High-tech mystique fades as hot young firms mature, sales slump
Boston — America's high-flying computer companies have somehow wandered into a skeet shooting-range. Bang! Apple announces it is laying off 1,200 employees and closing three of its six manufacturing plants.
Bang! Wang says it will lay off 1,600 people and will suffer losses for the first time in its history.
Bang! National Semiconductor says it is cutting its work force by 1,300.
Bang! IBM forecasts an earnings decline for the first nine months, sending the stock market into a nosedive.
And that was only June.
The alarming news from the microcomputer maker, the minicomputer company, the semiconductor manufacturer, and even invincible Big Blue, which makes mainframes as well as small computers, shows how widespread the high-tech slump is.
But the news was not unexpected. In recent months, thousands of employees have been laid off or asked to take vacations. The most profitable and stable of companies have reported losses or declines in earnings. Small companies are going out of business and new companies are hunting in vain for venture capital. The consolidation is reaching even large companies: Mainframe manufacturers Sperry and Burroughs announced a possible merger last week, presumably to combine their marketing, manufacturing, and research costs.
The slump is blamed on two developments: (1) the economic slowdown, which has induced businesses to hold off on investing in equipment such as computers; and (2) the strong dollar, which cheapens imports.
To their dismay, young computer companies are finding that they are in a very cyclical industry. This new generation of computermakers, born after the last computer industry downturn in 1975-76, now sees it cannot glide over every turbulent period as it did in 1980-81.
Such companies may not remember the computer slump in 1971-72 and then again in 1975-76. The reason the industry was unscathed by the last recession, says Kenneth Flamm, a research associate at the Brookings Institution and co-author of ``The Global Factory,'' is that two big markets opened up to computer makers. The weak dollar boosted US exports overseas, and inexpensive computers caught the imagination and wallets of individuals and small businesses. The latter two factors are not helping US companies today.
But the long-term outlook for computers is healthy, say Dr. Flamm, because technology is still advancing by leaps and bounds. For the last 25 years, he says, the cost of computing power (a unit of computing capacity) has dropped by 30 percent a year in real terms. That means that $10,000 worth of computing power seven or eight years ago now costs $1,000. And as costs continue to drop -- and they will, he says, because so much money is being poured into research and development -- computers expand into more and more industrial markets.
In the near term, however, there are fundamental problems American companies must solve if they are to stave off foreign competition.
The very nature of the computer is changing, and computer companies have been slow to adjust to the shift. The computer is becoming a low-cost, high-volume ``commodity'' product, less dependent on innovation and more dependent on low-cost production. This has played to Southeast Asia's strengths, with its low-cost labor and automated manufacturing. It hit the semiconductor industry first, and today some 80 to 90 percent of the memory chips are built offshore. But small computers and peripherals such as disk drives and printers are cheaper to produce abroad: Singapore, for example, makes them for 25 to 30 percent less than the US, analysts estimate.
William Easterbrook at Kidder, Peabody & Co. predicts that by the end of the decade, 90 to 95 percent of computers -- not just micros, but even the more sophisticated minicomputers and mainframes -- will be commodity products, easy to produce and susceptible to foreign competition. The US should prepare itself for a bigger wave of imports and look for its niche in software, marketing, and new technologies, he says.
``To the extent that [computers] becomes a commodity industry, we're in trouble,'' says Flamm. ``You're going to die if you mass-produce low-end computers, because the US can't compete with the cost of production offshore. Survival means moving onto leading-edge technologies where you have a temporary monopoly,'' he says.
Some analysts say that the trend toward offshore manufacturing may be ending. Ted Lyman, associate director of public policy at SRI International, says the process of manufacturing computers is becoming so advanced that US firms will not want such technology to get into foreign hands. He cites the case of the Macintosh plant in Freemont, Calif., which can turn out a Macintosh computer every 27 seconds. Because the plant is so automated, he says, labor is 1 percent of costs, which makes the low-cost labor abroad less attractive.
However, manufacturing should not return to the US in the immediate future, Flamm says. Because computer technology is changing so fast, it is too early for companies to invest in the latest assembly technology. No matter how advanced the Macintosh facility seems today, it will be obsolete soon. Companies would be smarter, he says, to keep manufacturing labor-intensive, and hire or fire workers in Southeast Asia as sales rise and fall.
A computer company's product is no longer hardware or software, but a ``business solution,'' says Nicholas Pagon, an analyst at Butcher & Singer. Executives, realizing that the machines have not cranked up office productivity the way they thought they would, are pausing before buying new computers, he says. They want to integrate desktop machines with mainframes and are waiting to see which companies can best help them do that. ``Computer companies won't see their margins increase unless they sell a solution [to a customer's particular business problems] and not hardware,'' he says.
These problems are forcing changes on the once-footloose industry. If it was ideas that generated the industry's first profits, it is cost-cutting, marketing, and planning that will sustain them. In perhaps the most telling symbol of this, Steven Jobs, wunderkind of Silicon Valley, was kicked upstairs May 31 in a reorganization at Apple that combined the company's six divisions into two. Analysts have applauded the reorganization, saying it will eliminate overlapping costs.
Consolidations between companies, as opposed to within a company, have analysts less thrilled. If Burroughs does acquire Sperry, the new company would span the market -- from Burroughs' commercial products to Sperry's military ones -- and would be the second-largest computer firm after IBM. But their computers are very different and run different software.
``I don't see much near-term synergy,'' says Mr. Easterbrook at Kidder, Peabody. ``It's reminiscent of other big computer mergers in the past, in which it took years and years to develop compatibility of products.'' He says it will be at least five years before Sperry and Burroughs can smooth out their differences.
Nevertheless, experts say the industry needs to consolidate. The venture capital boom in 1983-84 created too many computer companies, says Easterbrook. There are thousands of hardware firms today, and there should be only hundreds. The software industry will still be fragmented, he says, but the 15,000 firms will be pared down.
Robert Olton at Gnostic Concepts, an electronics-market analysis firm, says the industry ``is between two waves of growth'' as new products start to come into the market in two years. Still, he says the industry will grow 13.7 percent in 1985: ``The industry has gone from the Rolls Royce of economic growth the the BMW.''