies in particular took a lashing. Industry revenues dropped 11% for the year worldwide, and profits plunged 26%. Computer makers fared better. Unit sales of PCs rose 11% despite soft demand in Asia--but pricing pressure kept revenue growth nearly flat and pulled down profits.
For 1999, executives and analysts are guardedly upbeat. The slump in chips seems to have bottomed out last August. "I'm hopeful that we're past the worst for the industry as a whole," says Craig R. Barrett, chief executive of Intel Corp. Even the world's largest chipmaker suffered a profit decline for 1998--Intel's first annual dip in a decade.PROFIT PUSH. The Semiconductor Industry Assn. now predicts 9% growth for this year. Still, total revenues will barely top $133 billion, some 8% below their peak in 1995. Not until 2000 will chips return to double-digit growth and hit a new revenue record, pegged at $154 billion by SIA.
The computers that gobble up those chips should fare better. PCs are expected to notch 14% growth this year, to 105 million units, according to market researcher Dataquest Inc. What's more, the steep, two-year decline in PC prices should abate, allowing computer makers to restore profitability. After falling by 1% in 1998, computer earnings will surge 40% this year, according to consensus estimates collected by First Call Corp. Chalk that up to better inventory management and strong demand for high-end server and workstation computers. They're expected to grow 16% and 23%, respectively, and help balance the razor-thin margins earned by consumer PCs.
Bargain-hunting consumers needn't fret about price rises, though. The race to plumb the bottom may slow--but it will continue. Newcomer emachines Inc., for example, now offers a $399 PC, and even resurgent IBM has rolled out a $599 model. In 1997, about a quarter of the PCs sold at U.S. retail stores cost $1,000 or less, says researcher ZD Market Intelligence. By 1998, that proportion had risen to 43%. And in 1999, this trend will continue.BACK TO ASIA. The most surprising story of 1998 was the resurgence of Apple Computer Inc. All but written off before the return of founder Steven P. Jobs in 1997, Apple came roaring back on the strength of its snazzy iMac computer. Buyers snapped up more than 630,000 of the $1,300 iMacs between August and yearend, restoring Apple's profitability and boosting its third-quarter U.S. market share to 5.3%, up from 4% for 1997. "Apple is doing an excellent job," says analyst Michael K. Kwatinetz of CS First Boston. The question, though, is whether Apple can translate its recent rebound into a sustained recovery.
Much the same question could be asked about this year's predicted snapback for PC profits overall. The rise of cheap PCs clouds the outlook. In 1998, revenues for U.S. PC makers inched up a mere 1%, to $53.4 billion--yet unit shipments surged 14%, to 36 million PCs, says Forrester Research Inc. This year will be a repeat, with units climbing 14% but revenues rising just 3%, to $55 billion. Some PC makers hope to compensate by cultivating volume markets, mainly among homeowners who are snapping up low-priced products. By October of last year, says researcher Intelect ASW, nearly 46% of U.S. households had a PC, up from 41% a year earlier. But that's only half of the 90%-plus of homes with TVs and VCRs.
PC makers are also pinning their hopes on emerging economies. The Asian crisis stunted PC growth in that region last year, with unit sales falling 2.5% in Japan and 1.3% in the rest of Asia, according to International Data Corp. (IDC). But in 1999, the non-Japanese Asian market could grow nearly 16%. And even troubled Japan will see a 6% increase in PC sales, predicts IDC, assuming its economy starts to bounce back.
Aside from economic uncertainty, the biggest question facing the industry is the Year 2000 bug. Analysts believe companies will tilt computer purchases to this year's first half, then "lock down" to test for Y2K bugs and avoid introducing new glitches. If so, the sales skew could portend a lean second half for computer vendors, says analyst Steven M. Milunovich of Merrill Lynch & Co.
That might also send Intel's results south again. The company's surprising downturn in 1998 was caused by an unusual combination--slack demand, higher production costs, and growing competition from rival Advanced Micro Devices Inc. But Intel restored its luster with a strong fourth quarter. Analysts say that this momentum should carry into 1999, producing record first-half revenues and profits. And the microprocessor king might escape a second-half slowdown because it will roll out a new chip, code-named Katmai, with vastly improved 3-D graphics capabilities. Katmai could spur a wave of PC upgrades among consumers who crave the latest whizbang feature. On the other hand, Intel's much anticipated Merced chip, its first 64-bit processor, will be delayed until 2000.
Intel's market share eroded last year, and more losses are coming this year. In 1997, Intel sold 86% of all "Wintel" processors--the brains of PCs that run Microsoft Corp.'s Windows software. By yearend 1998, Intel's figure had slipped to 80%. Meanwhile, AMD's market share jumped five points, to 12%, "and it will continue to gain share in 1999," predicts IDC chip analyst Kelly S. Henry. She and others expect AMD to get a big boost from its upcoming K7 chip, which is slated to make its debut late this year.LOSERS. Prospects for National Semiconductor Corp. are mixed. The company got hammered in 1998 in many of its bread-and-butter ASIC chips, or application-specific integrated circuits. But its Cyrix microprocessors are increasingly popular for low-cost PCs from the likes of Packard Bell NEC Inc. and IBM, so Cyrix chips scored marginal gains against Intel.
Overall, unit sales of Intel-compatible processors should grow 17% this year, while revenues climb 13%. For the beleaguered producers of memory chips, though, 1999 offers scant solace. Yes, the uncommonly steep price declines of the past three years are finally slowing. And demand continues to grow: The average amount of memory in PCs will climb from 37.8 megabytes in 1997 to more than 90 MB this year, predicts IDC. But there will still be a capacity glut for dynamic random-access memory (DRAM) chips. So prices will remain weak. After losing perhaps $9 billion in 1998, says Dataquest analyst Jim Handy, DRAM makers can expect to lose $5 billion more this year.
For Japanese and Korean DRAM makers, the red ink has curtailed investments in new chipmaking equipment. Companies such as Applied Materials Inc. and Novellus Systems Inc., which supply the gear for making chips, don't see a turnaround this year. Equipment sales plummeted roughly 23% last year, to $14.3 billion, and will creep up to just $15 billion for 1999. Starting in 2000, though, new technologies such as copper circuitry should spur a wave of equipment upgrades. "Customers have to invest to compete" during the double-digit spurt in chip sales expected at the start of the next millennium, says Applied CEO James C. Morgan. The rest of the industry can only hope he's right.By Andy Reinhardt in San Mateo, Calif.Return to top