The Computer Slump Becomes A Sea Change

When growth in the computer industry suddenly slumped back in 1985, dropping from a 15% annual rate to 9% in a matter of months, few of the largest manufacturers seemed particularly bothered. It was only a temporary downturn, they maintained, and new technologies would soon create new opportunities--and generate new profits. And business did start picking up in 1988, but not at the old rate. So industry stalwarts such as IBM, Unisys, and Groupe Bull began trimming payrolls and closing unneeded facilities. It was a calm, measured response to what IBM Chairman John F. Akers came to refer to as the market's "new reality." With a bit of fine-tuning, IBM and others figured, they could get back to customary profit levels.

Wrong. A year of recession in the U. S. has dashed any lingering hope among computer makers that things will ever again be as they were. The industry is in a tremendous upheaval as it moves from dozens of hardware and software designs to just a few. Only a handful of proprietary computer "architectures"--IBM's System/390 mainframe, for one--are likely to survive.

The bulk of the market will be standards-based desktop computers, which don't require huge factories, thousands of salespeople, scores of branch offices, or even major research facilities. In short, says Charles White, vice-president for industry service at consultants Gartner Group Inc., computer hardware, like the automobile in the 1920s, has changed from a custom-built luxury item to a mass-produced commodity.

So computer makers aren't just pruning overhead--they're hacking away with a meat ax. On the heels of depressed second-quarter earnings reports--IBM's net, for example, plunged 93%--industry giants in rapid succession announced plans to lay off tens of thousands of workers. After two years of timid cutbacks, Digital Equipment Corp. set plans on July 25 to eliminate an estimated 12,000 jobs--at the cost of a $1.1 billion charge against earnings for its just-ended fiscal year. Unisys Corp., struggling with massive debt, finally took the bold action that management says will make it profitable again: It's firing 10,000 workers and eliminating a major computer line--at a cost of $925 million in charges. "Shave off 10% and 10% and 10%, and you go into a death spiral," says Unisys President Reto Braun.

LUCKY APPLE. All over the world, it's crunch time in the computer biz. Troubled electronics giant Philips is giving up on minicomputers, selling out to DEC. And to slash $348 million from its operating expenses, Germany's Siemens-Nixdorf Information Systems plans to cut 3,000 jobs, on top of 1,000 cut earlier this year.

There's even trouble in Silicon Valley, where desktop computer makers escaped the late-1980s slowdown. Hewlett-Packard Co. hopes to persuade 2,000 employees to take early retirement. And with cheap new Macintoshes driving down its gross margins--from a high of 54% last year to 45.8% now--Apple Computer Inc. is adjusting to its own new reality. It's laying off 1,200 employees, a move that cost it $53.1 million in the June quarter. And Apple and others are cutting back on perks like child care and fitness centers.

But Apple is one of the lucky ones. It's gaining share in the still-healthy desktop market and has an $890 million cash hoard--not to mention a promising link-up with IBM. Older suppliers face a scary prospect: There may no longer be a market for the systems they've spent decades developing. Wang Laboratories Inc. has admitted as much after years of losses, layoffs, and restructurings. In June, it announced a deal to resell IBM minis, which all but guarantees the demise of its own VS line.

Other established suppliers, such as Prime Computer, Groupe Bull, and Control Data, are shifting to hardware designed--and often built--by chip companies. Others are banding together in consortiums such as the ACE group, led by Compaq Computer Corp., which is proposing a standard desktop design for all to use. Norman Weizer, senior consultant at Arthur D. Little Inc. in Cambridge, Mass., says such maneuvers only delay the inevitable: "The big shakeout is yet to come. The handwriting is on the wall for a number of companies."

HOLD THE HARDWARE. That means more mergers and joint ventures. With the slow economy keeping a lid on demand, there's much excess capacity in the computer industry. Sperry fought the Burroughs bid that created Unisys in 1986, and this year, NCR struggled to stay out of AT&T's clutches. But from now on, computer makers may welcome takeover bids. Even if they can cut costs and stay profitable, few have the right stuff to fly solo through the 1990s.

What will it take to survive? "The computerless computer company," perhaps. That's the title of a provocative Harvard Business Review article by Andrew S. Rappaport and Shmuel Halevi. The authors, who head Technology Research Group, a Boston-based consulting firm, advise computer makers to simply forget about building basic hardware, which they argue is of marginal importance. "Defining how the computers are used . . . will create real value--and thus market power, employment, and wealth--in the decades ahead," they say.

Easier said than done. Software is the key to giving computers true value, but it remains the industry's big bugaboo--it's far trickier than hardware to build. So, expect more red ink, more cutbacks, more consolidation. "The events are predictable. You just look at the precedents in other industries," says Gartner Group's White. "It's the timing that makes the guessing game interesting."

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