Mixed signals from chips, PC makers temper rebound hope

Peter Henderson

SAN FRANCISCO: Two bedrock technology industries, microchip and PC makers,

are giving conflicting signals about the prospects for quick recovery in the

sector, a riddle that bears on whether the wider economy will pick up.

Chipmakers say the worst may be over, while computer companies say foreign

markets for computer systems are going soft. The question is whether signs of a

recovery are just wishful thinking or the real thing.

"What we are seeing is continued deterioration," Hewlett-Packard

Co. chief executive of computer and printer maker Carly Fiorina, said this week.

"We are now becoming more convinced that this is a global IT slowdown,

which will last for some time."

Intel Corp. chief financial officer Andy Bryant the world microchip leader,

said on Thursday: "There is not a disaster any place; it's just routine

business." There is no clear consensus from industry leaders or from Wall

Street.

Mixed signs, eyes on the US



Many analysts look at a few key issues. Those include improved, lower inventory
levels for computer and chipmakers and whether any events on the horizon will

stimulate demand.

Some also divide the world into the United States and the rest, arguing that

the globe's leading economy stumbled first and should show the first signs of

recovery. There is also a more basic question - will the recovered technology

world boom or just chug along?

"What we are seeing is customers becoming more discriminating,"

said Fiorina, adding that customers would only buy technology that clearly would

improve profits. "We are doing exactly the same thing," she said.

Brian Halla, chairman, president and chief executive of National Semiconductor

Corp., said cell phone and personal computer makers had burned through excess

inventory but would not order more parts before they needed them.

He hoped Microsoft Corp.'s new operating system, Windows XP, would boost PC

sales after launch later this year. "I'd say a real bounce would depend on

maybe Microsoft, the new operating system really stimulating a lot of PC sales

or some dramatic improvement in GSM (mobile phone) handsets," he said in an

interview.

Intel's Bryant said his company is at a new lower level, not that markets

were improving. He said on Thursday he wasn't losing any sleep that Intel's

sales would fall outside the range of expectations the company set in March,

albeit at the low end of a range of between $6.2 and $6.8 billion. And Intel

would increase its own inventories because business is usually better in the

second half of the year, he said.

But how does Intel, or anyone for that matter, know that business will

improve in the second half of the year?

"Historically the second half has been better than the first half,"

said Dresdner Kleinwort Wasserstein analyst Nimal Vallipuram. "Has Intel

seen anything in the past one month to prove that point? The answer is no."

"We are playing on the seasonality, and the seasonality has stood for years

and years and years," he added. "And I see no reason the seasonality

should go away."

But computer makers painted a troubling picture of world markets. Network

computer maker Sun Microsystems Inc. and Hewlett-Packard have both said US sales

were weak but that foreign markets were the ones deteriorating more than

expected.

Analysts divided on recovery



Analyst Roger Kay said his technology research firm, International Data Corp,
expected PC unit sales to decline this year in the United States for the first

time, by 6.3 per cent. That did not conflict with Intel view of the world, he

argued, because Intel has said business is at a new low level.

"That means things could have been better, and they aren't," he

said. Ashok Kumar, an analyst at US Bancorp Piper Jaffray, said PC growth would

be constrained in a research note on the Intel mid-quarter report, entitled

"False Dawn?"

"The company said Q2 is the low-water mark," he said. "The

original expectation is that Q1 would be the low-water mark. So now the question

is, is this the bottom or are we going to hear next that Q3 is the low-water

mark?" But Salomon Smith Barney analyst Jonathan Joseph, one of the most

bullish on the chip sector, said the first sign of a recovery was that companies

met expectations.

"The early stages of a cyclical bottom are described by essentially

companies beginning to hit guidance," he said. The factors in a recovery

are moving targets, too, said Bear Stearns analyst Andy Neff. "Inventories

are too high when you think demand is too low," he said, by way of

illustration.

The current downturn was exacerbated because companies built up supplies on

fear of shortages and expectations of growth - growth that stalled out at the

end of last year.

(C) Reuters Limited 2001.