DESPITE MULTIMEDIA BRIGHT SPOT, PC BUSINESS OUTLOOK IS GRIM FOR 1996

While there may be pockets of good news in the PC business, the overall outlook is for a down year in 1996. In fact, some analysts are predicting a severe downturn for high technology in general. The signs of debacle are evident in many recent news reports.

One highly visible event, however, was the dire warnings from Palo Alto, Calif.-based Hewlett-Packard Company for poor quarterly results a full month before the report was due. A second was the announcement of poor results from Schaumburg, Ill.-based Motorola Inc. Analysts fear the announcements are only the tip of a much larger iceberg.
On July 10, Hewlett-Packard said it would discontinue manufacturing disk drive mechanisms, a $150 million write-off. HP combined this bad news with a grin report on order growth. For the upcoming third quarter the company expects orders to be significantly below the 24% increase it reported in the second quarter.

HP’s woes result from competitive price pressure in the PC business. Unit volume for the industry continues growing at 15% per year. However, manufacturers make very little money on each unit sold.

News reports in the Wall Street Journal for June 18 stated that a year ago, a Gateway PC with 133 MHz Pentium CPU, 1.6-gigabyte hard drive, and 4X-speed CD ROM drive sold for $4,399. Today, the same system with 166-MHz Pentium, 2.5-Gbyte hard drive, and 8X-speed CD ROM drive sells for nearly 40% less, $2,699.

Phil Devin, an analyst at Dataquest in San Jose, Calif. says disk drive vendors have experienced price cuts of 48% per year. Little wonder HP exited the disk drive business.
The other troubling report from Hewlett-Packard was the world regions it cited as trouble spots. The company stated that it was experiencing a slowdown in orders in Europe, Asia, and the Americas. Asia was the surprise as this region of the world had been a heavy purchaser of PCs and related equipment.

Motorola’s woes are related to HP’s in the PC business. Motorola is the major suppliers of PowerPC chips in the Macintosh PC from Apple Computer Inc. in Cupertino, Calif. as well as all the Mac clones beginning to crop up.

Motorola acts as a bellwether company for another reason, too. The company is also a major supplier of the microcontroller and related chips inside disk drives, tape drives, laser printers, all the peripheral equipment surrounding the PC.

For its semiconductor operation, the company reported a 5% sales decline along with a 34% drop in orders for its second quarter. Semiconductors sales represent 40% of Motorola’s profits. The company reacted by committing to reducing capital investment by at least 15%. Along with everyone else in the industry, Motorola spent heavily expanding capacity in the last 18 months.

The most troubling fact about the current PC market is its lack of future direction. No “hit” product promises to rejuvenate PCs and related equipment sales.

The Internet demands modems and larger storage peripherals. Multimedia attracts home users intent on running the latest interactive gaming and “infotainment” software on the fastest PC available. But, no application is likely to increase demand for PCs significantly in the near term.

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